SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTER ENDED SEPTEMBER 30, 2002
SEC Exchange Act No. 000-23601
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Pathfinder Bancorp, Inc.
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(Exact name of Company as specified in its charter)
Federal
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(State or jurisdiction of incorporation or organization)
16-1540137
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(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York
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13126
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(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
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Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,607,513 shares
of the Company's common stock outstanding as of November 8, 2002.
PATHFINDER BANCORP, INC.
INDEX
PART 1. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
- - Consolidated Balance Sheets 1
- - Consolidated Statements of Income 2 - 3
- - Consolidated Statements of Shareholders' Equity 4
- - Consolidated Statements of Cash Flow 5
- - Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial 9 - 15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16 -
18
Item 4. Controls and Procedures
PART II OTHER INFORMATION 19 - 22
Item 1. Legal proceedings
Item 2. Change in securities
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of security holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
September December 31,
ASSETS 2002 2001
- --------------------------------------------------------------------------------------- ------------- --------------
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,332,460 $ 5,433,029
Interest earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,505,366 2,160,927
------------- --------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 12,837,826 7,593,956
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,986,184 53,422,149
Mortgage loans held-for-sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,449,948 5,270,999
Loans:
Real estate residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,652,296 116,101,197
Real estate commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,941,902 30,454,798
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,952,844 3,353,133
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,410,066 14,357,635
------------- --------------
Total Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,957,108 164,266,763
Less: Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,680,427 1,679,215
------------- --------------
Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,276,681 162,587,548
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,238,623 4,929,433
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468,124 1,465,347
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,420,359 632,465
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,341,854 2,341,854
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,164,050 6,270,671
------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $258,183,649 $ 244,514,422
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
Deposits:
Interest bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $166,774,515 $ 156,553,658
Non-interest bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,044,610 13,035,489
------------- --------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,819,125 169,589,147
Borrowed funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,644,000 49,440,500
Company obligated mandatorily redeemable preferred securities of subsidiary, Pathfinder
Statutory Trust I, holding solely junior subordinated debentures of the Company . . . . 5,000,000 0
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,489,348 3,300,026
------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,952,473 222,329,673
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01 per share; authorized 10,000,000
shares; 2,906,686 and 2,894,220 shares issued; and 2,602,513 and 2,600,995
shares outstanding 2002 and 2001, respectively. . . . . . . . . . . . . . . . . . . 29,067 28,942
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,050,534 6,917,817
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,936,150 19,015,639
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . 162,037 80,652
Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,588) (173,142)
Treasury Stock, at cost; 304,173 and 293,225 shares, respectively. . . . . . . . . . (3,815,024) (3,685,159)
------------- --------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,231,176 22,184,749
------------- --------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . $258,183,649 $ 244,514,422
============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(UNAUDITED)
September 30, September 30,
2002 2001
-------------- ---------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,191,513 $ 3,133,892
Interest and dividends on investments:
U.S. Treasury and agencies. . . . . . . . . . . . . . . . 53,370 89,132
State and political subdivisions. . . . . . . . . . . . . 77,429 81,313
Corporate obligations . . . . . . . . . . . . . . . . . . 279,202 373,385
Marketable equity securities. . . . . . . . . . . . . . . 47,851 54,489
Mortgage-backed securities. . . . . . . . . . . . . . . . 208,655 309,416
Federal funds sold and interest-bearing deposits. . . . . 60,168 32,718
-------------- ---------------
Total interest income. . . . . . . . . . . . . . . . . 3,918,188 4,074,345
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . 1,139,458 1,544,769
Interest on borrowed funds. . . . . . . . . . . . . . . . . 628,613 552,730
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Total interest expense . . . . . . . . . . . . . . . . 1,768,071 2,097,499
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Net interest income . . . . . . . . . . . . . . . . 2,150,117 1,976,846
Provision for loan losses . . . . . . . . . . . . . . . . . 138,424 38,528
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Net interest income after provision for loan losses 2,011,693 1,938,318
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OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . 155,111 136,552
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 74,368 53,937
Increase in value of bank owned life insurance. . . . . . . 43,582 61,868
Net gain on securities, loans and other real estate . . . . 2,562 (39,682)
Other charges, commissions & fees . . . . . . . . . . . . . 94,321 119,021
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Total other income. . . . . . . . . . . . . . . . . 369,944 331,696
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OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . 999,444 752,666
