Attached files
file | filename |
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EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CEO - PATHFINDER BANCORP INC | exhibit31-1.htm |
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CFO - PATHFINDER BANCORP INC | exhibit31-2.htm |
EX-32.1 - SECTION 1350 CERTIFICATION OF THE CEO AND CFO - PATHFINDER BANCORP INC | exhibit32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________________
FORM
10-Q
[X] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ending June 30, 2010
OR
[ ]TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the transition period from _______ to _______
Commission
File Number: 000-23601
PATHFINDER BANCORP, INC.
(Exact
Name of Company as Specified in its Charter)
FEDERAL
|
16-1540137
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification Number)
|
214 West First Street,
Oswego, NY 13126
(Address
of Principal Executive Office) (Zip Code)
(315)
343-0057
(Issuer's
Telephone Number including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES T NO
*
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
YES * NO
*
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer*
Accelerated filer*
Non-accelerated filer* Smaller
reporting company T
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES * NO
T
As of
August 12, 2010, there were 2,972,119 shares issued and 2,484,832 shares
outstanding of the Registrant’s Common Stock.
PATHFINDER BANCORP, INC.
INDEX
PART
I - FINANCIAL INFORMATION
|
PAGE
NO.
|
||
Item
1.
|
Consolidated
Financial Statements (Unaudited)
|
||
3
|
|||
4
|
|||
6
|
|||
7
|
|||
8
|
|||
Item
2.
|
19
|
||
and
Results of Operations
|
|||
Item
3.
|
28
|
||
Item
4T.
|
28
|
||
29
|
|||
Item
1.
|
Legal
proceedings
|
||
Item
1A.
|
Risk
Factors
|
||
Item
2.
|
Unregistered
sales of equity securities and use of proceeds
|
||
Item
3.
|
Defaults
upon senior securities
|
||
Item
4.
|
Removed
and Reserved
|
||
Item
5.
|
Other
information
|
||
Item
6.
|
Exhibits
|
||
30
|
|||
31
|
PART I FINANCIAL INFORMATION
Item
1 – Consolidated Financial Statements
Pathfinder
Bancorp, Inc.
Consolidated
Statements of Condition
(Unaudited)
June
30,
|
December
31,
|
|||||||
(In
thousands, except share data)
|
2010
|
2009
|
||||||
ASSETS:
|
||||||||
Cash
and due from banks
|
$ | 8,936 | $ | 8,678 | ||||
Interest
earning deposits
|
339 | 5,953 | ||||||
Total
cash and cash equivalents
|
9,275 | 14,631 | ||||||
Investment
securities, at fair value
|
93,830 | 72,754 | ||||||
Federal
Home Loan Bank stock, at cost
|
2,113 | 1,899 | ||||||
Loans
|
270,283 | 262,465 | ||||||
Less:
Allowance for loan losses
|
3,455 | 3,078 | ||||||
Loans
receivable, net
|
266,828 | 259,387 | ||||||
Premises
and equipment, net
|
7,665 | 7,173 | ||||||
Accrued
interest receivable
|
1,663 | 1,482 | ||||||
Foreclosed
real estate
|
59 | 181 | ||||||
Goodwill
|
3,840 | 3,840 | ||||||
Bank
owned life insurance
|
7,096 | 6,956 | ||||||
Other
assets
|
3,963 | 3,389 | ||||||
Total
assets
|
$ | 396,332 | $ | 371,692 | ||||
LIABILITIES AND SHAREHOLDERS'
EQUITY:
|
||||||||
Deposits:
|
||||||||
Interest-bearing
|
$ | 285,094 | $ | 269,539 | ||||
Noninterest-bearing
|
30,553 | 27,300 | ||||||
Total
deposits
|
315,647 | 296,839 | ||||||
Short-term
borrowings
|
7,236 | - | ||||||
Long-term
borrowings
|
33,000 | 36,000 | ||||||
Junior
subordinated debentures
|
5,155 | 5,155 | ||||||
Other
liabilities
|
4,346 | 4,460 | ||||||
Total
liabilities
|
365,384 | 342,454 | ||||||
Shareholders'
equity:
|
||||||||
Preferred
stock, par value $0.01 per share; $1,000 liquidation
preference;
|
||||||||
1,000,000
shares authorized; 6,771 shares issued and outstanding
|
6,162 | 6,101 | ||||||
Common
stock, par value $0.01; authorized 10,000,000 shares;
|
||||||||
2,972,119
and 2,484,832 shares issued and outstanding, respectively
|
30 | 30 | ||||||
Additional
paid in capital
|
8,615 | 8,615 | ||||||
Retained
earnings
|
23,190 | 22,419 | ||||||
Accumulated
other comprehensive loss
|
(547 | ) | (1,425 | ) | ||||
Treasury
stock, at cost; 487,287 shares
|
(6,502 | ) | (6,502 | ) | ||||
Total
shareholders' equity
|
30,948 | 29,238 | ||||||
Total
liabilities and shareholders' equity
|
$ | 396,332 | $ | 371,692 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Pathfinder
Bancorp, Inc.
Consolidated
Statements of Income
(Unaudited)
For
the three
|
For
the three
|
|||||||
|
months
ended
|
months
ended
|
||||||
(In
thousands, except per share data)
|
June
30, 2010
|
June
30, 2009
|
||||||
Interest
and dividend income:
|
||||||||
Loans,
including fees
|
$ | 3,752 | $ | 3,685 | ||||
Debt
securities:
|
||||||||
Taxable
|
615 | 672 | ||||||
Tax-exempt
|
68 | 3 | ||||||
Dividends
|
47 | 80 | ||||||
Federal
funds sold and interest earning deposits
|
3 | 1 | ||||||
Total
interest income
|
4,485 | 4,441 | ||||||
Interest
expense:
|
||||||||
Interest
on deposits
|
853 | 1,154 | ||||||
Interest
on short-term borrowings
|
- | 6 | ||||||
Interest
on long-term borrowings
|
355 | 405 | ||||||
Total
interest expense
|
1,208 | 1,565 | ||||||
Net
interest income
|
3,277 | 2,876 | ||||||
Provision
for loan losses
|
262 | 272 | ||||||
Net
interest income after provision for loan losses
|
3,015 | 2,604 | ||||||
Noninterest
income:
|
||||||||
Service
charges on deposit accounts
|
343 | 360 | ||||||
Earnings
on bank owned life insurance
|
57 | 56 | ||||||
Loan
servicing fees
|
60 | 55 | ||||||
Losses
on impairment of investment securities
|
- | (298 | ) | |||||
Net
gains on sales and redemptions of investment securities
|
17 | - | ||||||
Net
losses on sales of loans and foreclosed real estate
|
(34 | ) | (15 | ) | ||||
Debit
card interchange fees
|
81 | 73 | ||||||
Other
charges, commissions & fees
|
142 | 114 | ||||||
Total
noninterest income
|
666 | 345 | ||||||
Noninterest
expense:
|
||||||||
Salaries
and employee benefits
|
1,496 | 1,377 | ||||||
Building
occupancy
|
340 | 306 | ||||||
Data
processing expenses
|
354 | 336 | ||||||
Professional
and other services
|
186 | 242 | ||||||
FDIC
assessment
|
129 | 215 | ||||||
Other
expenses
|
387 | 340 | ||||||
Total
noninterest expenses
|
2,892 | 2,816 | ||||||
Income
before income taxes
|
789 | 133 | ||||||
Provision
for income taxes
|
239 | 102 | ||||||
Net
income
|
550 | 31 | ||||||
Preferred
stock dividends and discount accretion
|
115 | - | ||||||
Net
income available to common shareholders
|
$ | 435 | $ | 31 | ||||
Earnings
per common share - basic
|
$ | 0.17 | $ | 0.01 | ||||
Earnings
per common share - diluted
|
$ | 0.17 | $ | 0.01 | ||||
Dividends
per common share
|
$ | 0.03 | $ | 0.06 |
The
accompanying notes are an integral part of the consolidated financial
statements.
Pathfinder
Bancorp, Inc.
Consolidated
Statements of Income
(Unaudited)
For
the six
|
For
the six
|
|||||||
|
months
ended
|
months
ended
|
||||||
(In
thousands, except per share data)
|
June
30, 2010
|
June
30, 2009
|
||||||
Interest
and dividend income:
|
||||||||
Loans,
including fees
|
$ | 7,535 | $ | 7,312 | ||||
Debt
securities:
|
||||||||
Taxable
|
1,159 | 1,383 | ||||||
Tax-exempt
|
116 | 13 | ||||||
Dividends
|
130 | 161 | ||||||
Federal
funds sold and interest earning deposits
|
5 | 2 | ||||||
Total
interest income
|
8,945 | 8,871 | ||||||
Interest
expense:
|
||||||||
Interest
on deposits
|
1,696 | 2,451 | ||||||
Interest
on short-term borrowings
|
- | 20 | ||||||
Interest
on long-term borrowings
|
702 | 811 | ||||||
Total
interest expense
|
2,398 | 3,282 | ||||||
Net
interest income
|
6,547 | 5,589 | ||||||
Provision
for loan losses
|
525 | 407 | ||||||
Net
interest income after provision for loan losses
|
6,022 | 5,182 | ||||||
Noninterest
income:
|
||||||||
Service
charges on deposit accounts
|
732 | 711 | ||||||
Earnings
on bank owned life insurance
|
140 | 112 | ||||||
Loan
servicing fees
|
117 | 111 | ||||||
Losses
on impairment of investment securities
|
- | (298 | ) | |||||
Net
gains on sales and redemptions of investment securities
|
28 | 87 | ||||||
Net
(losses) gains on sales of loans and foreclosed real
estate
|
(53 | ) | 65 | |||||
Debit
card interchange fees
|
153 | 137 | ||||||
Other
charges, commissions & fees
|
259 | 219 | ||||||
Total
noninterest income
|
1,376 | 1,144 | ||||||
Noninterest
expense:
|
||||||||
Salaries
and employee benefits
|
3,059 | 2,749 | ||||||
Building
occupancy
|
654 | 629 | ||||||
Data
processing expenses
|
682 | 675 | ||||||
Professional
and other services
|
378 | 414 | ||||||
FDIC
assessment
|
257 | 262 | ||||||
Other
expenses
|
724 | 660 | ||||||
Total
noninterest expenses
|
5,754 | 5,389 | ||||||
Income
before income taxes
|
1,644 | 937 | ||||||
Provision
for income taxes
|
494 | 327 | ||||||
Net
income
|
1,150 | 610 | ||||||
Preferred
stock dividends and discount accretion
|
230 | - | ||||||
Net
income available to common shareholders
|
$ | 920 | $ | 610 | ||||
Earnings
per common share - basic
|
$ | 0.37 | $ | 0.25 | ||||
Earnings
per common share - diluted
|
$ | 0.37 | $ | 0.25 | ||||
Dividends
per common share
|
$ | 0.06 | $ | 0.06 |
The
accompanying notes are an integral part of the consolidated financial
statements.
