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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 MARCH 31, 2005
SEC Exchange Act No. 000-23601
Pathfinder Bancorp, Inc.
(Exact name of Company as specified in its charter)
Federal
(State or jurisdiction of incorporation or organization)
16-1540137
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
- ---------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,453,132 shares
of the Company's common stock outstanding as of May 13, 2005.
PATHFINDER BANCORP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition 1
Consolidated Statements of Income 2
Consolidated Statements of Shareholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial 8-14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about 15-16
Market Risk
Item 4. Control and Procedures 17
PART II OTHER INFORMATION 18
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
MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004
March 31, December 31,
ASSETS 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,017 $ 6,741
Interest earning deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 7,584
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,440 14,325
Investment securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . 89,836 75,069
Federal Home Loan Bank stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . . 1,773 1,768
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2,159
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,858 186,952
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,878 1,827
- ---------------------------------------------------------------------------------------------------------------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,980 185,125
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,699 7,580
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,595 1,505
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 798
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840 3,840
Intangible asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571 627
Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,812 5,768
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,220 3,473
- ---------------------------------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,616 $ 302,037
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Deposits:
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 226,895 $ 217,513
Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,085 19,159
- ---------------------------------------------------------------------------------------------------------------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,980 236,672
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,360 34,360
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 . . . . - 5,155
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,167 3,024
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,662 280,211
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01; authorized 10,000,000 shares;
2,940,419 and 2,937,419 shares issued; and 2,453,132 and 2,450,132
shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . 29 29
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,495 7,453
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,084 21,186
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . (1,130) (307)
Unearned ESOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (33)
Treasury Stock, at cost; 487,287 shares . . . . . . . . . . . . . . . . . . . . . . . (6,502) (6,502)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,954 21,826
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . . . . $ 308,616 $ 302,037
=====================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-1-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three For the three
months ended months ended
March 31, 2005 March 31, 2004
- ------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,889 $ 2,990
Debt securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 604 472
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . 103 48
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 51 36
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 15
- ------------------------------------------------------------------------------------------------
Total interest income . . . . . . . . . . . . . . . . . 3,698 3,561
- ------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits . . . . . . . . . . . . . . . . . . . . 1,030 852
Interest on short-term borrowings . . .. . . . . . . . . . . 10 9
Interest on long-term borrowings . . . . . . . . . . . . . . 459 496
- ------------------------------------------------------------------------------------------------
Total interest expense. . . . . . . . . . . . . . . . . 1,499 1,357
- ------------------------------------------------------------------------------------------------
Net interest income. . . . . . . . . . . . . . . . . 2,199 2,204
Provision for loan losses. . . . . . . . . . . . . . . . . . 72 188
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses. 2,127 2,016
- ------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts. . . . . . . . . . . . . 274 235
Loan servicing fees. . . . . . . . . . . . . . . . . . . . . 41 41
Increase in value of bank owned life insurance . . . . . . . 44 48
Net gain on securities . . . . . . . . . . . . . . . . . . . - 154
Net (loss) gain on loans/real estate . . . . . . . . . . . . (12) 80
Other charges, commissions & fees. . . . . . . . . . . . . . 142 120
- ------------------------------------------------------------------------------------------------
Total other income . . . . . . . . . . . . . . . . . 489 678
- ------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . 1,264 1,203
Building occupancy . . . . . . . . . . . . . . . . . . . . . 243 277
Data processing expenses . . . . . . . . . . . . . . . . . . 307 225
Professional and other services. . . . . . . . . . . . . . . 189 146
Amortization of intangible asset . . . . . . . . . . . . . . 56 56
Other expenses . . . . . . . . . . . . . . . . . . . . . . . 361 343
- ------------------------------------------------------------------------------------------------
Total other expenses . . . . . . . . . . . . . . . . 2,420 2,250
- ------------------------------------------------------------------------------------------------
Income before income taxes . . . . . . . . . . . . . . . . . . 196 444
Provision for income taxes . . . . . . . . . . . . . . . . . . 47 121
- ------------------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149 $ 323
=================================================================================================
NET INCOME PER SHARE - BASIC. . . . . . . . . . . . . . . $ 0.06 $ 0.13
=================================================================================================
NET INCOME PER SHARE - DILUTED. . . . . . . . . . . . . . $ 0.06 $ 0.13
=================================================================================================
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . $ 0.1025 $ 0.10
=================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(unaudited)
Additional
Paid in Retained
Shares Amount Capital Earnings
- ----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2004. . . . . . . . . . 2,937,419 $ 29 $ 7,453 $ 21,186
Comprehensive loss
Net income. . . . . . . . . . . . . . . . . . 149
Other comprehensive loss, net of tax
Unrealized net losses on securities
Total comprehensive loss
ESOP shares earned. . . . . . . . . . . . . . 22
Stock option exercised. . . . . . . . . . . . 3,000 - 20
Dividends declared ($.1025 per share) . . . . (251)
- ----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005 . . . . . . . . . . . 2,940,419 $ 29 $ 7,495 $ 21,084
==============================================================================================
Accum.
