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, 2004
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 13126
Oswego, New York
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(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
Not Applicable
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(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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,448,132 shares
of the Company's common stock outstanding as of November 5, 2004.
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 of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
Item 2.Management's Discussion and Analysis of Financial 10-17
Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosure about Market 18-19
Risk
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, 2004 (UNAUDITED) AND DECEMBER 31, 2003
September 30, December 31,
ASSETS 2004 2003
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(Dollars in thousands except per share data)
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,665 $ 5,803
Interest earning deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,764 2,911
--------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,429 8,714
Investment securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . 74,989 57,559
Federal Home Loan Bank stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . . 1,768 2,048
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,235 3,520
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,788 188,717
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,887 1,715
--------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,901 187,002
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,196 6,650
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505 1,273
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 202
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840 3,840
Intangible asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683 850
Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,737 4,493
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,499 1,789
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Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,029 $ 277,940
======================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
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Deposits:
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,576 $ 191,104
Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,155 15,790
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Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,731 206,894
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2,100
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,360 38,860
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,155 -
Company obligated mandatorily redeemable preferred securities of subsidiary, Pathfinder
Statutory Trust I, holding solely junior subordinated debentures of the Company . . . . - 5,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,830 3,301
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,076 256,155
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01; authorized 10,000,000 shares;
2,935,419 and 2,919,386 shares issued; and 2,448,132 and 2,432,099
shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . 29 29
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,415 7,225
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,372 20,747
Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . (317) 364
Unearned ESOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (78)
Treasury Stock, at cost; 487,287 shares . . . . . . . . . . . . . . . . . . . . . . . (6,502) (6,502)
--------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,953 21,785
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . . . . $ 303,029 $ 277,940
=================================================================================================================================
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, 2004 September 30, 2003
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(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,898 $ 3,167
Debt securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . 580 426
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . . . 63 54
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . 36 28
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2
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Total interest income. . . . . . . . . . . . . . . . . 3,595 3,677
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . 920 884
Interest on short-term borrowings . . . . . . . . . . . . . 1 15
Interest on long-term borrowings. . . . . . . . . . . . . . 471 529
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Total interest expense . . . . . . . . . . . . . . . . 1,392 1,428
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Net interest income . . . . . . . . . . . . . . . . 2,203 2,249
Provision for loan losses . . . . . . . . . . . . . . . . . 112 126
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Net interest income after provision for loan losses 2,091 2,123
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OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . 251 213
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 66 62
Increase in value of bank owned life insurance. . . . . . . 48 57
Net gain on sales of securities . . . . . . . . . . . . . . 85 2
Net gain on sales of loans/real estate. . . . . . . . . . . 128 153
Other charges, commissions & fees . . . . . . . . . . . . . 137 114
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Total other income. . . . . . . . . . . . . . . . . 715 601
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OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . 1,201 1,107
Building occupancy. . . . . . . . . . . . . . . . . . . . . 255 249
Data processing expenses. . . . . . . . . . . . . . . . . . 249 221
Professional and other services . . . . . . . . . . . . . . 165 223
Amortization of intangible asset. . . . . . . . . . . . . . 55 55
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 395 419
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Total other expenses. . . . . . . . . . . . . . . . 2,320 2,274
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Income before income taxes. . . . . . . . . . . . . . . . . . 486 450
Provision for income taxes. . . . . . . . . . . . . . . . . . 126 117
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NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 360 $ 333