Pathfinder
Bancorp, Inc.
|
Consolidated
Statements of Changes in Shareholders' Equity
|
Six
Months Ended June 30, 2010 and June 30, 2009
|
(Unaudited)
|
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
Com-
|
|||||||||||||||||||||||||||
Preferred
|
Common
|
Paid
in
|
Retained
|
prehensive
|
Treasury
|
|||||||||||||||||||||||
(In
thousands, except share data)
|
Stock
|
Stock
|
Capital
|
Earnings
|
Loss
|
Stock
|
Total
|
|||||||||||||||||||||
Balance,
January 1, 2010
|
$ | 6,101 | $ | 30 | $ | 8,615 | $ | 22,419 | $ | (1,425 | ) | $ | (6,502 | ) | $ | 29,238 | ||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
1,150 | 1,150 | ||||||||||||||||||||||||||
Other
comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||||
Unrealized
holding gains on securities
|
||||||||||||||||||||||||||||
available
for sale (net of $665 tax expense)
|
886 | 886 | ||||||||||||||||||||||||||
Unrealized
holding loss on financial
|
||||||||||||||||||||||||||||
derivative
(net of $49 tax benefit)
|
(74 | ) | (74 | ) | ||||||||||||||||||||||||
Retirement
plan net losses and transition
|
||||||||||||||||||||||||||||
obligation
recognized in plan expenses
|
||||||||||||||||||||||||||||
(net
of $44 tax expense)
|
66 | 66 | ||||||||||||||||||||||||||
Total
Comprehensive income
|
2,028 | |||||||||||||||||||||||||||
Preferred
stock discount accretion
|
61 | (61 | ) | - | ||||||||||||||||||||||||
Preferred
stock dividends
|
(169 | ) | (169 | ) | ||||||||||||||||||||||||
Common
stock dividends declared ($0.06 per share)
|
(149 | ) | (149 | ) | ||||||||||||||||||||||||
Balance,
June 30, 2010
|
$ | 6,162 | $ | 30 | $ | 8,615 | $ | 23,190 | $ | (547 | ) | $ | (6,502 | ) | $ | 30,948 | ||||||||||||
Balance,
January 1, 2009
|
$ | - | $ | 30 | $ | 7,909 | $ | 21,198 | $ | (3,140 | ) | $ | (6,502 | ) | $ | 19,495 | ||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
610 | 610 | ||||||||||||||||||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Unrealized
holding gains on securities
|
||||||||||||||||||||||||||||
available
for sale (net of $132 tax expense)
|
76 | 76 | ||||||||||||||||||||||||||
Retirement
plan net losses and transition
|
||||||||||||||||||||||||||||
obligation
recognized in plan expenses
|
||||||||||||||||||||||||||||
(net
of $56 tax expense)
|
83 | 83 | ||||||||||||||||||||||||||
Total
Comprehensive income
|
769 | |||||||||||||||||||||||||||
Common
stock dividends declared ($0.06 per share)
|
(150 | ) | (150 | ) | ||||||||||||||||||||||||
Balance,
June 30, 2009
|
$ | - | $ | 30 | $ | 7,909 | $ | 21,658 | $ | (2,981 | ) | $ | (6,502 | ) | $ | 20,114 |
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Pathfinder
Bancorp, Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
For
the six
|
For
the six
|
|||||||
|
months
ended
|
months
ended
|
||||||
(In
thousands)
|
June
30, 2010
|
June
30, 2009
|
||||||
OPERATING
ACTIVITIES
|
||||||||
Net
income
|
$ | 1,150 | $ | 610 | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Provision
for loan losses
|
525 | 407 | ||||||
Proceeds
from sales of loans
|
144 | 6,513 | ||||||
Originations
of loans held-for-sale
|
(146 | ) | (6,427 | ) | ||||
Realized
losses (gains) on sales of:
|
||||||||
Real
estate acquired through foreclosure
|
51 | 21 | ||||||
Loans
|
2 | (86 | ) | |||||
Premises
and equipment
|
1 | - | ||||||
Available-for-sale
investment securities
|
(28 | ) | (87 | ) | ||||
Impairment
write-down on available-for-sale securities
|
- | 298 | ||||||
Depreciation
|
324 | 327 | ||||||
Amortization
of mortgage servicing rights
|
16 | 13 | ||||||
Amortization
of deferred loan costs
|
109 | 109 | ||||||
Earnings
on bank owned life insurance
|
(140 | ) | (112 | ) | ||||
Net
amortization (accretion) of premiums and discounts on investment
securities
|
148 | (144 | ) | |||||
(Increase)
decrease in accrued interest receivable
|
(181 | ) | 160 | |||||
Net
change in other assets and liabilities
|
(1,376 | ) | (1,654 | ) | ||||
Net
cash provided by (used in) operating activities
|
599 | (52 | ) | |||||
INVESTING
ACTIVITIES
|
||||||||
Purchase
of investment securities available-for-sale
|
(36,600 | ) | (12,653 | ) | ||||
Net
(purchases of) proceeds from the redemption of Federal Home Loan Bank
stock
|
(214 | ) | 632 | |||||
Proceeds
from maturities and principal reductions of
|
||||||||
investment
securities available-for-sale
|
15,167 | 11,150 | ||||||
Proceeds
from sale of:
|
||||||||
Available-for-sale
investment securities
|
1,789 | 6,559 | ||||||
Real
estate acquired through foreclosure
|
128 | 132 | ||||||
Premises
and equipment
|
24 | - | ||||||
Net
increase in loans
|
(8,134 | ) | (600 | ) | ||||
Purchase
of premises and equipment
|
(841 | ) | (184 | ) | ||||
Net
cash (used in) provided by investing activities
|
(28,681 | ) | 5,036 | |||||
FINANCING
ACTIVITIES
|
||||||||
Net
increase in demand deposits, NOW accounts, savings
accounts,
|
||||||||
money
management deposit accounts, MMDA accounts and escrow
deposits
|
24,823 | 9,438 | ||||||
Net
(decrease) increase in time deposits
|
(6,015 | ) | 2,030 | |||||
Net
proceeds from (repayments on) short-term borrowings
|
7,236 | (16,575 | ) | |||||
Payments
on long-term borrowings
|
(5,000 | ) | (1,000 | ) | ||||
Proceeds
from long-term borrowings
|
2,000 | 2,000 | ||||||
Cash
dividends paid to preferred shareholders
|
(169 | ) | - | |||||
Cash
dividends paid to common shareholders
|
(149 | ) | (330 | ) | ||||
Net
cash provided by (used in) financing activities
|
22,726 | (4,437 | ) | |||||
(Decrease)
increase in cash and cash equivalents
|
(5,356 | ) | 547 | |||||
Cash
and cash equivalents at beginning of period
|
14,631 | 7,678 | ||||||
Cash
and cash equivalents at end of period
|
$ | 9,275 | $ | 8,225 | ||||
CASH
PAID DURING THE PERIOD FOR:
|
||||||||
Interest
|
$ | 2,447 | $ | 3,312 | ||||
Income
taxes
|
402 | 521 | ||||||
NON-CASH
INVESTING ACTIVITY
|
||||||||
Transfer
of loans to foreclosed real estate
|
59 | 69 | ||||||
|
||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Notes to Consolidated Financial Statements (Unaudited)
(1)
Basis of Presentation
The
accompanying unaudited consolidated financial statements of Pathfinder Bancorp,
Inc. and its wholly owned subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information, the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes necessary for a complete presentation of consolidated
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Certain amounts
in the 2009 consolidated financial statements have been reclassified to conform
to the current period presentation. These reclassifications had no
effect on net income as previously reported.
The
following material under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is written with the presumption
that the users of the interim financial statements have read, or have access to,
the Company's latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 2009 and 2008 and for the two year periods 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 six months ended June 30, 2010, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.
(2)
Earnings per Common Share
Basic
earnings per common share has been computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
throughout the three months and six months ended June 30, 2010 and 2009, using
2,484,832 weighted average common shares outstanding for each
quarter. Diluted earnings per common share for the three months and
six months ended June 30, 2010 and 2009, have been computed using 2,488,041 and
2,484,832 weighted average common shares outstanding for the three month
periods, respectively, and 2,484,832 for each of the six month
periods. Diluted earnings per share gives effect to weighted average
shares that would be outstanding assuming the exercise of issued stock options
and warrants using the treasury stock method. The dilutive effect for
the three months ended June 30, 2010 was the result of the Company’s common
stock weighted average trading price rising above the strike price of
outstanding warrants. However, when calculating the dilutive effect
for the six months ended June 30, 2010, the relationship between the trading
price and strike prices in the first quarter of 2010 must also be considered.
The Company’s common stock trading price averaged over the six-month period
remained below strike prices of the outstanding stock options and warrants and
therefore there was no significant dilutive effect. There was also no
dilutive effect during the three months and six months ended June 30,
2009.
(3)
Pension and Postretirement Benefits
The
Company has a noncontributory defined benefit pension plan covering
substantially all employees. The plan provides defined benefits based on years
of service and final average salary. In addition, the Company provides certain
health and life insurance benefits for eligible retired
employees. The healthcare plan is contributory with participants’
contributions adjusted annually; the life insurance plan is
noncontributory. Employees with less than 14 years of service as of
January 1, 1995, are not eligible for the health and life insurance retirement
benefits.
The
composition of net periodic pension plan costs for the three months and six
months ended June 30, is as follows:
For
the three months
|
For
the six months
|
|||||||||||||||
|
ended
June 30,
|
ended
June 30,
|
||||||||||||||
(In
thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Service
cost
|
$ | 65 | $ | 57 | $ | 130 | $ | 114 | ||||||||
Interest
cost
|
94 | 83 | 188 | 166 | ||||||||||||
Expected
return on plan assets
|
(143 | ) | (68 | ) | (268 | ) | (136 | ) | ||||||||
Amortization
of net losses
|
50 | 65 | 100 | 130 | ||||||||||||
Net
periodic benefit cost
|
$ | 66 | $ | 137 | $ | 150 | $ | 274 |
The
composition of net periodic postretirement plan costs for the three months and
six months ended June 30, is as follows:
For
the three months
|
For
the six months
|
|||||||||||||||
|
ended
June 30,
|
ended
June 30,
|
||||||||||||||
(In
thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Service
cost
|
$ | - | $ | 1 | $ | - | $ | 2 | ||||||||
Interest
cost
|
5 | 5 | 10 | 10 | ||||||||||||
Amortization
of transition obligation
|
4 | 5 | 9 | 10 | ||||||||||||
Net
periodic benefit cost
|
$ | 9 | $ | 11 | $ | 19 | $ | 22 |
The
Company made a non-recurring contribution to the defined benefit pension plan of
$1.0 million during the first quarter of 2010. Regular
contributions of approximately $64,000 were also made in the first quarter as
planned. There were no additional contributions made in the second
quarter.
(4)
Comprehensive Income
Accounting
principles generally accepted in the United States of America, require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, unrealized gains
and losses on financial derivatives, and unrecognized gains and losses, prior
service costs and transition assets or obligations for defined benefit pension
and post-retirement plans are reported as a separate component of the
shareholders’ equity section of the consolidated statements of condition, such
items, along with net income, are components of comprehensive
income.