Other Com-. Unearned
prehensive. . ESOP Treasury
(Loss) . . Shares Stock Total
- --------------------------------------------- ------------ ---------- ---------
BALANCE, DECEMBER 31, 2004. . . . . . . . . . $ (307) $ (33) $ (6,502) $ 21,826
Comprehensive loss
Net income. . . . . . . . . . . . . . . . . . 149
Other comprehensive loss, net of tax
Unrealized net losses on securities . . . . . (823) (823)
----------
Total comprehensive loss. . . . . . . . . . . (674)
ESOP shares earned. . . . . . . . . . . . . . 11 33
Stock option exercised. . . . . . . . . . . . 20
Dividends declared ($.1025 per share) . . . . (251)
- ----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005 . . . . . . . . . . . $ (1,130) $ (22) $ (6,502) $ 20,954
==============================================================================================
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(unaudited)
Additional
Paid in Retained
Shares Amount Capital Earnings
- ----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2003. . . . . . . . . . 2,919,386 $ 29 $ 7,225 $ 20,747
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . 323
Other comprehensive income,net of tax
Unrealized net losses on securities
Total comprehensive income
ESOP shares earned. . . . . . . . . . . . . . 26
Stock option exercised. . . . . . . . . . . . 16,033 - 125
Dividends declared ($.10 per share) . . . . (245)
- ----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2004 . . . . . . . . . . . 2,935,419 $ 29 $ 7,376 $ 20,825
==============================================================================================
Accum.
Other Com-. Unearned
prehensive. . ESOP Treasury
Income . . Shares Stock Total
- --------------------------------------------- ------------ ---------- ---------
BALANCE, DECEMBER 31, 2003. . . . . . . . . . $ 364 $ (78) $ (6,502) $ 21,785
Comprehensive loss
Net income. . . . . . . . . . . . . . . . . . 211 323
Other comprehensive loss, net of tax
Unrealized net losses on securities . . . . . 211
----------
Total comprehensive loss. . . . . . . . . . . 534
ESOP shares earned. . . . . . . . . . . . . . 11 37
Stock option exercised. . . . . . . . . . . . 125
Dividends declared ($.10 per share) . . . . (245)
- ----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2004 . . . . . . . . . . . $ 575 $ (67) $ (6,502) $ 22,236
==============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
March 31, March 31,
2005 2004
----------- -----------
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 149 $ 323
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 72 188
ESOP and other stock-based compensation earned. . . . . . 33 37
Deferred income tax expense (benefit) . . . . . . . . . . 34 (18)
Proceeds from sale of loans . . . . . . . . . . . . . . . 1,120 4,662
Originations of loans held-for-sale . . . . . . . . . . . - (3,334)
Realized (gain) loss on:
Sale of real estate loans through foreclosure . . . . . 2 (30)
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 12 (50)
Available-for-sale investment securities. . . . . . . . - (154)
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 161 144
Amortization of intangible. . . . . . . . . . . . . . . . 56 56
Amortization of deferred financing costs. . . . . . . . . 8 8
Amortization of mortgage servicing rights . . . . . . . . 37 41
Increase in surrender value of life insurance . . . . . . (44) (48)
Net amortization of premiums on investment securities . . 89 64
Increase in interest receivable . . . . . . . . . . . . . (90) (163)
Net change in other assets and liabilities. . . . . . . . (296) (810)
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . 1,343 916
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale. . . (17,810) (23,812)
Proceeds from maturities and principal reductions of
investment securities available-for-sale. . . . . . . . 1,577 1,814
Proceeds from sale:
Real estate acquired through foreclosure. . . . . . . . 49 96
Available-for-sale investment securities. . . . . . . . - 3,920
Purchase of life insurance. . . . . . . . . . . . . . . . - (1,100)
Net decrease in loans . . . . . . . . . . . . . . . . . . 997 1,816
Purchase of premises and equipment. . . . . . . . . . . . (280) (78)
- -------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . (15,467) (17,344)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits . . . . . . . . . . . . . . . . . . (10,000) 25,840
Net increase (decrease) in time deposits. . . . . . . . . 18,308 (1,783)
Net proceeds from short term borrowings . . . . . . . . . 1,000 1,000
Payments on long-term borrowings. . . . . . . . . . . . . (2,000) (1,000)
Proceeds from exercise of stock options . . . . . . . . . 20 125
Cash dividends paid . . . . . . . . . . . . . . . . . . . (89) (86)
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . 7,239 24,096