=======================================================================================================
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . $ 0.15 $ 0.14
=================== ===================
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . $ 0.15 $ 0.14
=================== ===================
DIVIDENDS PER SHARE. . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.10
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three For the three
months ended months ended
September 30, 2004 September 30, 2003
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(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,869 $ 9,647
Debt securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,637 1,572
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . . . 170 174
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . 107 135
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 27
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Total interest income. . . . . . . . . . . . . . . . . 10,838 11,555
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . 2,687 2,891
Interest on short-term borrowings . . . . . . . . . . . . . 17 25
Interest on long-term borrowings. . . . . . . . . . . . . . 1,441 1,644
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Total interest expense . . . . . . . . . . . . . . . . 4,145 4,560
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Net interest income . . . . . . . . . . . . . . . . 6,693 6,995
Provision for loan losses . . . . . . . . . . . . . . . . . 407 492
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Net interest income after provision for loan losses 6,286 6,503
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OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . 713 590
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 184 189
Increase in value of bank owned life insurance. . . . . . . 144 142
Net gain on sales of securities . . . . . . . . . . . . . . 569 523
Net gain on sales of loans and foreclosed real estate . . . 249 332
Other charges, commissions & fees . . . . . . . . . . . . . 386 363
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Total other income. . . . . . . . . . . . . . . . . 2,245 2,139
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OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . 3,584 3,303
Building occupancy. . . . . . . . . . . . . . . . . . . . . 789 755
Data processing expenses. . . . . . . . . . . . . . . . . . 703 637
Professional and other services . . . . . . . . . . . . . . 493 580
Amortization of intangible asset. . . . . . . . . . . . . . 167 168
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 1,161 1,373
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Total other expenses. . . . . . . . . . . . . . . . 6,897 6,816
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Income before income taxes. . . . . . . . . . . . . . . . . . 1,634 1,826
Provision for income taxes. . . . . . . . . . . . . . . . . . 429 484
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NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,205 $ 1,342
=======================================================================================================
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . $ 0.50 $ 0.55
=================== ===================
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . $ 0.49 $ 0.54
=================== ===================
DIVIDENDS PER SHARE. . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.30
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004
(unaudited)
Accumulated
Additional Other Com-
Paid in Retained prehensive
Shares Amount Capital Earnings Income (Loss)
----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2003. . . . . . . 2,919 $29 $7,225 $20,747 $ 364
Comprehensive income
Net income. . . . . . . . . . . . . . . 1,205
Other comprehensive income, net of tax
Unrealized net losses on securities . . (681)
Total Comprehensive income
ESOP shares earned. . . . . . . . . . . 65
Stock option exercised. . . . . . . . . 16 0 125
Dividends declared ($.3025 per share) . (580)
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BALANCE, SEPTEMBER 30, 2004 . . . . . . 2,935 $29 $7,415 $21,372 $(317)
====================================================================================================
Unearned
ESOP Treasury
Shares Stock Total
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003. . . . . . . $ (78) $(6,502) $21,785
Comprehensive income
Net income. . . . . . . . . . . . . . . 1,205
Other comprehensive income, net of tax
Unrealized net losses on securities . . (681)
-----
Total Comprehensive income 524
ESOP shares earned. . . . . . . . . . . 34 99
Stock option exercised. . . . . . . . . 125
Dividends declared ($.3025 per share) . (580)
-------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 . . . . . . $ (44) $(6,502) $21,953
===================================================================
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(unaudited)
Accumulated
Additional Other Com-
Paid in Retained prehensive
Shares Amount Capital Earnings Income (Loss)
----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2002. . . . . . . 2,915 $29 $7,114 $19,746 $ 281
Comprehensive income
Net income. . . . . . . . . . . . . . . 1,342
Other comprehensive income (loss) net of tax
Unrealized net losses on securities . . (95)
Total Comprehensive income
ESOP shares earned. . . . . . . . . . . 53
Stock option exercised. . . . . . . . . 4 0 27
Treasury stock purchased
Dividends declared ($.30 per share) . (567)
----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 . . . . . 2,919 $29 $7,194 $20,521 $ 186
====================================================================================================
Unearned
ESOP Treasury
Shares Stock Total
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002. . . . . . . $ (124) $(3,815) $23,231
Comprehensive income
Net income. . . . . . . . . . . . . . . 1,342
Other comprehensive income, net of tax
Unrealized net losses on securities . . (95)
------
Total Comprehensive income 1,247
ESOP shares earned. . . . . . . . . . . 35 88
Stock option exercised. . . . . . . . . 27
Treasury stock purchased (2,652) (2,652)
Dividends declared ($.30 per share) . (567)
-------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 . . . . . . $ (89) $(6,467) $21,374
===================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
September 30, September 30,
2004 2003
------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 1,205 $ 1,342
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . 407 492
ESOP and other stock-based compensation earned . . . . 99 88