The
components of other comprehensive income and related tax effects for the three
and six months ended June 30 are as follows:
For
the three months
|
For
the six months
|
|||||||||||||||
ended
June 30,
|
ended
June 30,
|
|||||||||||||||
(In
thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Unrealized
holding gains on securities available for sale:
|
||||||||||||||||
Unrealized
holding gains (losses) arising during the period
|
$ | 952 | $ | 217 | $ | 1,580 | $ | (3 | ) | |||||||
Reclassification
adjustment for impairment charges included in net income
|
- | 298 | - | 298 | ||||||||||||
Reclassification
adjustment for net gains included in net income
|
(17 | ) | - | (28 | ) | (87 | ) | |||||||||
Net
unrealized gains on securities available for sale
|
935 | 515 | 1,552 | 208 | ||||||||||||
Unrealized
holding losses on financial derivative:
|
||||||||||||||||
Unrealized
holding losses arising during the period
|
(177 | ) | - | (123 | ) | - | ||||||||||
Net
unrealized losses on financial derivative
|
(177 | ) | - | (123 | ) | - | ||||||||||
Defined
benefit pension and post retirement plans:
|
||||||||||||||||
Reclassification
adjustment for amortization of benefit plans' net loss
|
||||||||||||||||
and
transition obligation recognized in net periodic expense
|
54 | 70 | 109 | 140 | ||||||||||||
Net
change in defined benefit plan
|
54 | 70 | 109 | 140 | ||||||||||||
Other
comprehensive income before tax
|
812 | 585 | 1,538 | 348 | ||||||||||||
Tax
effect
|
(370 | ) | (162 | ) | (660 | ) | (189 | ) | ||||||||
Other
comprehensive income
|
$ | 442 | $ | 423 | $ | 878 | $ | 159 |
The
components of accumulated other comprehensive loss and related tax effects for
the periods indicated are as follows:
June
30,
|
December
31,
|
|||||||
(In
thousands)
|
2010
|
2009
|
||||||
Unrealized
gains on securities available for sale
|
||||||||
(net
of tax expense 2010 - $831; 2009 - $166)
|
$ | 1,135 | $ | 249 | ||||
Unrealized
losses on financial derivative
|
||||||||
(net
of tax benefit 2010 - $49; 2009 - $0)
|
(74 | ) | - | |||||
Net
pension losses
|
||||||||
(net
of tax benefit 2010 - $1,060; 2009 - $1,100)
|
(1,589 | ) | (1,649 | ) | ||||
Net
post-retirement transition obligation
|
||||||||
(net
of tax benefit 2010 - $13; 2009 - $17)
|
(19 | ) | (25 | ) | ||||
$ | (547 | ) | $ | (1,425 | ) |
(5)
Investment Securities
The
amortized cost and estimated fair value of investment securities are summarized
as follows:
June
30, 2010
|
||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
(In
thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
Bond investment securities:
|
||||||||||||||||
US
Treasury and agencies
|
$ | 24,632 | $ | 222 | $ | - | $ | 24,854 | ||||||||
State
and political subdivisions
|
20,096 | 762 | (51 | ) | 20,807 | |||||||||||
Corporate
|
5,819 | 175 | (557 | ) | 5,437 | |||||||||||
Residential
mortgage-backed
|
36,759 | 1,490 | (14 | ) | 38,235 | |||||||||||
Total
|
87,306 | 2,649 | (622 | ) | 89,333 | |||||||||||
Equity investment
securities:
|
||||||||||||||||
Mutual
funds:
|
||||||||||||||||
Ultra
short mortgage fund
|
2,022 | 30 | - | 2,052 | ||||||||||||
Large
cap equity fund
|
1,851 | - | (112 | ) | 1,739 | |||||||||||
Other
mutual funds
|
183 | 21 | - | 204 | ||||||||||||
Common
stock - financial services industry
|
501 | 1 | - | 502 | ||||||||||||
Total
|
4,557 | 52 | (112 | ) | 4,497 | |||||||||||
Other
investments
|
- | - | - | - | ||||||||||||
Total
investment securities
|
$ | 91,863 | $ | 2,701 | $ | (734 | ) | $ | 93,830 |
December
31, 2009
|
||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
(In
thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
Bond investment securities:
|
||||||||||||||||
US
Treasury and agencies
|
$ | 14,528 | $ | 30 | $ | (26 | ) | $ | 14,532 | |||||||
State
and political subdivisions
|
8,989 | 20 | (81 | ) | 8,928 | |||||||||||
Corporate
|
5,333 | 194 | (562 | ) | 4,965 | |||||||||||
Residential
mortgage-backed
|
36,124 | 989 | (173 | ) | 36,940 | |||||||||||
Total
|
64,974 | 1,233 | (842 | ) | 65,365 | |||||||||||
Equity investment
securities:
|
||||||||||||||||
Mutual
funds:
|
||||||||||||||||
Ultra
short mortgage fund
|
2,519 | - | - | 2,519 | ||||||||||||
Large
cap equity fund
|
2,088 | - | - | 2,088 | ||||||||||||
Other
mutual funds
|
183 | 24 | - | 207 | ||||||||||||
Common
stock - financial services industry
|
372 | - | - | 372 | ||||||||||||
Total
|
5,162 | 24 | - | 5,186 | ||||||||||||
Other
investments
|
2,203 | - | - | 2,203 | ||||||||||||
Total
investment securities
|
$ | 72,339 | $ | 1,257 | $ | (842 | ) | $ | 72,754 |
The
amortized cost and estimated fair value of debt investments at June 30, 2010 by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
Amortized
|
Estimated
|
|||||||
Cost
|
Fair
Value
|
|||||||
(In
thousands)
|
||||||||
Due
in one year or less
|
$ | 94 | $ | 94 | ||||
Due
after one year through five years
|
27,546 | 27,892 | ||||||
Due
after five years through ten years
|
9,264 | 9,449 | ||||||
Due
after ten years
|
13,643 | 13,663 | ||||||
Mortgage-backed
securities
|
36,759 | 38,235 | ||||||
Totals
|
$ | 87,306 | $ | 89,333 |
The
Company’s investment securities’ gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, are as follows:
June
30, 2010
|
||||||||||||||||||||||||
|
Less
than Twelve Months
|
Twelve
Months or More
|
Total
|
|||||||||||||||||||||
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||||||||
Losses
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
|||||||||||||||||||
(In
thousands)
|
|
|||||||||||||||||||||||
State
and political subdivisions
|
$ | (51 | ) | $ | 2,434 | $ | - | $ | - | $ | (51 | ) | $ | 2,434 | ||||||||||
Corporate
|
(19 | ) | 480 | (538 | ) | 1,427 | (557 | ) | 1,907 | |||||||||||||||
Residential
mortgage-backed
|
(6 | ) | 1,978 | (8 | ) | 321 | (14 | ) | 2,299 | |||||||||||||||
Equity
and other investments
|
(112 | ) | 1,741 | - | - | (112 | ) | 1,741 | ||||||||||||||||
$ | (188 | ) | $ | 6,633 | $ | (546 | ) | $ | 1,748 | $ | (734 | ) | $ | 8,381 | ||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
December
31, 2009
|
||||||||||||||||||||||||
|
Less
than Twelve Months
|
Twelve
Months or More
|
Total
|
|||||||||||||||||||||
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||||||||
Losses
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
US
Treasury and Agencies
|
$ | (26 | ) | $ | 4,996 | $ | - | $ | - | $ | (26 | ) | $ | 4,996 | ||||||||||
State
and political subdivisions
|
(81 | ) | 2,988 | - | - | (81 | ) | 2,988 | ||||||||||||||||
Corporate
|
- | - | (562 | ) | 1,402 | (562 | ) | 1,402 | ||||||||||||||||
Residential
mortgage-backed
|
(149 | ) | 9,665 | (24 | ) | 545 | (173 | ) | 10,210 | |||||||||||||||
$ | (256 | ) | $ | 17,649 | $ | (586 | ) | $ | 1,947 | $ | (842 | ) | $ | 19,596 |
We
conduct a formal review of investment securities on a quarterly basis for the
presence of other-than-temporary impairment (“OTTI”). In the second quarter of
2009, we adopted the updated guidance on determining OTTI on debt securities. We
assess whether OTTI is present when the fair value of a debt security is less
than its amortized cost basis at the statement of condition date. Under these
circumstances, OTTI is considered to have occurred (1) if we intend to sell the
security; (2) if it is “more likely than not” we will be required to sell the
security before recovery of its amortized cost basis; or (3) the present value
of expected cash flows is not sufficient to recover the entire amortized cost
basis. The “more likely than not” criteria is a lower threshold than the
“probable” criteria used under previous guidance. The guidance
requires that credit-related OTTI is recognized in earnings while
noncredit-related OTTI on securities not expected to be sold is recognized in
other comprehensive income (“OCI”). Noncredit-related OTTI is based on other
factors, including illiquidity. Presentation of OTTI is made in the statement of
income on a gross basis, including both the portion recognized in earnings as
well as the portion recorded in OCI. Normally, the gross OTTI would then be
offset by the amount of noncredit-related OTTI, showing the net as the impact on
earnings. All OTTI charges have been credit-related to date, and
therefore no offset or cumulative effect adjustment was presented on the
consolidated financial statements. Additional disclosures are also
required by this guidance.
At June
30, 2010, three corporate securities were in unrealized loss
positions. Two of the securities in unrealized loss positions
represent trust-preferred issuances from large money center financial
institutions. The JP Morgan Chase floating rate trust-preferred
security has a carrying value of $985,000 and a fair value of $751,000. The Bank
of America floating rate trust-preferred security has a carrying value of
$980,000 and a fair value of $676,000. The securities are rated A2
and Baa3 by Moody’s, respectively. The securities are both floating
rate notes that adjust quarterly to LIBOR. These securities reflect
net unrealized losses due to the fact that current similar issuances are being
originated at higher spreads to LIBOR, as the market currently demands a greater
pricing premium for the associated risk in the current economic
environment. Management has performed a detailed credit analysis on
the underlying companies and has concluded that each issue is not credit
impaired. Due to the fact that each security has approximately 17
years until final maturity, and management has determined that there is no
related credit impairment, the associated pricing risk is managed similar to
long-term, low yielding, 15 and 30 year fixed rate residential mortgages carried
in the Company’s loan portfolio. The risk is managed through the
Company’s extensive interest rate risk management procedures. The
Company expects the present value of expected cash flows will be sufficient to
recover the amortized cost basis. Thus, the securities are not deemed
to be other-than-temporarily impaired. The third security, Lloyds TSB
Bank, has a carrying value of $499,000 and a fair value of
$480,000. The security is rated AA-, A+, and Aa3 by Fitch, Standards
& Poor’s and Moody’s ratings agencies, respectively. The security
has been in an unrealized loss position for only two months. The valuation of
this security, along with the securities of all other European banks, has been
negatively impacted as a result of the Greek debt crisis. The
security is currently trading at a level above par. No
other-than-temporary impairment is deemed present.
A total
of three residential mortgage-backed security holdings have unrealized losses as
of June 30, 2010. One of the securities was issued by government
agencies or government sponsored enterprises. This unrealized loss relates
principally to changes in interest rates subsequent to the acquisition of the
specific security. No OTTI is deemed present on this
security. The remaining two securities in this classification
represent private label CMO’s, which have current unrealized losses of less than
$5,000 each. Both securities are currently “AAA” rated by Moody’s or S&P.