- -------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . (6,885) 7,668
Cash and cash equivalents at beginning of period . . . . . 14,325 8,714
- -------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . $ 7,440 $ 16,382
=====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
-4-
PATHFINDER BANCORP, INC.
Notes to Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance with
the instructions for Form 10-Q and Regulation S-X and, therefore, do not include
information for footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The following material under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is written with the presumption that the users of the interim
financial statements have read, or have access to, the Company's latest audited
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations as of December 31,
2004 and for the three year period then ended. Therefore, only material changes
in financial condition and results of operations are discussed in the remainder
of Part 1.
Operating results for the three months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005.
(2) EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding throughout the three months
ended March 31, 2005, and 2004, using 2,447,210 and 2,424,057 weighted average
common shares outstanding, respectively. Diluted earnings per share for the
three months ended March 31, 2005 and 2004 have been computed using 2,486,766
and 2,475,687 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 BENEFITS
The composition of net periodic benefit plan cost for the three months ended
March 31, is as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
2005 2004
- ---------------------------------------------------
(In thousands)
Service cost. . . . . . . . . . $ 38 $ 43
Interest cost . . . . . . . . . 57 52
Expected return on plan assets. (71) (63)
Amortization of net losses. . . 24 24
- ---------------------------------------------------
Net periodic benefit cost . . . $ 48 $ 56
===================================================
The Company previously disclosed in its financial statements for the year ended
December 31, 2004, that it expected to contribute $190,000 to its pension plan
in 2005. As of March 31, 2005, $121,000 had been contributed to the pension
plan.
-5-
(4) DIVIDEND RESTRICTIONS
The Company maintains a restricted capital account with a $1.2 million balance,
representing Pathfinder Bancorp, M.H.C.'s portion of dividends waived as of
March 31, 2005.
(5) COMPREHENSIVE INCOME
The components of other comprehensive (loss) income and related tax effects for
the three month period ended March 31, 2005 and 2004 are as follows:
For the three months
ended March 31,
2005 2004
- ----------------------------------------------------------
(In thousands)
Gross change in unrealized gains on
securities available for sale. . . . $(1,372) $ 506
Reclassification adjustment for gains
included in net income . . . . . . . - (154)
- ----------------------------------------------------------
(1,372) 352
Tax effect . . . . . . . . . . . . . . 549 (141)
- ----------------------------------------------------------
Net of tax amount. . . . . . . . . . . $ (823) $ 211
==========================================================
(6) GUARANTEES
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The
credit risk involved in issuing letters of credit is essentially the same as
those that are involved in extending loan facilities to customers. The Company,
generally, holds collateral and/or personal guarantees supporting these
commitments. The Company had $1.1 million of standby letters of credit as of
March 31, 2005. Management believes that the proceeds obtained through a
liquidation of collateral and the enforcement of guarantees would be sufficient
to cover the potential amount of future payment required under the corresponding
guarantees. The current amount of the liability as of March 31, 2005 for
guarantees under standby letters of credit issued is not material.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) revised
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. Statement No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that
an employee provides service in exchange for the award.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the compliance dates for Financial Accounting Standards Board's
-6-
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). Under the new rule, the Company is required to adopt
SFAS No. 123R in the first annual period beginning after June 15, 2005. Since
the Company's options are fully granted and vested, the Company does not
anticipate the adoption will have any impact on the consolidated financial
statements.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R).