Deferred income tax expense. . . . . . . . . . . . . . 60 182
Proceeds from sale of loans. . . . . . . . . . . . . . 10,885 14,846
Originations of loans held-for-sale. . . . . . . . . . (8,430) (15,236)
Net gain on sales of:
Real estate loans through foreclosure. . . . . . . . (79) (145)
Loans. . . . . . . . . . . . . . . . . . . . . . . . (170) (187)
Available-for-sale investment securities . . . . . . (569) (523)
Depreciation . . . . . . . . . . . . . . . . . . . . . 434 393
Amortization of intangible . . . . . . . . . . . . . . 167 167
Amortization of deferred financing costs . . . . . . . 23 23
Amortization of mortgage servicing rights. . . . . . . 32 (57)
Increase in value of bank owned life insurance . . . . (144) (142)
Net amortization of premiums on investment securities. 256 180
Increase in interest receivable. . . . . . . . . . . . (232) (59)
Net change in other assets and liabilities . . . . . . (853) 963
------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . 3,091 2,327
------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale . (31,459) (23,188)
Proceeds from maturities and principal reductions of
investment securities available-for-sale . . . . . . 7,134 17,172
Proceeds from sales:
Real estate acquired through foreclosure . . . . . . 352 1,718
Available-for-sale investment securities . . . . . . 6,353 6,024
Purchase of bank owned life insurance. . . . . . . . . (1,100) -
Net decrease (increase) in loans . . . . . . . . . . . 376 (14,565)
Purchase of premises and equipment . . . . . . . . . . (980) (1,220)
------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . (19,324) (14,059)
------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits. . . . . . . . . . . . . . . . . 30,498 10,862
Net decrease in time deposits. . . . . . . . . . . . . (661) (3,290)
Net (decrease) increase from short-term borrowings . . (2,100) 4,500
Payments on long-term borrowings . . . . . . . . . . . (4,500) (8,000)
Proceeds from long-term borrowings . . . . . . . . . . 1,000 5,700
Proceeds from exercise of stock options. . . . . . . . 125 27
Cash dividends paid. . . . . . . . . . . . . . . . . . (414) (566)
Treasury stock purchased . . . . . . . . . . . . . . . - (2,652)
------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . 23,948 6,581
------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . 7,715 (5,151)
Cash and cash equivalents at beginning of period. . . . 8,714 13,740
------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . $ 16,429 $ 8,589
==========================================================================================
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, 2003 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, 2004
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2004.
(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
and nine months ended September 30, 2004 and 2003, using 2,438,796 and
2,415,681 weighted average common shares outstanding for the three months
ended, and 2,433,264 and 2,426,206 for the nine months ended, respectively.
Diluted earnings per share for the three and nine months ended September
30, 2004 and 2003 have been computed using 2,478,377 and 2,464,041 for the
three months ended and 2,477,521 and 2,472,789 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) STOCK-BASED COMPENSATION
The Company's stock-based compensation plan is accounted for based on the
intrinsic value method set forth in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
provisions. Compensation expense for employee stock options is generally
not recognized if the exercise price of the option equals or exceeds the
fair value of the stock on the date of the grant. Compensation expense for
restricted share awards is ratably recognized over the period of vesting,
usually the restricted period, based on the fair value of the stock on the
grant date.
As of December 31, 2003, the stock options previously issued by the Company
were fully vested. As such, there was no effect on pro forma net income for
2004. The following table illustrates the effect on net income and earnings
per share for the three and nine month periods ended September 30, 2003, as
if the Black-Scholes fair value method described in SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended, had been applied to
the Company's stock-based compensation plan:
-6-
For the three For the nine
Months ended months ended
September 30, 2003 September 30, 2003
------------------- -------------------
(In thousands, except per share data)
Net Income:
As reported. . . . . . . . . . . . . . . . . . $ 333 $ 1,342
Less: Total stock-based employee compensation
expense determined under Black-Scholes option
pricing model, net of tax effect . . . . . . . 7 21
------------------- -------------------
Pro forma net income . . . . . . . . . . . . . $ 326 $ 1,321
Earnings per share: Basic Diluted Basic Diluted
--------------------------------------------------------------------------------------
As reported . . . . $ 0.14 $ 0.14 $ 0.55 $ 0.54
Pro forma . . . . . $ 0.13 $ 0.13 $ 0.54 $ 0.53
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. Since
changes in the subjective input assumptions can materially affect the fair
value estimates, the existing model, in management's opinion does not
necessarily provide a single reliable measure of the fair value of its
stock options. In addition, the pro forma effect on reported net income and
earnings per share for the periods presented should not be considered
representative of the pro forma effects on reported net income and earnings
per share for future periods.
(4) PENSION BENEFITS
The composition of net periodic benefit plan cost for the three and nine
months ended September 30, is as follows:
For the three For the nine
months ended months ended
September 30, September 30,
2004 2003 2004 2003
---------------------------------------------------------------------------------------
(In thousands)
Service cost. . . . . . . . . . $ 36 $ 38 $ 122 $ 114
Interest cost . . . . . . . . . 52 50 156 150
Expected return on plan assets. (63) (57) (189) (171)
Amortization of net losses. . . 23 27 71 79
---------------------------------------------------------------------------------------
Net periodic benefit cost . . . $ 48 $ 58 $ 160 $ 172
=======================================================================================
The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it expected to contribute $250,000 to its
pension plan in 2004. As of September 30, 2004, $278,000 had been
contributed to this pension plan. No additional contributions will be made
in 2004.