Management reviewed the underlying credit score information and the
concentration risk associated with the states that the majority of the
underlying mortgage collateral resides in. No OTTI is deemed present
on these securities.
At June
30, 2010, six state and political subdivision securities from three individual
issuers are in unrealized loss positions. Three individual holdings
issued by the Oswego, New York Central School District all have unrealized loss
positions of less than 1% of their original costs. The three
remaining holdings carry unrealized losses of less than 2.7% of their book
values and are AA rated or better by Standards & Poor’s. These
unrealized losses relate principally to changes in interest rates subsequent to
the acquisition of the individual holdings. No other-than-temporary
impairment is deemed present.
In
determining whether OTTI has occurred for equity securities, the Company
considers the applicable factors described above and the length of time the
equity security’s fair value has been below the carrying amount. Management has
determined that we have the intent and ability to retain the equity securities
for a sufficient period of time to allow for recovery. The Company’s
holdings in an equity investment in The Phoenix Companies was carried at an
unrealized loss that is less than 1% of the book value at June 30,
2010. The unrealized loss has only been in place for one
month. The remaining equity investment holding, which is in an
unrealized loss position as of June 30, 2010, is the Company’s holding in the
AMF Large Cap Equity Institutional Fund; a mutual fund consisting of investment
grade dividend-paying common stocks of large capitalization
companies. The holding has only been in an unrealized loss position
for a few days at the end of June 2010. The fund’s value is highly
correlated to the overall market performance and management feels strongly that
the market will return to previous valuation levels over the next economic
cycle. The unrealized loss on the fund holdings as of June 30, 2010
totaled $112,000, or 6.04%. As of July 26, 2010, the fund was in a
small unrealized gain position. As such, the decline in market value
is not considered to be other-than-temporary.
The
following table presents a roll-forward of the amount related to credit losses
recognized in earnings for the six-month periods ended June 30, 2010 and
2009.
(In
thousands)
|
2010
|
2009
|
||||||
Beginning
balance – January 1
|
$ | 875 | $ | 875 | ||||
Initial
credit impairment
|
- | 298 | ||||||
Subsequent
credit impairments
|
- | - | ||||||
Reductions
for amounts recognized in earnings due to intent or requirement to
sell
|
- | (298 | ) | |||||
Reductions
for securities sold
|
- | - | ||||||
Reductions
for increases in cash flows expected to be collected
|
- | - | ||||||
Ending
balance - June 30
|
$ | 875 | $ | 875 |
Gross
realized gains (losses) on sales, redemptions, and impairment of securities for
the six months ended June 30 are detailed below:
(In
thousands)
|
2010
|
2009
|
||||||
Realized
gains
|
$ | 28 | $ | 96 | ||||
Realized
losses
|
- | (9 | ) | |||||
Other
than temporary impairment
|
- | (298 | ) | |||||
$ | 28 | $ | (211 | ) |
As of
June 30, 2010 and December 31, 2009, securities with an amortized cost of $40.8
million and $45.7 million, respectively, were pledged to collateralize certain
deposit and borrowing arrangements.
Management
has reviewed its loan and mortgage-backed securities portfolios and determined
that, to the best of its knowledge, little or no exposure exists to sub-prime or
other high-risk residential mortgages. The Company is not in the
practice of investing in, or originating these types of investments or
loans.
(6)
Guarantees and Commitments
The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its letters of credit. 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 $1.5 million of letters of credit as of
June 30, 2010. Management believes that the proceeds obtained through
a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payments required under the
corresponding guarantees. The current amount of the liability
as of June 30, 2010, for guarantees under letters of credit issued is not
material.
The bank
has entered in contracts for the construction of a new branch location and the
remodeling of its main office lobby. The combined commitment amount
of the contracts totals approximately $1.5 million. Both construction
projects are in the early stages.
(7)
Fair Value Measurements
Accounting
guidance related to fair value measurements and disclosures specifies a
hierarchy of valuation techniques based on whether the inputs to those valuation
techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect our market
assumptions. These two types of inputs have created the following fair value
hierarchy:
·
|
Level
1 – Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
|
·
|
Level
2 – Quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; and model-derived valuations in which all significant
inputs and significant value drivers are observable in active
markets.
|
·
|
Level
3 – Model derived valuations in which one or more significant inputs or
significant value drivers are
unobservable.
|
An asset
or liability’s level within the fair value hierarchy is based on the lowest
level of input that is significant to the fair value measurement.
The
Company used the following methods and significant assumptions to estimate fair
value:
Investment
securities: The fair values of securities available for sale are
obtained from an independent third party and are based on quoted prices on
nationally recognized exchange (Level 1), where available. At this
time, only the AMF Large Cap Equity Institutional Fund qualifies as a Level 1
valuation. If quoted prices are not available, fair values are
measured by utilizing matrix pricing, which is a mathematical technique used
widely in the industry to value debt securities without relying exclusively on
quoted prices for specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities (Level
2). Management made no adjustment to the fair value quotes that were
received from the independent third party pricing service.
Interest
rate swap derivative: The fair value of the interest rate swap
derivative is calculated based on a discounted cash flow model. All future
floating cash flows are projected and both floating and fixed cash flows are
discounted to the valuation date. The curve utilized for discounting
and projecting is built by obtaining publicly available third party market
quotes for various swap maturity terms.
Impaired
loans: Impaired loans are those loans in which the Company has measured
impairment generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent
third party appraisals of the properties, or discounted cash flows based upon
expected proceeds. These assets are included as Level 3 fair values,
based upon the lowest level of input that is significant to the fair value
measurements. The fair value consists of loan balances less their
valuation allowances.
The
following tables summarize assets measured at fair value on a recurring basis as
of June 30, 2010 and December 31, 2009, segregated by the level of valuation
inputs within the hierarchy utilized to measure fair value:
At
June 30, 2010
|
||||||||||||||||
Total
Fair
|
||||||||||||||||
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
Investment
securities available for sale
|
$ | 1,739 | $ | 92,091 | $ | - | $ | 93,830 | ||||||||
Interest
rate swap derivative
|
- | (122 | ) | - | (122 | ) | ||||||||||
At
December 31, 2009
|
||||||||||||||||
Total
Fair
|
||||||||||||||||
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
Investment
securities available for sale
|
$ | 2,088 | $ | 70,666 | $ | - | $ | 72,754 | ||||||||
Interest
rate swap derivative
|
- | 1 | - | 1 |
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).
The
following tables summarize assets measured at fair value on a nonrecurring basis
as of June 30, 2010 and December 31, 2009, segregated by the level of valuation
inputs within the hierarchy utilized to measure fair value:
At
June 30, 2010
|
||||||||||||||||
Total
Fair
|
||||||||||||||||
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 1,271 | $ | 1,271 | ||||||||
At
December 31, 2009
|
||||||||||||||||
Total
Fair
|
||||||||||||||||
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 907 | $ | 907 |
There
have been no transfers of assets in or out of any fair value measurement
level.
Required
disclosures include fair value information of financial instruments, whether or
not recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective period-ends, and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each period-end.
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The Company, in estimating its fair
value disclosures for financial instruments, used the following methods and
assumptions:
Cash and cash equivalents –
The carrying amounts of these assets approximate their fair value.
Investment securities – The
fair values of securities available for sale are obtained from an independent
third party and are based on quoted prices on nationally recognized exchange
(Level 1), where available. If quoted prices are not available, fair
values are measured by utilizing matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities without relying
exclusively on quoted prices for specific securities, but rather by relying on
the securities’ relationship to other benchmark quoted securities (Level
2). Management made no adjustment to the fair value quotes that were
received from the independent third party pricing service.
Loans – The fair values of
portfolio loans, excluding impaired loans (see previous discussion of methods
and assumptions), are estimated using an option adjusted discounted cash flow
model that discounts future cash flows using recent market interest rates,
market volatility and credit spread assumptions.
Federal Home Loan Bank stock –
The carrying amount of these assets approximates their fair value.
Accrued interest receivable and
payable – The carrying amount of these assets approximates their fair
value.
Mortgage servicing rights -
The carrying amount of these assets approximates their fair value.
Interest rate swap derivative
- The fair value of the interest rate swap derivative is calculated based on a
discounted cash flow model. All future floating cash flows are projected and
both floating and fixed cash flows are discounted to the valuation
date. The curve utilized for discounting and projecting is built by
obtaining publicly available third party market quotes for various swap maturity
terms.
Deposit liabilities – The fair
values disclosed for demand deposits (e.g., interest-bearing and
noninterest-bearing checking, passbook savings and certain types of money
management accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered in the market on
certificates of deposits to a schedule of aggregated expected monthly maturities
on time deposits.
Borrowings – Fixed/variable
term “bullet” structures are valued using a replacement cost of funds
approach. These borrowings are discounted to the FHLBNY advance
curve. Option structured borrowings’ fair values are determined by
the FHLB for borrowings that include a call or conversion option. If
market pricing is not available from this source, current market indications
from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY
advance curve less an appropriate spread to adjust for the option.
Junior subordinated debentures
– Current economic conditions have rendered the market for this liability
inactive. As such, we are unable to determine a good estimate of fair
value. Since the rate paid on the debentures held is lower than what
would be required to secure an interest in the same debt at year end, and we are
unable to obtain a current fair value, we have disclosed that the carrying value
approximates the fair value.
Off-balance sheet instruments
– Fair values for the Company’s off-balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit
standing. Such fees were not material at June 30, 2010 and
2009.
The
carrying amounts and fair values of the Company’s financial instruments as of
June 30, 2010 and December 31, 2009 are presented in the following
table:
June
30, 2010
|
December
31, 2009
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
(Dollars
in thousands)
|
Amounts
|
Fair
Values
|
Amounts
|
Fair
Values
|
||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 9,275 | $ | 9,275 | $ | 14,631 | $ | 14,631 | ||||||||
Investment
securities
|
93,830 | 93,830 | 72,754 | 72,754 | ||||||||||||
Net
loans
|
266,828 | 274,864 | 259,387 | 266,290 | ||||||||||||
Federal
Home Loan Bank stock
|
2,113 | 2,113 | 1,899 | 1,899 | ||||||||||||
Accrued
interest receivable
|
1,663 | 1,663 | 1,482 | 1,482 | ||||||||||||
Mortgage
servicing rights
|
46 | 46 | 61 | 61 | ||||||||||||
Interest
rate swap derivative
|
- | - | 1 | 1 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
$ | 315,647 | $ | 319,050 | $ | 296,839 | $ | 299,613 | ||||||||
Borrowed
funds
|
40,236 | 41,574 | 36,000 | 37,116 | ||||||||||||
Junior
subordinated debentures
|
5,155 | 5,155 | 5,155 | 5,155 | ||||||||||||
Accrued
interest payable
|
140 | 140 | 189 | 189 | ||||||||||||
Interest
rate swap derivative
|
122 | 122 | - | - | ||||||||||||
Off-balance
sheet instruments:
|
||||||||||||||||
Standby
letters of credit
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Commitments
to extend credit
|
- | - | - | - |
(8)
Interest Rate Derivative
Derivative
instruments are entered into primarily as a risk management tool of the Company.