-7-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Throughout the Management's Discussion and Analysis ("MD&A") the term, "the
Company", refers to the consolidated entity of Pathfinder Bancorp, Inc.
Pathfinder Bank and Pathfinder Statutory Trust I are wholly owned subsidiaries
of Pathfinder Bancorp, Inc. Pathfinder Commercial Bank, Pathfinder REIT, Inc.
and Whispering Oaks Development Corp. represent wholly owned subsidiaries of
Pathfinder Bank. At March 31, 2005, Pathfinder Bancorp, M.H.C., the Company's
mutual holding company parent, whose activities are not included in the M.D.& A
held 64.5% of the Company's common stock and the public held 35.5%.
The following discussion reviews the Company's financial condition at March 31,
2005 and the results of operations for the three months ended March 31, 2005 and
March 31, 2004.
This Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage loans, investment securities and other loans, and its cost of funds
consisting of interest paid on deposits and borrowed funds. The Company's net
income is also affected by its provision for loan losses, as well as by the
amount of other income, including income from fees and service charges on
deposit accounts, net gains and losses on sales of securities, loans and
foreclosed real estate, and other expenses such as salaries and employee
benefits, building occupancy and equipment costs, data processing and income
taxes. Earnings of the Company also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which events
are beyond the control of the Company. In particular, the general level of
market rates tends to be highly cyclical.
-8-
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry. Application of these principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value or when an asset or liability needs to
be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available. When third party information is not
available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements included in the 2004 Annual
Report on Form 10-K ("the Consolidated Financial Statements"). These policies,
along with the disclosures presented in the other financial statement notes and
in this discussion, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions and estimates underlying
those amounts, management has identified the determination of the allowance for
loan losses to be the accounting area that requires the most subjective and
complex judgments, and as such could be the most subject to revision as new
information becomes available.
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated balance sheet. Note 1 to the Consolidated Financial
Statements describes the methodology used to determine the allowance for loan
losses, and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included in this report.
The Company carries all of its investments at fair value with any unrealized
gains or losses reported net of tax as an adjustment to shareholders' equity.
Based on management's assessment, at March 31, 2005, 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.
RESULTS OF OPERATIONS
Net income for the first quarter of 2005 was $149,000 as compared to net income
of $323,000 for the same quarter in 2004. Basic earnings per share was $0.06
-9-
and $0.13 per share for the quarters ended March 31, 2005 and 2004,
respectively. The return on average assets and return on shareholders' equity
were 0.19% and 2.77%, respectively, for the three months ended March 31, 2005,
compared with 0.45% and 5.83%, respectively, for the three months ended March
31, 2004. During the first quarter of 2005 when compared to the first quarter
of 2004, the provision for loan losses decreased $116,000, offset by a $189,000
decrease in other income and a $170,000 increase in other expenses.
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, remained relatively constant at
$2.2 million for the three months ended March 31, 2005 when compared to the same
period of 2004. The Company's net interest margin ratio for the first quarter
of 2005 decreased to 3.20% from 3.36% when compared to the same quarter in 2004.
Management expects continued margin compression to adversely impact earnings
over the near term. The decline in net interest income is attributable to lower
market interest rates which decreased earning asset yields to 5.34% from 5.42%
for the same period in 2004. Average interest-earning assets increased 6%
to $280.2 million at March 31, 2005 as compared to $264.7 million at March 31,
2004. The increase in average earning assets is primarily attributable to a
$16.1 million increase in investment securities and a $2.3 million increase in
interest-earning deposits, offset by a $3. million decrease in loans receivable.
Average interest-bearing liabilities increased $15.9 million, and the cost
of funds increased 8 basis points to 2.27% from 2.19% for the same period in
2004. The increase in the average balance of interest-bearing
liabilities resulted primarily from a $22.3 million growth in average
deposits, offset by a $6.4 million decrease in borrowed funds. The growth in
deposits was primarily in money market and time deposit accounts and resulted
from the Company's focus on attracting new municipal deposit customers.