(5) DIVIDEND RESTRICTIONS
The Company maintains a restricted capital account with a $1.0 million
balance, representing Pathfinder Bancorp, M.H.C.'s portion of dividends
waived as of September 30, 2004.
(6) COMPREHENSIVE INCOME
The components of other comprehensive (loss) income and related tax effects
for the three and nine month period ended September 30, 2004 and 2003 are
as follows:
-7-
For the three For the nine
Months ended months ended
September 30, September 30,
2004 2003 2004 2003
-------------------------------------------------------------------------
(In thousands)
Gross change in unrealized gains on
securities available for sale. . . . $1,316 $(682) $ (567) $ 365
Reclassification adjustment for gains
included in net income . . . . . . . (85) (2) (569) (523)
-------------------------------------------------------------------------
1,231 (684) (1,136) (158)
Tax effect . . . . . . . . . . . . . . (492) 277 455 63
-------------------------------------------------------------------------
Net of tax amount. . . . . . . . . . . $ 739 $(407) $ (681) $ (95)
=========================================================================
(7) 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 $1.1
million of standby letters of credit as of September 30, 2004. 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, 2004 for guarantees
under standby letters of credit issued is not material.
(8) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003. This
Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). Pathfinder Statutory Trust I qualifies as a variable
interest entity under FIN 46. Pathfinder Statutory Trust I issued
mandatorily redeemable preferred securities (Trust Preferred Securities) to
third-party investors and loaned the proceeds to the Company. Pathfinder
Statutory Trust I holds, as it sole asset, subordinated debentures issued
by the Company.
FIN 46 required the Company to deconsolidate Pathfinder Statutory Trust I
from the consolidated financial statements as of March 31, 2004. There has
been no restatement of prior periods. The impact of this deconsolidation
was to increase junior subordinated debentures by $5,155,000 and reduce the
mandatory redeemable preferred securities line item by $5,000,000, which
represented the trust preferred securities of the trust. The Company's
equity interest in the trust subsidiary of $155,000, which had previously
been eliminated in consolidation, is now reported in "Other assets". For
regulatory reporting purposes, the Federal Reserve Board has indicated that
the preferred securities will continue to qualify as Tier 1 Capital subject
to previously specified limitations, until further notice. If regulators
make a determination that Trust Preferred Securities can no longer be
considered in regulatory capital, the securities become callable and the
Company may redeem them. The adoption of FIN 46 did not have an impact on
the Company's results of operations or liquidity.
-8-
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on
Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF No. 03-01 includes new guidance
for evaluating and recording impairment losses on debt and equity
investments, as well as new disclosure requirements for investments that
are deemed to be temporarily impaired. The accounting guidance of EITF No.
03-01 is effective for fiscal years beginning after June 15, 2004, while
the disclosure requirements are effective for fiscal years ending after
June 15, 2004. The Company has not yet determined the impact that adoption
will have on its financial position or results of operations as the impact
is heavily dependent on the interest rate environment at the date of
adoption and pending implementation guidance from the Financial Accounting
Standards Board.
-9-
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. Pathfinder Statutory Trust I is not included in the
consolidated financial statements for the period ended September 30, 2004. At
September 30, 2004, Pathfinder Bancorp, M.H.C., the Company's mutual holding
company parent, whose activities are not included in the M.D.& A held 64.7% of
the Company's common stock and the public held 35.3%.
The following discussion reviews the Company's financial condition at September
30, 2004 and the results of operations for the three and nine months ended
September 30, 2004 and September 30, 2003.
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 noninterest income, including income from fees and service charges,
net gains and losses on sales of securities, loans and foreclosed real estate,
and non interest expense such as employee compensation and benefits, 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.
-10-
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 2003 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, 2004, 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 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.
-11-
RESULTS OF OPERATIONS
Net income for the third quarter of 2004 was $360,000 as compared to net income
of $333,000 for the same quarter in 2003. Basic earnings per share was $0.15
and $0.14 per share for the quarters ended September 30, 2004 and 2003,
respectively. The return on average assets and return on shareholders' equity
were 0.48% and 6.62%, respectively, for the three months ended September 30,
2004, compared with 0.47% and 6.29%, respectively, for the three months ended
September 30, 2003. During the third quarter of 2004 when compared to the third
quarter of 2003, other income increased $114,000 and provision for loan losses
decreased $14,000, partially offset by a decrease in net interest income of
$46,000 and an increase in other expenses of $46,000.
For the nine months ended September 30, 2004, net income was $1.2 million, a
decrease of $137,000, or 10%, as compared to net income of $1.3 million in 2003.