Financial derivatives are recorded at fair value as other assets and other
liabilities. The accounting for changes in the fair value of a derivative
depends on whether it has been designated and qualifies as part of a hedging
relationship. For a fair value hedge, changes in the fair value of the
derivative instrument and changes in the fair value of the hedged asset or
liability are recognized currently in earnings. For a cash flow hedge, changes
in the fair value of the derivative instrument, to the extent that it is
effective, are recorded in other comprehensive income and subsequently
reclassified to earnings as the hedged transaction impacts net income. Any
ineffective portion of a cash flow hedge is recognized currently in
earnings. See Note 7 for further discussion of the fair
value of the interest rate derivative.
The
Company has $5 million of floating rate Trust Preferred debt indexed to 3-month
LIBOR. As a result, it is exposed to variability in cash flows
related to changes in projected interest payments caused by changes in the
benchmark interest rate. During the fourth quarter of fiscal
2009, the Company entered into an interest rate swap agreement, with a $2.0
million notional amount, to convert a portion of the variable-rate junior
subordinated debentures to a fixed rate for a term of approximately 7 years at a
rate of 4.96%. The derivative is designated as a cash flow
hedge. The hedging strategy ensures that changes in cash flows from
the derivative will be highly effective at offsetting changes in interest
expense from the hedged exposure.
The
following table summarizes the fair value of outstanding derivatives and their
presentation on the statements of condition:
June
30,
|
December
31,
|
||||||||
(In
thousands)
|
2010
|
2009
|
|||||||
Cash
flow hedge:
|
|||||||||
Interest
rate swap
|
Other
assets
|
$ | - | $ | 1 | ||||
Other
liabilities
|
122 | - |
The
change in accumulated other comprehensive loss and the impact on earnings from
the interest rate swap that qualifies as a cash flow hedge for the six months
ended June 30, 2010 were as follows:
(In
thousands)
|
2010
|
|||
Balance
as of January 1:
|
$ | 1 | ||
Amount
of loss recognized in other comprehensive income
|
(154 | ) | ||
Amount
of loss reclassified from other comprehensive income
|
||||
and
recognized as interest expense
|
31 | |||
Balance
as of June 30:
|
$ | (122 | ) |
No amount
of ineffectiveness has been included in earnings and the changes in fair value
have been recorded in OCI. The amount included in accumulated other
comprehensive loss would be reclassified into current earnings should a portion,
or the entire hedge no longer be considered effective, but at this time,
management expects the hedge to remain fully effective during the remaining term
of the swap.
The
Company posted cash, of $100,000, under collateral arrangements to satisfy
collateral requirements associated with the interest rate swap
contract.
(9)
New Accounting Pronouncements
The FASB
has issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now
require:
·
|
A
reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers;
and
|
·
|
In
the reconciliation for fair value measurements using significant
unobservable inputs, a reporting entity should present separately
information about purchases, sales, issuances, and
settlements.
|
In
addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures:
·
|
For
purposes of reporting fair value measurement for each class of assets and
liabilities, a reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities;
and
|
·
|
A
reporting entity should provide disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring
fair value measurements.
|
ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal
years. This update may require the Company to provide additional
disclosures related to fair value measurements, if conditions are
met.
ASU
2010-18, Receivables (Topic
310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is
Accounted for as a Single Asset, codifies the consensus reached in EITF
Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool
That Is Accounted for as a Single Asset.” The amendments to the Codification
provide that modifications of loans that are accounted for within a pool under
Subtopic 310-30 do not result in the removal of those loans from the pool even
if the modification of those loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to consider
whether the pool of assets in which the loan is included is impaired if expected
cash flows for the pool change. ASU 2010-18 does not affect the
accounting for loans under the scope of Subtopic 310-30 that are not accounted
for within pools. Loans accounted for individually under Subtopic
310-30 continue to be subject to the troubled debt restructuring accounting
provisions within Subtopic 310-40. ASU 2010-18 is effective
prospectively for modifications of loans accounted for within pools under
Subtopic 310-30 occurring in the first interim or annual period ending on or
after July 15, 2010. Early application is permitted. Upon initial adoption of
ASU 2010-18, an entity may make a one-time election to terminate accounting for
loans as a pool under Subtopic 310-30. This election may be applied
on a pool-by-pool basis and does not preclude an entity from applying pool
accounting to subsequent acquisitions of loans with credit
deterioration. The Company no longer pools loans and holds one single
asset that consists of a very small number of individual loans. It is
unlikely that the adoption of this standard will have an impact on the
Company.
ASU
2010-20, Receivables (Topic
310): Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses, will help investors assess the credit risk
of a company’s receivables portfolio and the adequacy of its allowance for
credit losses held against the portfolios by expanding credit risk
disclosures.
This ASU
requires more information about the credit quality of financing receivables in
the disclosures to financial statements, such as aging information and credit
quality indicators. Both new and existing disclosures must be
disaggregated by portfolio segment or class. The disaggregation of
information is based on how a company develops its allowance for credit losses
and how it manages its credit exposure. The amendments in this
Update apply to all public and nonpublic entities with financing
receivables. Financing receivables include loans and trade accounts
receivable. However, short-term trade accounts receivable, receivables
measured at fair value or lower of cost or fair value, and debt securities are
exempt from these disclosure amendments. The effective date of ASU 2010-20
differs for public and nonpublic companies. For public companies, the
amendments that require disclosures as of the end of a reporting period are
effective for periods ending on or after December
15, 2010. The amendments that require disclosures about activity that
occurs during a reporting period are effective for periods beginning on or after
December 15, 2010. This update will require the Company to provide
additional disclosures related to loan receivables and credit
quality.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Throughout
Management’s Discussion and Analysis (“MD&A”) the term, “the Company”,
refers to the consolidated entity of Pathfinder Bancorp,
Inc. Pathfinder Bank and Pathfinder Statutory Trust II are wholly
owned subsidiaries of Pathfinder Bancorp, Inc., however, Pathfinder Statutory
Trust II is not consolidated for reporting purposes. Pathfinder
Commercial Bank, Pathfinder REIT, Inc. and Whispering Oaks Development Corp. are
wholly owned subsidiaries of Pathfinder Bank. At June 30, 2010,
Pathfinder Bancorp, M.H.C, the Company’s mutual holding company parent, whose
activities are not included in the consolidated financial statements or the
MD&A, held 63.7% of the Company’s outstanding common stock and public
shareholders held the remaining 36.3% of the common stock.
The
following discussion reviews the Company's consolidated financial condition at
June 30, 2010 and the consolidated results of operations for the three months
and six months ended June 30, 2010.
Statement
Regarding Forward-Looking Statements
When used
in this quarterly report the words or phrases “will likely result”, “are
expected to”, “will continue”, “is anticipated”, “estimate”, ”project” or
similar expressions are intended to identify “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are subject to certain risks and uncertainties.
By identifying these forward-looking statements for you in this manner, the
Company is alerting you to the possibility that its actual results and financial
condition may differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking statements. 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 various factors 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. Additionally,
all statements in this document, including forward-looking statements, speak
only as of the date they are made, and the Company undertakes no obligation to
update any statement in light of new information or future events.
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 consolidated 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 2009 Annual Report on
Form 10-K ("the consolidated financial statements").
These
policies, along with the disclosures presented in the other consolidated
financial statement notes and in this discussion, provide information on how
significant assets and liabilities are valued in the consolidated financial
statements and how those values are determined. Based on the
valuation techniques used and the sensitivity of financial statement amounts to
the methods, assumptions and estimates underlying those amounts, management has
identified the allowance for loan losses, deferred income taxes, pension
obligations, the evaluation of investment securities for other than temporary
impairment and the estimation of fair values for accounting and disclosure
purposes to be the accounting areas that require 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 statement of condition. 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.
Deferred
income tax assets and liabilities are determined using the liability
method. Under this method, the net deferred tax asset or liability is
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases as well as net operating and capital loss carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date. To the extent that current available evidence about the future
raises doubt about the likelihood of a deferred tax asset being realized, a
valuation allowance is established. The judgment about the level of
future taxable income, including that which is considered capital, is inherently
subjective and is reviewed on a continual basis as regulatory and business
factors change.
Pension
and post-retirement benefit plan liabilities and expenses are based upon
actuarial assumptions of future events, including fair value of plan assets,
interest rates, rate of future compensation increases and the length of time the
Company will have to provide those benefits. The assumptions used by management
are discussed in Note 11 to the consolidated financial statements.
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, except for security impairment losses, which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the security portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. Management continually analyzes the portfolio to determine if further impairment has occurred that may be deemed as other-than-temporary. Further charges are possible depending on future economic conditions.
The
estimation of fair value is significant to several of our assets, including
investment securities available for sale, the interest rate derivative,
intangible assets and foreclosed real estate, as well as the value of loan
collateral when valuing loans. These are all recorded at either fair value or
the lower of cost or fair value. Fair values are determined based on third party
sources, when available. Furthermore, accounting principles generally accepted
in the United States require disclosure of the fair value of financial
instruments as a part of the notes to the consolidated financial statements.
Fair values may be influenced by a number of factors, including market interest
rates, prepayment speeds, discount rates and the shape of yield
curves.
Fair
values for securities available for sale are obtained from an independent third
party pricing service. Where available, fair values are based on
quoted prices on a nationally recognized securities exchange. If
quoted prices are not available, fair values are measured using quoted market
prices for similar benchmark securities. Management made no
adjustments to the fair value quotes that were provided by the pricing
source. The fair values of foreclosed real estate and the underlying
collateral value of impaired loans are typically determined based on appraisals
by third parties, less estimated costs to sell. If necessary, appraisals are
updated to reflect changes in market conditions.
Recent
Events
Congress
has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (the “ Dodd-Frank Act”), which will significantly change the current bank
regulatory structure and affect the lending, investment, trading and operating
activities of financial institutions and their holding companies. The
Dodd-Frank Act will eliminate our current primary federal regulator, the Office
of Thrift Supervision. The Dodd-Frank Act also authorizes the Board
of Governors of the Federal Reserve System to supervise and regulate all savings
and loan holding companies like the Company, in addition to bank holding
companies that it currently regulates. As a result, the Federal
Reserve Board’s current regulations applicable to bank holding companies,
including holding company capital requirements, will apply to savings and loan
holding companies like the Company. These capital requirements are
substantially similar to the capital requirements currently applicable to the
Bank. The Dodd-Frank Act also requires the Federal Reserve Board to
set minimum capital levels for bank holding companies that are as stringent as
those required for the insured depository subsidiaries, and the components of
Tier 1 capital would be restricted to capital instruments that are currently
considered to be Tier 1 capital for insured depository
institutions. Bank holding companies with assets of less than $500
million are exempt from these capital requirements. Under the
Dodd-Frank Act, the proceeds of trust preferred securities are excluded from
Tier 1 capital, unless such securities were issued prior to May 19, 2010 by bank
or savings and loan holding companies with less than $15 billion of
assets. The legislation also establishes a floor for capital of
insured depository institutions that cannot be lower than the standards in
effect today, and directs the federal banking regulators to implement new
leverage and capital requirements within 18 months that take into account
off-balance sheet activities and other risks, including risks relating to
securitized products and derivatives.