INTEREST INCOME
Total interest income, on a tax-equivalent basis, for the quarter ended March
31, 2005 increased $151,000, or 4%, to $3.7 million from $3.6 million at the
quarter ended March 31, 2004. Average loans decreased $3.0 million, with yields
declining 13 basis points to 6.17% for the first quarter of 2005. Average
commercial loans increased $1.2 million, and experienced an increase in the
average tax-equivalent yield of 61 basis points, to 6.51% from 5.90%, in 2004.
The increase in the yield on commercial loans is primarily the result of the
adjustable rate portions of the portfolio repricing upward in connection with
upward adjustments in the prime rate. The average balance of loans to municipal
entities for the first quarter of 2005 was $3.3 million, compared to $3.7
million for the same period in 2004. The Company's residential mortgage loan
portfolio decreased $3.9 million, or 3%, when comparing the first quarter of
2005 to the same period in 2004. The average yield on the residential mortgage
loan portfolio decreased 26 basis points to 5.86% in 2005 from 6.12% in 2004.
An increase in the average balance of consumer loans of $2.1 million, or 12%,
resulted from an increase in home equity loans. The average yield declined 9
basis points, to 6.90% from 6.99% in 2004.
Average investment securities (taxable and tax-exempt) for the quarter ended
March 31, 2005 increased by $16.1 million, compared to the same period a year
ago, with an increase in tax-equivalent interest income from investments of
$222,000, or 39%, compared to the first quarter of 2004. The average
-10-
tax-equivalent yield of the portfolio increased 40 basis points, to 3.82% from
3.42%. The increase in the average balance of investment securities is a result
of the investment of excess liquidity into the portfolio in light of the slower
loan portfolio growth. Investment securities purchased during the first three
months of 2005 carried a weighted average yield of approximately 4.70%.
INTEREST EXPENSE
Total interest expense increased $142,000 for the three months ended March 31,
2005, when compared to the same quarter in 2004. Deposit expense for the
comparable periods increased $178,000, or 21%, as the average rate paid on
higher earning money management accounts increased 62 basis points to 1.66% in
2005 from 1.04% in 2004, combined with an increase in the average balance of
money management accounts to $42.8 million in 2005 from $35.5 million in 2004.
The cost of other interest-bearing deposits increased 5 basis points, to 1.88%
from 1.83%, as the average balance of these deposits increased $15.0 million, or
9%. Interest expense on borrowings decreased by $35,000, or 7%, from the prior
period. The reduction in interest expense on borrowings was the result of
decreased average balances of advances outstanding as excess liquidity from
deposit growth was used to pay down maturing advances. The decrease in
borrowings expense is partially offset by an increase in the cost of borrowings
to 4.53% in 2005 from 4.34% in 2004, and an increase in the cost of the junior
subordinated debentures to 5.97% in 2005 from 4.62% in 2004.
PROVISION FOR LOAN LOSSES
Provision for loan losses for the quarter ended March 31, 2005 decreased to
$72,000 from $188,000 for the same period in 2004, primarily as a result of a
decrease in nonperforming loans and total loans. The Company's ratio of
allowance for loan losses to period end loans has increased to 1.01% at March
31, 2005 from 0.98% at December 31, 2004. Nonperforming loans to period end
loans has decreased to 0.94% at March 31, 2005 from 0.98% at December 31, 2004.
OTHER INCOME
The Company's other income is primarily comprised of fees on deposit account
balances and transactions, loan servicing, commissions, and net gains on
securities, loans and foreclosed real estate.