The decrease in net income was primarily a result of a decline in net interest
income of $302,000, partially offset by declines in provisions for loan losses
and income taxes. Basic earnings per share decreased to $0.50 per share for the
nine months ended September 30, 2004 from $0.55 for the same period in 2003.
The return on average assets and return on shareholders' equity were 0.54% and
7.40%, respectively for the nine months ended September 30, 2004, compared with
0.63% and 8.47% for the same period in 2003.
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 ratio
result from the interaction between the volume and composition of earning
assets, interest-bearing liabilities, related yields and associated funding
costs.
Net interest income, on a tax-equivalent basis, decreased slightly to $2.2
million for the three months ended September 30, 2004, as compared to $2.3
million during the same period of 2003. The Company's net interest margin ratio
for the third quarter of 2004 decreased to 3.28% from 3.63% when compared to the
same quarter in 2003. Management expects continued margin compression to
challenge earnings growth over the near term. The decline in net interest income
is attributable to lower market interest rates which decreased earning asset
yields to 5.33% from 5.91% when compared to the same period during 2003.
Average interest-earning assets increased 8% to $271.6 million at September
30, 2004 as compared to $250.5 million at September 30, 2003. The increase
in average earning assets is primarily attributable to a $22.3 million
increase in investment securities and a $4.9 million increase in
interest-earning deposits, offset by a $6.1 million decrease in loans
receivable. Average interest-bearing liabilities increased $17.5 million,
while the cost of funds decreased 22 basis points to 2.16% from 2.38% for the
same period in 2003. The increase in the average balance of
interest-bearing liabilities resulted primarily from a $25.6 million growth in
average deposits, offset by a $8.1 million decrease in borrowed funds. The
growth in deposits was primarily in NOW accounts and money management accounts
and resulted from the Company's focus on attracting new municipal deposit
customers.
For the nine months ended September 30, 2004, net interest income, on a
tax-equivalent basis, decreased $297,000, or 4%, as compared to the same period
during 2003. Net interest margin decreased 40 basis points, to 3.29% at
September 30, 2004 from 3.69% at September 30, 2003. Average interest-earning
assets increased 7% to $274.2 million at September 30, 2004 as compared to
$255.4 million at September 30, 2003, while the yield on interest earning
assets declined 76 basis points to 5.31% from 6.07% for the comparable periods.
The increase in average earning assets is primarily attributable to a $15.4
million increase in investment securities and a $4.3 million increase in
interest-earning deposits, partially offset by a $949,000 decrease in loans
receivable. Average interest-bearing liabilities increased $9.6 million,
while the cost of funds decreased 32 basis points to 2.18% from 2.50% for the
same period in 2003. The increase in the average balance of
interest-bearing liabilities resulted primarily from a $14.9 million growth in
average deposits, offset by a $5.3 million decrease in borrowed funds.
-12-
INTEREST INCOME
Total interest income, on a tax-equivalent basis, for the quarter ended
September 30, 2004 decreased $78,000, or 2%, to $3.6 million from $3.7 million
at the quarter ended September 30, 2003. Average loans decreased $6.1 million,
with yields declining 37 basis points to 6.19% for the third quarter of 2004.
Average commercial loans decreased $469,000, and experienced an increase in the
average tax-equivalent yield of 124 basis points, to 5.53% from 4.29%, in 2003.
The increase in the yield on commercial loans was affected, in part, by higher
yielding alternative loans replacing the lower yielding municipal loans which
paid down in August of 2003. The average balance of loans to municipal entities
for the third quarter of 2004 was $2.7 million, compared to $4.2 million for the
same period in 2003. The Company's residential mortgage loan portfolio decreased
$8.4 million, or 6%, when comparing the third quarter of 2004 to the same period
in 2003. The average yield on the residential mortgage loan portfolio decreased
39 basis points to 5.96% in 2004 from 6.35% in 2003. New loans were originated
at lower rates than in the prior period and a large volume of existing mortgages
had their rates modified downward or were refinanced at lower rates. An
increase in the average balance of consumer loans of $1.9 million, or 12%,
resulted from an increase in home equity loans. The average yield declined 141
basis points, to 6.75% from 8.16% in 2003.
Average investment securities (taxable and tax-exempt) for the quarter ended
September 30, 2004 increased by $22.3 million, compared to the same period a
year ago, with an increase in tax-equivalent interest income from investments of
$176,000, or 34%, compared to 2003. The average tax-equivalent yield of the
portfolio declined 17 basis points, to 3.58% from 3.75%. The increase in the
average balance of investment securities is reflective of the expanded deposit
growth with local municipalities. Investment securities purchased in 2004
pledged against municipal deposits had an average yield of 3.34%.