The
Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with
broad powers to supervise and enforce consumer protection laws. The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions such as the Bank, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices. The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets. Banks and
savings institutions with $10 billion or less in assets will be examined by
their applicable bank regulators. The new legislation also weakens
the federal preemption available for national banks and federal savings
associations, and gives state attorneys general the ability to enforce
applicable federal consumer protection laws.
The
legislation also broadens the base for Federal Deposit Insurance Corporation
insurance assessments. Assessments will now be based on the average
consolidated total assets less tangible equity capital of a financial
institution. The Dodd-Frank Act also permanently increases the
maximum amount of deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1, 2009, and
non-interest bearing transaction accounts have unlimited deposit insurance
through December 31, 2013.
Lastly,
the Dodd-Frank Act will increase stockholder influence over boards of directors
by requiring companies to give stockholders a non-binding vote on executive
compensation and so-called “golden parachute” payments, and authorizing the
Securities and Exchange Commission to promulgate rules that would allow
stockholders to nominate their own candidates using a company’s proxy
materials. The legislation also directs the Federal Reserve Board to
promulgate rules prohibiting excessive compensation paid to bank holding company
executives, regardless of whether the company is publicly traded or
not.
The
Dodd-Frank Act was signed into law on July 21, 2010. The Act
represents the most sweeping financial services industry reform since the
1930’s. Generally, the Act is effective the day after it was signed
into law, but different effective dates apply to specific sections of the
Act. Among other things, the Act may result in added costs of doing
business and regulatory compliance burdens and affect competition among
financial services entities. At this time, it is difficult to predict
the extent to which the Dodd-Frank Act or the resulting regulations will impact
the Company’s business. However, compliance with these new laws and regulations
will result in additional costs, which may adversely impact the Company’s
results of operations, financial condition or liquidity. Additional
information, including a summary of certain provisions of the Act, is available
on the Federal Deposit Insurance Corporation website at
www.fdic.gov/regulations/reform/index.html.
Overview
Net
income was $550,000 for the three months ended June 30, 2010. Net
income available to common shareholders was $435,000, or $0.17 per basic and
diluted common share, for the same three months. This compares to
$31,000, or $0.01 per basic and diluted common share, for the three-month period
ended June 30, 2009. For the six months ended June 30, 2010, the
Company reported net income of $1.2 million. Net income available to
common shareholders was $920,000, or $0.37 per basic and diluted share as
compared to $610,000, or $0.25 per basic and diluted share for the same period
in 2009. The Company has continued efforts to expand both its lending
and deposit relationships within the small business
community. Consequently, the Company’s asset mix has shifted from one
more concentrated in residential loans and retail deposits to a more diversified
mix of residential, consumer, and commercial relationships. On an
average balance basis, total commercial loans, including loans to
municipalities, comprised 37.5% of the total gross loan portfolio for the six
months ended June 30, 2010 compared to 35.1% for the six months ended June 30,
2009. Increasing the commercial loan portfolio under the present
economic conditions could increase the inherent risk in the loan portfolio, but
the Company is maintaining controlled growth to provide the desired
diversification and the additional risk is addressed with increased loan loss
provisions. Total business deposits, including municipal deposits,
comprised 24.5% of total deposits on an average basis for the quarter ended June
30, 2010 compared to 20.8% for the second quarter of 2009.
Since
December 31, 2009, deposits have increased $18.8 million. The
liquidity provided by deposit growth, as well as additional short-term
borrowings of $7.2 million, has been used to fund an increase in loans of $7.4
million and an increase in investment portfolio holdings of $21.1
million. Cash and cash equivalents have decreased to provide
additional funding of loan originations and security purchases. The
Company made a non-recurring contribution to the defined benefit pension plan of
$1.0 million during the first quarter of 2010. The contribution was
made to enhance the funding of the plan, which will reduce the future
anticipated pension expense.
In 2010
we have continued to expand our geographic reach into the greater Syracuse
market. In order to provide full services to this market and address
the new and emerging customer opportunities, we have begun construction of a new
branch location in Cicero, New York. At this time, construction is in
the early stages, but business development efforts in that market have provided
both loan and deposit growth.
Results
of Operations
The
return on average assets and return on average shareholders' equity were 0.57%
and 7.17%, respectively, for the three months ended June 30, 2010, compared with
0.03% and 0.61%, respectively, for the three months ended June 30,
2009. During the second quarter of 2010, when compared to the second
quarter of 2009, net interest income increased $401,000. The
provision for loan losses decreased $10,000, and noninterest income increased
$321,000 offset by an increase in noninterest expenses of $76,000.
Net
Interest Income
Net
interest income is the Company's primary source of operating income for payment
of operating expenses and providing for loan losses. It is the amount
by which interest earned on loans, interest-earning deposits and investment
securities, exceeds the interest paid on deposits and other interest-bearing
liabilities. Changes in net interest income and net interest margin
result from the interaction between the volume and composition of
interest-earning assets, interest-bearing liabilities, related yields and
associated funding costs.
Net
interest income, on a tax-equivalent basis increased to $3.3 million for the
three months ended June 30, 2010, from $2.8 million for the three months ended
June 30, 2009. The Company's net interest margin for the second
quarter of 2010 increased to 3.72% from 3.41% when compared to the same quarter
in 2009. Continued reductions in short-term interest rates have
resulted in a positively sloped yield curve. Reductions in the
Company’s cost of funds, combined with efforts to maintain the current levels of
earning asset yields have resulted in an expansion of the Company’s net interest
margin. The increase in net interest income is attributable to a decrease of 59
basis points in the average cost of interest bearing liabilities, and was
partially offset by a decrease of 25 basis points in the average yield earned on
earning assets. Average interest-earning assets increased 9.1% to
$358.1 million for the three months ended June 30, 2010, as compared to $328.2
million for the three months ended June 30, 2009. The increase in
average earning assets is attributable to a $15.3 million increase in average
loans receivable, a $12.3 million increase in average investment securities and
a $2.3 million increase in average interest earning deposits. Average
interest-bearing liabilities increased $24.1 million to $325.4
million from $301.3 million for the three months ended June 30, 2009. The
increase in the average balance of interest-bearing liabilities resulted from a
$27.0 million increase in average deposits, offset by a decrease of $2.9 million
in average borrowings.
For the
six months ended June 30, 2010, net interest income, on a tax-equivalent basis,
increased to $6.6 million from $5.6 million for the six months ended June 30,
2009. Net interest margin increased 30 basis points to 3.71% for the
six months ended June 30, 2010 from 3.41% for the six months ended June 30,
2009. Average interest-earning assets increased 8.3% to $357.3 million for the
six months ended June 30, 2010 as compared to $330.0 million for the six months
ended June 30, 2009, and the yield on interest-earning assets decreased 33 basis
points to 5.06% from 5.39% for the comparable period. The
increase in average interest-earning assets was attributable to a $15.0 million
increase in average loans receivable, a $7.6 million increase in average
investment securities and a $4.7 million increase in average interest earning
deposits. Average interest-bearing liabilities increased $19.7
million but the cost of funds decreased 68 basis points to 1.49% for the six
months ended June 30, 2010, from 2.17% for the same period in
2009. The increase in the average balance of interest-bearing
liabilities was the result of a $24.6 million, or 9.5%, increase in average
deposits offset by a $4.9 million, or 11.2%, decrease in average
borrowings.
Interest
Income
Total
interest income, on a tax-equivalent basis, for the quarter ended June 30, 2010,
increased $171,000, or 3.9%, to $4.5 million when compared to the quarter ended
June 30, 2009.
The
average balance of loans increased $15.3 million to $264.4 million, with yields
decreasing 23 basis points to 5.70% for the second quarter of
2010. Average residential real estate loans increased $2.1 million,
or 1.5%, and experienced a decrease in the average yield to 5.52% from 5.62% in
the comparable quarter of 2009. Average commercial real estate
loans increased $6.4 million, while the average yield on those loans decreased
to 6.25% from 6.96% in the comparable quarter. Average municipal
loans increased approximately $1.7 million, and experienced a decrease in yield
of 66 basis points. Average consumer loans increased $1.8 million, or
6.4%, while the average yield decreased by 8 basis points. The
commercial loan category was the only segment of the current loan portfolio that
experienced an increase in the yield. Average commercial loans
increased $3.3 million and experienced an increase in the average yield of 5
basis points, to 5.18% for the quarter ended June 30, 2010, from 5.13%, in the
quarter ended June 30, 2009.
Average
investment securities (taxable and tax-exempt) for the quarter ended June 30,
2010, increased by $12.3 million, with an increase in tax-equivalent interest
income from investments of $96,000, or 14.4%, when compared to the second
quarter of 2009. The average tax-equivalent yield of the portfolio
decreased 7 basis points, to 3.54% from 3.61%. The decrease in
the overall portfolio yield is being driven by the portfolio repricing during
the current low rate environment as well as management’s decision to invest in
shorter term investments in order to position the Company for the potential of
rising interest rates. Shorter-term, liquid investments typically
provide lower yields than loans or longer-term investment
securities.
Total
interest income, on a tax-equivalent basis, for the six months ended June 30,
2010 increased $132,000, or 1.5%, when compared to the six months ended June 30,
2009.
Average
loans increased $15.0 million, with average yields decreasing 16 basis points to
5.74% from 5.90% for the six-month period ended June 30, 2010 when compared with
the same period in 2009. As reflected in the second quarter data, all
loan categories showed an increase in the six-month averages when compared to
the same period in 2009. Similarly, yields on all categories, except
commercial loans, have also declined when comparing the six-month
periods. Average residential real estate loans increased $1.5 million
and experienced a slight decrease in the average yield of 2 basis points from
the comparable six-month period ended June 30, 2009. Average
commercial real estate loans increased $6.9 million, or 12.2%, while the average
yield on those loans decreased to 6.30% from 6.87% from the period a year
earlier. Average municipal loans increased approximately $1.0
million, and experienced a decrease in yield of 75 basis
points. Average consumer loans increased $1.9 million, while the
average yield decreased by 16 basis points. Average commercial loans
increased $3.6 million, or 12.9%, and experienced an increase in the average
yield of 3 basis points, to 5.11% for the six months ended June 30, 2010, from
5.08%, for the same period ended June 30, 2009.
For the
six months ended June 30, 2010, tax-equivalent interest income from investment
securities decreased $99,000, or 6.3%, compared to the same period in
2009. The average tax-equivalent yield of the portfolio
decreased 63 basis points, to 3.58% from 4.21%. The decrease in
yield was offset by an increase in the average balance of investment
securities. The average balance for the six-month period ended June
30, 2010 was $81.9 million compared to $74.2 million for the six-month period
ended June 30, 2009. The increase in average balance reflects the use
of liquidity generated by increased deposits.