The following table sets forth certain information on other income for the
periods indicated:
Three Months Ended March 31,
2005 2004 Change
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit accounts . . . . . . . . . . . $ 274 $ 235 $ 39 16.6%
Loan servicing fees . . . . . . . . . . . . . . . . . . . 41 41 - 0.0%
Increase in value of bank owned life insurance. . . . . . 44 48 (4) -8.3%
Net (loss) gain on sales of loans/foreclosed real estate. (12) 80 (92) -115.0%
Other charges, commissions and fees . . . . . . . . . . . 142 120 22 18.3%
- ------------------------------------------------------------------------------------------
Core other income . . . . . . . . . . . . . . . . . . . . 489 524 (35) -6.7%
Net gain on sales of securities . . . . . . . . . . . . . - 154 (154) -100.0%
- ------------------------------------------------------------------------------------------
Total other income. . . . . . . . . . . . . . . . . . . . $ 489 $ 678 $ (189) -27.9%
===========================================================================================
For the three months ended March 31, 2005, core other income decreased $35,000,
or 7%, when compared with the three months ended March 31, 2004. Income from
service charges on deposit accounts increased as the number of deposit accounts
increased, combined with an increase in fees associated with deposit accounts.
The increase in other operating income primarily resulted from fees associated
with ATM and debit cards usage and the recording of a New York State Grant
income associated with a Leadership Training program, offset by a decrease in
fees generated by investment services. The decrease in the net gain on sale of
loans/foreclosed real estate is primarily due to a $30,000 gain recognized on a
-11-
Whispering Oaks Development Inc. lot sale in February of 2004, which did not
recur in 2005. The remaining decrease is due to fewer gains recognized on loan
sales due to the decrease in the volume of loans sold into the secondary market.
The decrease in the net gain on sales of investment securities was the result
of gains associated with the sale of corporate stock and mortgage backed
securities in March of 2004. There were no investment security sales during the
first quarter of 2005.
OTHER EXPENSES
The following table sets forth certain information on other expense for the
quarters indicated:
Three Months Ended March 31,
2005 2004 Change
- -------------------------------------------------------------------
(Dollars in thousands)
Salaries and employee benefits . . $1,264 $1,203 $ 61 5.1%
Building occupancy . . . . . . . . 243 277 (34) -12.3%
Data processing expenses . . . . . 307 225 82 36.4%
Professional and other services. . 189 146 43 29.5%
Amortization of intangible assets. 56 56 - 0.0%
Other expenses . . . . . . . . . . 361 343 18 5.2%
- -------------------------------------------------------------------
Total other expenses . . . . . . . $2,420 $2,250 $ 170 7.6%
===================================================================
Total other expenses increased $170,000 for the three months ended March 31,
2005. Salaries and employee benefits increased as a result of increased
supplemental retirement plan costs and increases associated with an expanding
commercial lending sales force. The Company had 107 full time equivalent
employees at March 31, 2005 compared to 103 at March 31, 2004. The increase in
data processing charges was due to depreciation and maintenance expense
resulting from system hardware and software acquisitions, a 15% increase in
internet banking usage and increased check processing charges due to a 5%
increase in customer volume. The increase in professional and other services
was primarily due to consulting expenses associated with a fee enhancement
program and the Leadership Training program. A portion of the expenses
associated with the Leadership Training program were offset by corresponding
grant income recorded in other income. The decrease in building occupancy
expenses primarily resulted from reduced depreciation and machine maintenance
expenses, combined with a significant reduction in snow removal costs when
compared to the first quarter of 2004.
INCOME TAX EXPENSE
Income taxes decreased $74,000 for the quarter ended March 31, 2005 as compared
to the same period in 2004, which was attributable to a decrease in the
Company's pre-tax income. The effective tax rate was 24.0% for the first three
months of 2005, compared to 26.3% for the year ended December 31, 2004. The
Company has reduced its tax rate from the statutory rate primarily through the
ownership of tax-exempt investment securities, bank owned life insurance and
other tax savings strategies. Enactment of proposed state tax legislation
regarding Real Estate Investment Trusts would increase the state tax rate for
the Company.
CHANGES IN FINANCIAL CONDITION
ASSETS
Total assets increased approximately $6.6 million, or 2%, to $308.6 million at
March 31, 2005, from $302.0 million at December 31, 2004. The increase in total
assets was primarily the result of an increase in investment securities of $14.8
million, or 20%, offset by a $6.9 million, or 48%, decrease in cash and cash
equivalents and a $2.2 million decrease in mortgage loans held for sales. The
-12-
growth in investment securities was primarily funded with liquidity resulting
from deposit growth outpacing net loan originations.