Total interest income, on a tax-equivalent basis, for the nine months ended
September 30, 2004 decreased $712,000, or 6%, when compared to the nine months
ended September 30, 2003. Average loans decreased $949,000, with yields
declining 51 basis points to 6.29% from 6.80%. Average commercial loans
increased $3.9 million, while the yield decreased to 4.84% from 5.48% at
September 30, 2003.
For the nine months ended September 30, 2004, tax-equivalent interest income
from investment securities increased $32,000, or 2%, compared to the same period
in 2003. The average tax-equivalent yield of the portfolio declined 76 basis
points, to 3.38% from 4.14% and was offset by a $15.4 million increase in the
average balance of investment securities.
INTEREST EXPENSE
Total interest expense remained relatively constant at $1.4 million for the
three months ended September 30, 2004, when compared to the same quarter in
2003. Deposit expense for the comparable periods increased $36,000, or 4%, as
the average rate paid on higher earning money management accounts increased 34
basis points to 1.37% in 2004 from 1.03% in 2003, combined with an increase in
the average balance of money management accounts to $42.9 million in 2004 from
$21.3 million in 2003. The cost of other interest-bearing deposits declined 18
basis points, to 1.78% from 1.96%, and was offset by an increase of $4.0
million, or 2%, in the average balance of these deposits. Interest expense on
borrowings also decreased by $72,000, or 13%, from the prior period.
For the nine months ended September 30, 2004, interest expense decreased
$415,000, or 9%, to $4.1 million from $4.6 million for the same period in 2003.
This decrease was partially offset by a $14.9 million increase in the average
balance of deposits. Deposit expense for the comparable periods declined
$204,000, or 7%, as the average rate on deposits decreased 27 basis points, to
1.71% from 1.98%. Interest expense on borrowings declined 9 basis points to
4.46% from 4.55%.
-13-
PROVISION FOR LOAN LOSSES
The provision for loans losses was $112,000 for the third quarter of 2004 as
compared to $126,000 for the same period in 2003. The decrease in the provision
for the quarter primarily resulted from a decrease in commercial charge-offs for
the period. Non-performing loans totaled $3.0 million at September 30, 2004 and
December 31, 2003. Allowance for loan losses, as a percentage of loans,
increased slightly to 1.00% at September 30, 2004 compared to 0.91% as of
December 31, 2003.
For the nine months ended September 30, 2004, the provision for loan losses was
$407,000 as compared to $492,000 for the same period in 2003.
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.
The following table sets forth certain information on other income for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 Change 2004 2003 Change
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit accounts. . . . . . . . $ 251 $ 213 $ 38 17.8% $ 713 $ 590 $123 20.8%
Loan servicing fees. . . . . . . . . . . . . . . . 66 62 4 6.5% 184 189 (5) -2.6%
Increase in value of bank owned life insurance . . 48 57 (9) -15.8% 144 142 2 1.4%
Net gain on sales of loans/foreclosed real estate. 128 153 (25) -16.3% 249 332 (83) -25.0%
Other chrges, commissions and fees . . . . . . . . 137 114 23 20.2% 386 363 23 6.3%
------------------------------------------------------------------------------------------------------------------
Core other income. . . . . . . . . . . . . . . . . 630 599 31 5.2% 1,676 1,616 60 3.7%
Net gain on sales of securities. . . . . . . . . . 85 2 83 4150.0% 569 523 46 8.8%
------------------------------------------------------------------------------------------------------------------
Total other income . . . . . . . . . . . . . . . . $ 715 $ 601 $ 114 19.0% $2,245 $ 2,139 $106 5.0%
===================================================================================================================
For the three months ended September 30, 2004, core other income increased
$31,000, or 5%, when compared with the three months ended September 30, 2003.
Income on service charges on deposit accounts increased as the number of deposit
accounts increased. The increase in other operating income primarily resulted
from fees associated with ATM and debit cards usage. These increases were
partially offset by a decrease in the net gain on sale of loans to the secondary
market in comparable quarters.
For the nine months ended September 30, 2004, the increase in core other income
primarily due resulted from increased income generated from deposit accounts.
This increase was partially offset by a decrease in net gains on sale of loans
and foreclosed real estate.
The increase in the net gain on sales of investment securities for the three and
nine months ended September 30, 2004, was the result of gains associated with
the sale of corporate stock, corporate bonds and municipal bonds in 2004.