Interest
Expense
Total
interest expense decreased $357,000 for the three months ended June 30, 2010,
compared to the same quarter in 2009, as the cost of funds decreased 59 basis
points to 1.49% in 2010 from 2.08% in 2009. The cost of funds on
deposits decreased $301,000, or 26.1%. Each deposit product line’s
average balance increased in 2010 over the second quarter of 2009, with the
exception of time deposits. The average balance of time
deposits decreased $2.8 million, or 2.0%, when comparing the second quarter of
2010 to the same period in 2009. The time deposit cost of funds
decreased 93 basis points to 2.13% for the three months ended June 30, 2010 from
3.06% for the same three-month period in the prior year. The
combination of the decline in average balance and the lower cost of time
deposits resulted in a $334,000 reduction of interest expense. The
reduction in the cost of time deposits was offset by a $33,000 increase in the
cost of other deposits related to average balance increases. The
average balance of money market demand accounts increased $17.8 million to $51.4
million for the three months ended June 30, 2010 from $33.6 million for the
three months ended June 30, 2009. The average balance in demand deposit NOW
accounts increased $8.5 million, or 37.2%. Money management and
savings accounts, experienced an increased average combined balance of $3.5
million. The cost of funds associated with the deposit product lines,
other than time deposits, remained relatively unchanged (with cost reductions of
0 to 4 basis points) as the rate environment has not allowed for further
reductions of already low rates on such deposits.
The
average balance of total borrowings decreased $2.9 million for the three-month
period ended June 30, 2010 when compared to the three months ended June 30,
2009. Interest expense on borrowings decreased by $56,000, or 13.6%,
from the prior year’s second quarter as a result of a 31 basis point decrease in
the cost of funds on the junior subordinated debenture, that resulted from a
reduction in its index rate which is based on 3-month LIBOR, combined with the
cost of funds on other borrowings decreasing 35 basis points to 3.59% for the
three months ended June 30, 2010.
Total
interest expense decreased $884,000 for the six months ended June 30, 2010,
compared to the same period in 2009, as the cost of funds decreased 68 basis
points to 1.49% in 2010 from 2.17% in 2009. The cost of funds on
deposits decreased $754,000, or 30.8%. Each deposit product line’s
average balance increased in 2010 over the same six-month period in 2009, with
the exception of time deposits. The six-month average balance
of time deposits decreased $1.3 million when comparing 2010 to the same period
in 2009. The time deposit cost of funds decreased 110 basis points to
2.14% for the six months ended June 30, 2010 from 3.24% for the same six-month
period in the prior year. The combination of the decline in average
balance and the lower cost of time deposits resulted in a $767,000 reduction of
interest expense. The reduction in the cost of time deposits was
offset by a $13,000 increase in the cost of other deposits related to average
balance increases. The average balance of money market demand
accounts (“MMDA”) increased $15.0 million to $48.9 million for the six months
ended June 30, 2010 from $33.9 million for the six months ended June 30, 2009.
This large increase in average balance was partially offset by a 20 basis point
reduction in the cost of funds of MMDA. The average balance in demand
deposit NOW accounts increased $5.8 million, or 25.0%. Money
management and savings accounts, experienced an increased average combined
balance of $5.2 million. The cost of funds associated with the
deposit product lines, other than time deposits and MMDA, remained relatively
unchanged (with cost reductions of 0 to 4 basis points) as the rate environment
has not allowed for further reductions of already low rates on such
deposits.
The
average balance of total borrowings decreased $4.9 million for the six-month
period ended June 30, 2010 when compared to the six months ended June 30,
2009. Interest expense on borrowings decreased by $129,000, or 15.5%,
from the prior year as a result of an 18 basis point decrease in the cost of
funds on borrowings to 3.60% for the six months ended June 30,
2010.
Provision
for Loan Losses
The
provision for loan losses for the quarter ended June 30, 2010 decreased $10,000
when compared to the second quarter of 2009. This decrease was
created by additional provisions recorded in the second quarter of 2009 to
address the generally weakened economic conditions, an increase in delinquency
and non-performing residential loans and a growing loan
portfolio. Since that time, the Company has continued to provide for
future loan losses at a consistently higher level. Further
deterioration of the residential loan portfolio has not occurred and related
supplemental additions to the allowance for loan losses have not been
required. For the six months ended June 30, 2010, the provision for
loan losses increased $118,000 over the six-month period in
2009. The Company continues to provide for loan losses to
reflect the growing loan portfolio and to reflect a loan portfolio composition
that is more heavily weighted to commercial term and commercial real estate,
which have higher inherent risk characteristics than a consumer real estate
portfolio, as well as a general weakening in economic conditions and overall
asset quality. All of the increase in provision has been allocated to
commercial lending. The Company's ratio of allowance for loan losses
to period-end loans increased to 1.28% at June 30, 2010 as compared to 1.17% at
December 31, 2009. Nonperforming loans to period end loans increased
to 1.85% at June 30, 2010 from 0.88% at December 31, 2009. The increase in
nonperforming loans is primarily the result of an increase in delinquency of a
small number of commercial real estate loan relationships. Management
believes that the existing allowances provided on these loans are sufficient to
cover anticipated losses.
Noninterest
Income
The
Company's noninterest income is primarily comprised of fees on deposit account
balances and transactions, loan servicing, commissions, and net gains (losses)
on securities, loans and foreclosed real estate.
The
following table sets forth certain information on noninterest income for the
periods indicated:
Three
Months Ended June 30,
|
||||||||||||||||
(in
thousands)
|
2010
|
2009
|
Change
|
|||||||||||||
Service
charges on deposit accounts
|
$ | 343 | $ | 360 | $ | (17 | ) | -4.7 | % | |||||||
Earnings
on bank owned life insurance
|
57 | 56 | 1 | 1.8 | % | |||||||||||
Loan
servicing fees
|
60 | 55 | 5 | 9.1 | % | |||||||||||
Debit
card interchange fees
|
81 | 73 | 8 | 11.0 | % | |||||||||||
Other
charges, commissions and fees
|
142 | 114 | 28 | 24.6 | % | |||||||||||
Noninterest
income before gains (losses)
|
683 | 658 | 25 | 3.8 | % | |||||||||||
Net
gains (losses) on sales and redemptions or impairment of investment
securities
|
17 | (298 | ) | 315 | -105.7 | % | ||||||||||
Net
losses on sales of loans and foreclosed real estate
|
(34 | ) | (15 | ) | (19 | ) | 126.7 | % | ||||||||
Total
noninterest income
|
$ | 666 | $ | 345 | $ | 321 | 93.0 | % | ||||||||
Six
Months Ended June 30,
|
||||||||||||||||
(in
thousands)
|
2010 | 2009 |
Change
|
|||||||||||||
Service
charges on deposit accounts
|
$ | 732 | $ | 711 | $ | 21 | 3.0 | % | ||||||||
Earnings
on bank owned life insurance
|
140 | 112 | 28 | 25.0 | % | |||||||||||
Loan
servicing fees
|
117 | 111 | 6 | 5.4 | % | |||||||||||
Debit
card interchange fees
|
153 | 137 | 16 | 11.7 | % | |||||||||||
Other
charges, commissions and fees
|
259 | 219 | 40 | 18.3 | % | |||||||||||
Noninterest
income before gains (losses)
|
1,401 | 1,290 | 111 | 8.6 | % | |||||||||||
Net
gains (losses) on sales and redemptions or impairment of investment
securities
|
28 | (211 | ) | 239 | -113.3 | % | ||||||||||
Net
(losses) gains on sales of loans and foreclosed real
estate
|
(53 | ) | 65 | (118 | ) | -181.5 | % | |||||||||
Total
noninterest income
|
$ | 1,376 | $ | 1,144 | $ | 232 | 20.3 | % |
For the
three months ended June 30, 2010, noninterest income before gains (losses)
increased $25,000, or 3.8%, when compared with the three months ended June 30,
2009. A $28,000 increase in other charges, commissions and fees
was attributable to an increase in investment service revenue and automated
teller machine fees. The increase was offset by a decrease in
service charges on deposits accounts, which is primarily associated with a
decrease in activity in extended overdraft fees of 10%. The majority
of the increase in noninterest income is the result of gains recognized from
cash redemptions from mutual funds, as compared to the recording of an
other-than-temporary impairment charge of $298,000 related to the Company’s
holding in a CIT Group security for the same period during 2009.
For the
six months ended June 30, 2010, noninterest income before gains (losses)
increased $111,000, or 8.6%, when compared with the six months ended June 30,
2009. The increase was comprised of increases in all
noninterest income categories. A $40,000 increase in other
charges, commissions and fees was attributable to an increase in investment
service revenue and automated teller machine fees due to increased
activity. Earnings on bank owned life insurance increased 25.0%,
which is based on the cash surrender values of the insurance
policies. The increase in the service charges on deposit accounts is
primarily due to an increase in activity associated with check cashing fees
generated from services provided in connection with income tax refunds and
increases in returned check charges. Net gains and losses from the
sales of securities, loans and foreclosed real estate improved to a net loss of
$25,000. Net gains and losses from the sale or impairment of
securities increased $239,000 to a net gain of $28,000. The increase
is due to gains recognized on the sale of securities and from cash redemptions
of mutual funds, as compared to the recording of an other-than-temporary
impairment charge of $298,000 related to the Company’s holding in a CIT Group
security for the same period during 2009. The income improvement
experienced from investment securities was partially offset by net losses from
the sales of loans and foreclosed real estate. For the six months ended June 30,
2010, the Company reported a net loss of $53,000 incurred on the sale of three
properties held in foreclosed real estate compared to gains of $65,000 that were
recognized on the sale of $6.4 million of 30-year fixed rate residential
mortgages during the six months ended June 30, 2009. The losses
incurred on foreclosed real estate are the result of a softening local
residential real estate market and the number of properties currently available
for sale.
Noninterest
Expense
The
following table sets forth certain information on noninterest expense for the
quarters indicated:
Three
Months Ended June 30,
|
||||||||||||||||
(In
thousands)
|
2010
|
2009
|
Change
|
|||||||||||||
Salaries
and employee benefits
|
$ | 1,496 | $ | 1,377 | $ | 119 | 8.6 | % | ||||||||
Building
occupancy
|
340 | 306 | 34 | 11.1 | % | |||||||||||
Data
processing
|
354 | 336 | 18 | 5.4 | % | |||||||||||
Professional
and other services
|
186 | 242 | (56 | ) | -23.1 | % | ||||||||||
FDIC
assessments
|
129 | 215 | (86 | ) | -40.0 | % | ||||||||||
Other
operating
|
387 | 340 | 47 | 13.8 | % | |||||||||||
Total
noninterest expense
|
$ | 2,892 | $ | 2,816 | $ | 76 | 2.7 | % | ||||||||
Six
Months Ended June 30,
|
||||||||||||||||
(In
thousands)
|
2010 | 2009 |
Change
|
|||||||||||||
Salaries
and employee benefits
|
$ | 3,059 | $ | 2,749 | $ | 310 | 11.3 | % | ||||||||
Building
occupancy
|
654 | 629 | 25 | 4.0 | % | |||||||||||
Data
processing
|
682 | 675 | 7 | 1.0 | % | |||||||||||
Professional
and other services
|
378 | 414 | (36 | ) | -8.7 | % | ||||||||||
FDIC
assessments
|
257 | 262 | (5 | ) | -1.9 | % | ||||||||||
Other
operating
|
724 | 660 | 64 | 9.7 | % | |||||||||||
Total
noninterest expense
|
$ | 5,754 | $ | 5,389 | $ | 365 | 6.8 | % |
Total
noninterest expense increased $76,000, or 2.7%, for the three months ended June
30, 2010 when compared to the same period for 2009. The increase in non-interest
expense is due to an increase of $119,000 in salaries and employee benefits, a
$47,000 increase in other expenses, a $34,000 increase in building occupancy and
an $18,000 increase in data processing. These increases were offset
by decreases in FDIC assessments of $86,000 and $56,000 in professional and
other services. The
increase in salaries and employee benefits was due to the addition of 5
full-time equivalent positions and to annual merit based wage adjustments and
other incentive based compensation costs. The increase in other
expenses was due to the recording of expenses associated with the company’s
debit card rewards program, which was not in place in the same quarter of 2009,
and an increase in travel and training costs. The decrease in FDIC
assessments is due to the special assessment that was recorded in the second
quarter of 2009 partially offset by increased 2010 regular assessments on
deposits.