At March 31, 2005, the securities balance included a net unrealized loss on
available for sale securities of $1.1 million, net of taxes, versus a net
unrealized loss of $306,000, net of taxes at December 31, 2004. The increase in
interest rates during 2004 and 2005 led to the depreciation in the fair value of
securities during 2005. Management has determined that the declines in fair
value are not other than temporary.
LIABILITIES
Total liabilities increased $7.5 million, or 3%, to $287.7 million at March 31,
2005 from $280.2 million at December 31, 2004. The increase in liabilities is
primarily due to a $9.4 million increase in interest-bearing deposits, partially
offset by a $1.1 million decrease in noninterest-bearing deposits and a $1.0
million decrease in borrowed funds. The growth in deposits reflects the
Company's emphasis on attracting new municipal deposit customers and expanding
relationships with its existing 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
March 31, December 31, March 31,
2005 2004 2004
- --------------------------------------------------------------------------------
(In thousands)
Nonaccrual loans:
Commercial. . . . . . . . . . . . . . . . . . . . $ 840 $ 776 $1,955
Consumer. . . . . . . . . . . . . . . . . . . . . 117 122 161
Real estate - Mortgage . . . . . . . . . . . . . 805 953 849
- --------------------------------------------------------------------------------
Total nonaccrual loans. . . . . . . . . . . . . . 1,762 1,851 2,965
Loans past due 90 days or more and still accruing - - -
- --------------------------------------------------------------------------------
Total nonperforming loans . . . . . . . . . . . . 1,762 1,851 2,965
Foreclosed real estate. . . . . . . . . . . . . . 850 798 263
- --------------------------------------------------------------------------------
Total nonperforming assets. . . . . . . . . . . . 2,612 2,649 3,228
- --------------------------------------------------------------------------------
Nonperforming loans to total loans. . . . . . . . 0.94% 0.98% 1.57%
Nonperforming assets to total assets. . . . . . . 0.85% 0.88% 1.04%
================================================================================
Total nonperforming loans and foreclosed real estate at March 31, 2005 has
remained relatively consistent when compared to December 31, 2004.
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 March 31, 2005 was $1.9 million, or 1.01% of
period end loans, compared to $1.8 million, or 0.98% of period end loans, at
December 31, 2004. The increase as a percentage of loans is the result of an
increase in the overall reserve balance combined with a decline in gross loans.
CAPITAL
Shareholders' equity decreased $872,000, or 4%, to $21.0 million at March 31,
2005. The decrease in shareholders' equity primarily resulted from an $823,000
increase in accumulated other comprehensive loss, and a $102,000 decrease in
retained earnings, partially offset by a $42,000 increase in additional paid in
capital. The Company added $149,000 to retained earnings through net income and
returned $251,000 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 March 31, 2005. (See Footnote 4).
-13-
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, 2005, Pathfinder
Bank exceeded all regulatory required minimum capital ratios and met the
regulatory definition of a "well-capitalized" institution, i.e. a leverage
capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a
total risk-based capital ratio exceeding 10%.
LIQUIDITY
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth and reduce
assets to meet deposit withdrawals, to maintain reserve requirements, and to
otherwise operate the Company on an ongoing basis. The Company's primary
sources of funds are deposits, borrowed funds, amortization and prepayment of
loans and 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 March 31, 2005, management reported to the Board of
Directors that the Company is not currently in compliance with its liquidity
policy guidelines.
The policy non-compliance is the result of a sharp increase in the dollar amount
of short term certificates of deposit, which are maturing in less than 30 days.
The sharp increase was caused by certain large municipal customers and one large
retail customer shifting substantial core deposit balances into 30 day
certificates. Management will monitor this situation closely and, if
non-compliance still exists after three months, a policy adjustment or
corrective action will be proposed.
-14-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continues to aggressively pursue delinquent loan relationships.
While this aggressive pursuit, combined with conservative provisioning has
improved the overall quality of the loan portfolio, it has resulted in a
temporary increase in other real estate.