-14-
OTHER EXPENSES
The following table sets forth certain information on other expense for the
quarters indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 Change 2004 2003 Change
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
Salaries and employee benefits . . 1,201 1,107 94 8.5% 3,584 3,303 281 8.5%
Building occupancy . . . . . . . . 255 249 6 2.4% 789 755 34 4.5%
Data processing expenses . . . . . 249 221 28 12.7% 703 637 66 10.4%
Professional and other services. . 165 223 (58) -26.0% 493 580 (87) -15.0%
Amortization of intangible assets. 55 55 - 0.0% 167 168 (1) -0.6%
Other expenses . . . . . . . . . . 395 419 (24) -5.7% 1,161 1,373 (212) -15.4%
-----------------------------------------------------------------------------------------------------
Total other expenses . . . . . . . $2,320 $2,274 $ 46 2.0% $6,897 $ 6,816 $ 81 1.2%
=====================================================================================================
Total other expenses increased $46,000 and $81,000 for the three and nine months
ended September 30, 2004 and 2003, respectively. Salaries and employee benefits
increased as a result of increased pension and health insurance costs and
overall personnel costs due to increased staffing. The Company had 106 full time
equivalent employees at September 30, 2004 compared to 104 at September 30,
2003. The increase in data processing charges was due to depreciation expense
resulting from system hardware and software acquisitions, charges relating to
internet banking and increased ATM servicing charges. Building occupancy expense
increases primarily resulted from depreciation expenses associated with the new
Fulton branch, which opened in August of 2003. The decrease in professional and
other services and other operating expenses primarily resulted from operational
costs associated with a foreclosed real estate property in 2003 and personnel
realignment expenses in 2003, not recurring in 2004, a reduction in outside
mortgage consulting fees, as the service was replaced by in-house personnel and
a reduction in expenses associated with the no cost closing loan program and
mortgage recording taxes, as new loan volume decreased from the comparable
period of 2003.
INCOME TAX EXPENSE
Income taxes increased $9,000 for the quarter ended September 30, 2004 as
compared to the same period in 2003, which was primarily attributable to a
increase in the Company's pre-tax income. For the nine months ended September
30, 2004, income taxes decreased $55,000 when compared to the same period in
2003, which was primarily attributable to a decrease in the Company's pre-tax
income. The effective tax rate remained consistent at 26.3% for the first nine
months of 2004, compared to 26.7% for the year ended December 31, 2003.
CHANGES IN FINANCIAL CONDITION
ASSETS
Total assets increased approximately $25.1 million, or 9%, to $303.0 million at
September 30, 2004, from $277.9 million at December 31, 2003. The increase in
total assets was primarily the result of an increase in investment securities of
$17.4 million, or 30%, a $7.7 million, or 89%, increase in cash and cash
equivalents, a $1.2 million, or 28%, increase in bank owned life insurance and a
$1.7 million, or 96%, increase in other assets. These increases were partially
offset by a decrease in net loans of $1.1 million, or 1%. The growth in
investment securities was primarily funded by the increase in municipal
deposits. The increase in cash and cash equivalents was primarily the result of
the increased deposit levels and loans sales to the secondary market. The
excess liquidity is expected to be invested primarily in the commercial real
estate portfolio and investment securities. The increase in bank owned life
insurance was due to a $1.1 million purchase of life insurance policies relating
to the new executives and directors deferred compensation plan which was
effective December 31, 2003. The increase in other assets primarily resulted
from an increase in the deferred tax asset relating to the unrealized gain on
investment securities and increase in the pension asset.
-15-
LIABILITIES
Total liabilities increased $24.9 million, or 10%, to $281.1 million at
September 30, 2004 from $256.2 million at December 31, 2003. The increase in
liabilities is primarily due to a $27.5 million growth in interest-bearing
deposits and a $2.4 million growth in noninterest-bearing deposits, partially
offset by a $5.6 million decrease in borrowed funds. The growth in deposits
primarily resulted from the Company's focus on attracting new municipal deposit
customers.
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
September 30, December 31, September 30,
2004 2003 2003
-------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial. . . . . . . . . . . . . . . . . . . . $2,135 $1,677 $1,662
Consumer. . . . . . . . . . . . . . . . . . . . . 117 172 102
Real estate - Construction . . . . . . . . . . . - 270 -
Mortgage . . . . . . . . . . 699 873 623
-------------------------------------------------------------------------------------------
Total nonaccrual loans. . . . . . . . . . . . . . 2,951 2,992 2,387
Loans past due 90 days or more and still accruing - - -
-------------------------------------------------------------------------------------------
Total non-performing loans. . . . . . . . . . . . 2,951 2,992 2,387
Foreclosed real estate. . . . . . . . . . . . . . 247 202 362
-------------------------------------------------------------------------------------------
Total non-performing assets . . . . . . . . . . . 3,198 3,194 2,749
===========================================================================================
Non-performing loans to total loans . . . . . . . 1.57% 1.59% 1.23%
Non-performing assets to total assets . . . . . . 1.06% 1.15% 0.96%
-------------------------------------------------------------------------------------------
Total nonperforming loans and foreclosed real estate at September 30, 2004 has
remained relatively consistent when compared to December 31, 2003.