Noninterest
expenses increased $365,000, or 6.8% for the six months ended June 30,
2010. The increase in non-interest expense is due to an increase of
$310,000 in salaries and employee benefits, a $64,000 increase in other
expenses, a $25,000 increase in building occupancy and a $7,000 increase in data
processing. These increases were offset by a $36,000 decrease in
professional and other services and a $5,000 decrease in FDIC
assessments. The increase in salaries and employee benefits was due
to the addition of 5 full-time equivalent positions and to annual merit based
wage adjustments and other incentive based compensation costs. The
increase in other expenses is partially due to the recording of an accrued
liability associated with the Company’s debit card rewards program, which was
not in place in the six-month period of 2009.
Income
Tax Expense
Income
taxes increased $137,000 for the quarter ended June 30, 2010, as compared to the
same period in 2009. For the six-month period ended June 30, income
taxes increased $167,000. The effective tax rate was 30.0% and 34.9%
for the six months ended June 30, 2010 and June 30, 2009,
respectively. The increase in income tax expense in 2010, in
comparison to 2009, resulted primarily from higher pretax income of $707,000 for
the six-month period. The decrease of the effective tax rate is the
result of additional deferred tax expense recorded in the second quarter of 2009
to increase the valuation allowance established against deferred tax
assets. The Company’s tax rate is lower than the statutory rate
through the ownership of tax-exempt investment securities, bank owned life
insurance and other tax saving strategies.
Changes
in Financial Condition
Assets
Total
assets increased approximately $24.6 million, or 6.6%, to $396.3 million at June
30, 2010, from $371.7 million at December 31, 2009. The increase in
total assets was primarily the result of an increase of $21.1 million, or 29.0%,
in investment securities, a $7.4 million increase in the loan portfolio, offset
by a decrease of $5.4 million in total cash and cash equivalents. The
remaining asset increase is due to the addition of $492,000 in premises and
equipment, and approximately $987,000 in various other assets. The
reduction of cash and an increase in deposits has provided the liquidity to fund
the significant increase in the loan and investment portfolios.
Liabilities
Total
liabilities increased $22.9 million, or 6.7%, to $365.4 million at June 30,
2010, from $342.5 million at December 31, 2009. Deposits increased
$18.8 million, or 6.3% and short-term borrowings increased $7.2
million. This increase was offset by a reduction in long-term
borrowings of $3.0 million, or 8.3%. The increase in deposits was the
result of an increase of $14.3 million in business deposits and an increase in
municipal customer deposits of $6.9 million, offset by decreased retail and
escrow deposits of $1.7 million, and $700,000 respectively. The
increase in business deposits is due to the market expansion into the Cicero,
New York area and the Company’s focus on the small business sector of the
market.
Loan
and Asset Quality and Allowance for Loan Losses
The
following table represents information concerning the aggregate amount of
non-performing assets:
June
30,
|
December
31,
|
June
30,
|
||||||||||
(In
thousands)
|
2010
|
2009
|
2009
|
|||||||||
Nonaccrual
loans:
|
||||||||||||
Commercial
real estate and commercial
|
$ | 3,635 | $ | 1,021 | $ | 1,140 | ||||||
Consumer
|
188 | 111 | 288 | |||||||||
Real
estate - residential
|
1,170 | 1,181 | 1,151 | |||||||||
Total
nonaccrual loans
|
4,993 | 2,313 | 2,579 | |||||||||
Total
non-performing loans
|
4,993 | 2,313 | 2,579 | |||||||||
Foreclosed
real estate
|
59 | 181 | 251 | |||||||||
Total
non-performing assets
|
$ | 5,052 | $ | 2,494 | $ | 2,830 | ||||||
Non-performing
loans to total loans
|
1.85 | % | 0.88 | % | 1.03 | % | ||||||
Non-performing
assets to total assets
|
1.28 | % | 0.67 | % | 0.82 | % | ||||||
Interest
income that would have been recorded
|
||||||||||||
under
the original terms of the loans
|
$ | 258 | $ | 113 | $ | 156 |
Total
non-performing loans increased approximately $2.7 million at June 30, 2010, when
compared to December 31, 2009. The increase in non-performing loans
was primarily the result of the delinquency of two commercial loan
relationships. Management continues to monitor and react to national
and local economic treads as well as general portfolio conditions, which may
impact the quality of the portfolio. In response to recent trends and
risk management the Bank has increased the provision for loan losses,
maintaining the Company’s strict loan underwriting standards and carefully
monitoring the performance of the loan portfolio. These large
commercial relationships are monitored closely by management and met with on a
regular basis to work out repayment plans and alternative strategies for
collection.
Appraisals
are obtained at the inception of a real estate secured
loan. Collateral is reevaluated should the loan become 45 days
delinquent to best determine the banks level of exposure. For
commercial real estate held as collateral, the property is inspected every two
years. When evaluating our ability to collect from secondary sources
appraised values are adjusted to reflect the age of appraisal, the condition of
the property, the current local real estate market, and cost to
sell. Properties are re-appraised when our evaluation of the current
property condition and the local real estate market suggests values may not be
accurate.
The
current level of non-performing assets would not fall outside of the Bank’s
historic trend levels, were it not for the inclusion of one large commercial
relationship. This relationship totals $2.2 million in non-performing
loans at June 30, 2010. Of the balance outstanding, $2.0 million is
secured by commercial real estate and equipment. A
current evaluation of the commercial property has been obtained from a third
party in June 2010. Management believes that the appraised fair value
of the underlying collateral, discounted for selling costs, along with the
associated guarantees of business principals and the existing allowance provided
against these loans of $436,000, are adequate to cover potential losses that may
occur.
The allowance for loan losses at June 30, 2010 and December 31, 2009 was $3.5 million and $3.1 million, or 1.28% and 1.17% of period end loans, respectively.
Capital
Shareholders'
equity at June 30, 2010, was $30.9 million as compared to $29.2 million at
December 31, 2009. The Company added $1.2 million to retained
earnings through net income. The increase to retained earnings was
combined with a decrease of $878,000 in accumulated other comprehensive loss,
which decreased to $547,000 from $1.4 million at December 31, 2009. Unrealized
holding gains on securities, net of tax, resulted in a decrease in accumulated
other comprehensive loss of $886,000. In addition, $66,000 of
amortization of retirement plan losses and transition obligation, net of tax
expense, was recorded. These reductions to accumulated other
comprehensive loss were offset by $74,000 in unrealized losses on the interest
rate derivative, net of tax expense. Common stock dividends declared
reduced capital by $149,000. Preferred stock dividends paid to
the United States Treasury, under the terms of the agreement entered into in
2009 as part of the Capital Purchase Plan, reduced capital by
$169,000.
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
June 30, 2010, Pathfinder Bank exceeded all regulatory required minimum capital
ratios and met the regulatory definition of a “well-capitalized” institution,
i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio
exceeding 6% and a total risk-based capital ratio exceeding 10%.
Liquidity
Liquidity
management involves the Company’s ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth, meet deposit withdrawals,
maintain reserve requirements, and otherwise operate the Company on an ongoing
basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly 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, brokered
deposits, negotiated time deposits, the sale of "available-for-sale" investment
securities, the sale of securitized loans, or the sale of whole
loans. Such actions could result in higher interest expense costs
and/or losses on the sale of securities or loans.
The
Company has a number of existing credit facilities available to
it. Total credit available under the existing lines is approximately
$96.6 million. At June 30, 2010, the Company has $40.2 million
outstanding against the existing lines with $56.4 million in borrowing capacity
still available.
The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of June 30, 2010, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.
Item 3 – Quantitative and Qualitative Disclosures About Market
Risk
A smaller
reporting company is not required to provide the information relating to this
item.
Item 4T - Controls and Procedures
Under the
supervision and with the participation of the Company's management, including
our Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this report, the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There has been
no change in the Company's internal control over financial reporting during the
most recent fiscal quarter that has materially affected, or is reasonable likely
to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item
1 - Legal Proceedings
None
Item
1A – Risk Factors
A smaller
reporting company is not required to provide the information relating to this
item.
Item
2 – Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3 - Defaults Upon Senior Securities
None
Item
4 – Removed and Reserved
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
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PATHFINDER
BANCORP, INC.
August 13,
2010
/s/ Thomas W.
Schneider
Thomas W. Schneider
President and Chief Executive Officer
August 13,
2010 /s/ James A.
Dowd
James A. Dowd
Senior Vice President and 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, certify that:
|
|||
1. I
have reviewed this Quarterly Report on Form 10-Q of Pathfinder Bancorp,
Inc.;
|
|||
2. Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|||
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|||
4. The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|||
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed
such internal control over financial reporting, or caused such internal
control over financial reporting, to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|||
(c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|||
(d) Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|||
5. The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors:
|
|||
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|||
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
|||
August 13, 2010
|
/s/ Thomas W. Schneider
Thomas
W. Schneider
President
and Chief Executive Officer
|
EXHIBIT
31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial
Officer
Certification
of Chief Financial Officer
Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
I,
James A. Dowd, certify that:
|
|||
1. I
have reviewed this Quarterly Report on Form 10-Q of Pathfinder Bancorp,
Inc.;
|
|||
2. Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|||
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|||
4. The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|||
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed
such internal control over financial reporting, or caused such internal
control over financial reporting, to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|||
(c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|||
(d) Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|||
5. The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors:
|
|||
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|||
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
|||
August 13, 2010
|
/s/ James A. Dowd
James
A. Dowd
Senior
Vice President and Chief Financial Officer
|
EXHIBIT
32.1 Section 1350 Certification of the Chief Executive Officer and
Chief Financial Officer
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
Thomas
W. Schneider, President and Chief Executive Officer, and James A. Dowd,
Senior Vice President and Chief Financial Officer of Pathfinder Bancorp,
Inc. (the "Company"), each certify in his capacity as an officer of the
Company that he has reviewed the Quarterly Report of the Company on Form
10-Q for the quarter ended June 30, 2010 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.
|
|
August 13, 2010
|
/s/ Thomas W. Schneider
Thomas
W. Schneider
President
and Chief Executive Officer
|
August 13, 2010
|
/s/ James A. Dowd
James
A. Dowd
Senior
Vice President and Chief Financial Officer
|