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The management of interest rate sensitivity seeks to avoid fluctuating
net interest margins and to provide consistent net interest income through
periods of changing interest rates. The primary objective of the Company's
asset-liability management activities is to maximize net interest income while
maintaining acceptable levels of interest rate risk. The Company has an
Asset-Liability Management Committee (ALCO) which is responsible for
establishing policies to limit exposure to interest rate risk, and to ensure
procedures are established to monitor compliance with those policies. Those
procedures include reviewing the Company's assets and liability policies,
setting prices and terms on rate-sensitive products, and monitoring and
measuring the impact of interest rate changes on the Company's earnings and
capital. The Company's Board of Directors reviews the guidelines established by
ALCO.
During the past three years, until June 2004, 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 has raised its key short term interest
rate 175 basis points. Management anticipates that the Federal Reserve will
continue to raise its target interest rate over the foreseeable future. Net
interest margin compression has resulted as the yield curve flattens from sharp
increases in short-term interest rate while longer term rates have remained
relatively stable. Management will continue to seek to minimize any reduction in
net interest income in a period of rising short term interest rates to the
extent that it can resist raising its cost of funds during this period. The
Company is continuing to explore transactions and strategies to both increase
its net interest income and minimize its interest rate risk.
GAP ANALYSIS. At March 31, 2005, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $40.0 million, representing a
cumulative one-year gap ratio of a negative 12.96%.
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
-15-
rates. The table quantifies the changes in net interest income and net
portfolio value to parallel shifts in the yield curve. The column "Percentage
Change in Net Interest Income" measures the change to the next twelve month's
projected net interest income, due to parallel shifts in the yield curve. The
column "Percentage Change in Net Portfolio Value" measures changes in the
current fair value of assets and liabilities to parallel shifts in the yield
curve. The column "NPV Capital Ratio" measures the ratio of the fair value of
net assets to the fair value of total assets at the base case and in 100 basis
point incremental interest rate shocks. Currently, the Company's model projects
a 300 basis point increase and a 100 basis point decrease during the next year.
Given the current interest rate environment, the Company's ALCO believed it was
a better measure of current risk assuming a minus 100 point scenario, as a minus
300 basis point reduction would be unlikely given that current short-term market
interest rates remain 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.
Change in NPV
Interest Capital Earnings Value
Rates Ratio at Risk as Risk
- --------- -------- --------- --------
300 . . . 6.54% -15.09% -35.82%
200 . . . 7.52% -9.93% -24.19%
100 . . . 8.50% -4.89% -12.01%
0 9.41% ---- ----
- -100. . . 9.84% 3.56% 7.08%
Currently, the percentage change in the net portfolio value, up 300 basis point,
rate shock simulation is slightly above the established Board of Directors
guidelines of negative 35%. A major component of the change in net portfolio
value is a result of the simulated evaluation of the securities portfolio in the
up 300 basis point simulation. These parameters are set by the board as guidance
for the measurement of risk characteristics and trends. The Board seeks to
monitor this situation over time to determine if the trend will require policy
adjustment or correction action under asset/liability management.
-16-
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.
-17-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- ------------------------------
None
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- -------------------------------------------------------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- ------------------------------
None
ITEM 6 - EXHIBITS
- --------------------
Exhibit No. Description
- ------------ -----------
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief
Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief
Financial Officer
32.1 Section 1350 Certification of the Chief Executive Officer and Chief
Financial Officer
-18-
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.
--------------------------
May 13, 2005 /s/ Thomas W. Schneider
- -------------- --------------------------
Date Thomas W. Schneider
President, Chief Executive Officer
May 13, 2005 /s/ James A. Dowd
- -------------- -------------------
Date James A. Dowd
Vice President, Chief Financial Officer
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 March 31, 2005 quarterly report on Form 10-Q of
Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
May 13, 2005 /s/ Thomas W. Schneider
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Date Thomas W. Schneider
President and Chief Executive Officer
EXHIBIT 31.2
Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, Vice President and Chief Financial Officer, certify that:
1. I have reviewed the March 31, 2005 quarterly report on Form 10-Q of
Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
March 13, 2005 /s/ James A. Dowd
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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 March 31, 2005 and that to the best of his knowledge:
1. the report fully complies with the requirements of Sections 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
May 13, 2005 /s/ Thomas W. Schneider
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Date Thomas W. Schneider
President and Chief Executive Officer
May 13, 2005 /s/ James A. Dowd
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Date James A. Dowd
Vice President and Chief Financial Officer