Nonperforming loans continue to be addressed primarily through 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, 2004 was $1.9 million, or 1.00%
of period end loans, compared to $1.7 million, or 0.91% of period end loans, at
December 31, 2003. The increase as a percentage of loans is primarily the
result of the decline in gross loans.
CAPITAL
Shareholders' equity increased $168,000, or 1%, to $22.0 million at September
30, 2004. The increase in shareholders' equity primarily resulted from a
$625,000 increase in retained earnings and a $190,000 increase in additional
paid in capital, partially offset by a $681,000 increase in accumulated other
comprehensive loss. The Company added $1.2 million to retained earnings through
net income and returned $580,000 to its shareholders in the form of cash
dividends. The Company's mutual holding company parent, Pathfinder Bancorp,
M.H.C, accepted the dividend for the quarter ended September 30, 2004. (See
Footnote 5).
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
-16-
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, 2004, 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 maturities of investment securities and other short-term investments,
and earnings and funds provided from operations. While scheduled principal
repayments on loans are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Company manages the pricing of deposits to
maintain a desired deposit balance. In addition, the Company invests excess
funds in short-term interest-earning and other assets, which provide liquidity
to meet lending requirements.
The Company's liquidity has been enhanced by its membership in the Federal Home
Loan Bank of New York, whose competitive advance programs and lines of credit
provide the Company with a safe, reliable and convenient source of funds. A
significant decrease in deposits in the future could result in the Company
having to seek other sources of funds for liquidity purposes. Such sources
could include, but are not limited to, additional borrowings, trust preferred
security offerings, brokered deposits, negotiated time deposits, the sale of
"available-for-sale" investment securities, the sale of securitized loans, or
the sale of whole loans. Such actions could result in higher interest expense
costs and/or losses on the sale of securities or loans.
The 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, 2004, management believes that
liquidity as measured by the Company is in compliance with its policy
guidelines.
-17-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
During the past three years, the Federal Reserve lowered interest rates thirteen
times by a total of 550 basis points. These interest rate reductions have
caused significant repricing of the bank's interest-earning assets and
interest-bearing liabilities. Efforts have been made to shorten the repricing
duration of its rate sensitive assets by purchasing investment securities with
maturities within the next 3 to 5 years and promoting portfolio ARM (adjustable
rate mortgage) and hybrid ARM products. In addition, the Company has extended
the duration of its rate sensitive liabilities by lengthening the maturities of
its existing borrowings and offering certificates of deposit with three and four
year terms which allow depositors to make a one-time election, at any time
during the term of the certificate of deposit, to adjust the rate of the
instrument to the then prevailing rate for the certificate of deposit with the
same term.
Since June of 2004, the Federal Reserve raised its key interest rate 75 basis
points. Management anticipates that the Federal Reserve will continue to raise
its target interest rate over the foreseeable future. Management will continue
to seek to minimize any reduction in net interest income in a period of rising
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, 2004, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $34.3 million, representing a
cumulative one-year gap ratio of a negative 11.30%.
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).
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
-18-
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 100 basis point decrease during the next year.
With the federal funds rate at a record low, the Company's ALCO believed it was
a better measure of current risk assuming a minus 100 point scenario, as a minus
300 basis point reduction would be unlikely given that current short-term market
interest rates are already below 3.00%. 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. The Company's current interest rate risk
exposure is within those guidelines set forth.
Change in NPV
Interest Capital Earnings Value
Rates Ratio at Risk as Risk
--------------------------------------
300 . . . 6.88% -11.23% -30.40%
200 . . . 7.75% 7.28% -19.65%
100 . . . 8.56% 3.43% -8.90%
0 9.87% ---- ----
-100. . . 9.23% 1.56% 2.46%
-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 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 12, 2004 /s/ Thomas W. Schneider
--------------------------
Date: Thomas W. Schneider
President, Chief Executive Officer
November 12, 2004 /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, 2004 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 12, 2004 /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, 2004 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 12, 2004 /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, 2004 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 12, 2004 /s/ Thomas W. Schneider
------------------- --------------------------
Date Thomas W. Schneider
President and Chief Executive Officer
November 12, 2004 /s/ James A. Dowd
------------------- --------------------
Date James A. Dowd
Vice President and Chief Financial Officer