Building occupancy. . . . . . . . . . . . . . . . . . . . . 184,435 190,391
Data processing expenses. . . . . . . . . . . . . . . . . . 184,480 192,725
Professional and other services . . . . . . . . . . . . . . 189,538 170,053
Amortization of goodwill. . . . . . . . . . . . . . . . . . - 78,939
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 354,535 304,842
Total other expenses. . . . . . . . . . . . . . . . 1,912,432 1,689,616
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Income before income taxes. . . . . . . . . . . . . . . . . . 469,205 580,398
Provision for income taxes. . . . . . . . . . . . . . . . . . 120,379 137,415
-------------- ---------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 348,826 $ 442,983
============== ===============
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . $ 0.11 $ 0.17
============== ===============
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . $ 0.11 $ 0.17
============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(UNAUDITED)
September 30, September 30,
2002 2001
-------------- --------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,693,124 $ 9,360,114
Interest and dividends on investments:
U.S. Treasury and agencies. . . . . . . . . . . . . . . . 117,884 327,472
State and political subdivisions. . . . . . . . . . . . . 234,892 253,889
Corporate obligations . . . . . . . . . . . . . . . . . . 906,951 1,165,198
Marketable equity securities. . . . . . . . . . . . . . . 109,422 137,605
Mortgage-backed securities. . . . . . . . . . . . . . . . 683,028 1,005,702
Federal funds sold and interest-bearing deposits. . . . . 75,308 56,989
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Total interest income. . . . . . . . . . . . . . . . . 11,820,609 12,306,969
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . 3,530,164 4,760,037
Interest on borrowed funds. . . . . . . . . . . . . . . . . 1,757,076 1,827,401
-------------- --------------
Total interest expense . . . . . . . . . . . . . . . . 5,287,240 6,587,438
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Net interest income . . . . . . . . . . . . . . . . 6,533,369 5,719,531
Provision for loan losses . . . . . . . . . . . . . . . . . 1,208,005 578,739
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Net interest income after provision for loan losses 5,325,364 5,140,792
-------------- --------------
OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . 451,819 392,418
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 198,109 126,154
Increase in value of bank owned life insurance. . . . . . . 163,746 143,041
Net gain on securities, loans and other real estate . . . . 754,575 429,144
Other charges, commissions & fees . . . . . . . . . . . . . 319,451 323,810
-------------- --------------
Total other income. . . . . . . . . . . . . . . . . 1,887,700 1,414,567
-------------- --------------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . 2,733,986 2,239,876
Building occupancy. . . . . . . . . . . . . . . . . . . . . 553,669 617,502
Data processing expenses. . . . . . . . . . . . . . . . . . 585,874 566,881
Professional and other services . . . . . . . . . . . . . . 595,215 525,577
Amortization of goodwill. . . . . . . . . . . . . . . . . . - 236,817
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 1,025,221 911,658
Total other expenses. . . . . . . . . . . . . . . . 5,493,965 5,098,311
-------------- --------------
Income before income taxes. . . . . . . . . . . . . . . . . . 1,719,099 1,457,048
Provision for income taxes. . . . . . . . . . . . . . . . . . 452,911 391,435
-------------- --------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,266,188 $ 1,065,613
============== ==============
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . $ 0.49 $ 0.42
============== ==============
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . $ 0.48 $ 0.41
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited)
Additional
Common Stock Issued Paid in Retained
Shares Amount Capital Earnings
------------------------------ - ----------
BALANCE, DECEMBER 31, 2001 . . . . . . . . . . . . . 2,894,220 $ 28,942 $6,917,817 $19,015,639
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . 1,266,188
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period
Reclassification adjustment for gains included
in net income
Other comprehensive income, before tax
Income tax provision
Other comprehensive income, net of tax
Comprehensive income:
ESOP shares earned . . . . . . . . . . . . . . . . . 48,243
Stock option exercised . . . . . . . . . . . . . . . 12,466 125 84,474
Treasury stock purchased
Dividends declared ($.22 per share). . . . . . . . . (345,677)
----------------------------------------------
BALANCE, SEPTEMBER 30, 2002. . . . . . . . . . . . . 2,906,686 $ 29,067 $7,050,534 $19,936,150
===============================================
Accumulated
Other Com- Unearned
Comprehensive prehensive ESOP Treasury
Income(Loss) Income Shares Stock Total
--------------- ------------ ---------- ------------ -----------
BALANCE, DECEMBER 31, 2001 . . . . . . . . . . . . . $ - $ 80,652 $(173,142) $(3,685,159) $22,184,749
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . 1,266,188 1,266,188
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period. 752,661
Reclassification adjustment for gains included
in net income . . . . . . . . . . . . . . . . (617,320)
---------------
Other comprehensive income, before tax . . . . . . 135,341
Income tax provision . . . . . . . . . . . . . . . (53,956)
---------------
Other comprehensive income, net of tax . . . . . . 81,385 81,385 81,385
---------------
Comprehensive income:. . . . . . . . . . . . . . . . 1,347,573
===============
ESOP shares earned . . . . . . . . . . . . . . . . . 41,554 89,797
Stock option exercised . . . . . . . . . . . . . . . 84,599
Treasury stock purchased . . . . . . . . . . . . . . (129,865) (129,865)
Dividends declared ($.22 per share). . . . . . . . . (345,677)
---------------
BALANCE, SEPTEMBER 30, 2002. . . . . . . . . . . . . $ - $ 162,037 $(131,588) $(3,815,024) $23,231,176
=============== ============ ========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and September 30, 2001
(unaudited)
September 30, September 30,
2002 2001
-------------- --------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . 1,266,188 1,065,613
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . . 1,208,005 578,739
ESOP and other stock-based compensation earned . . . . . . 89,797 58,938
Deferred income tax benefit. . . . . . . . . . . . . . . . (139,214) (201,213)
Proceeds from sale of loans. . . . . . . . . . . . . . . . 15,873,671 9,257,819
Originations of loans held-for-sale. . . . . . . . . . . . (14,049,992) (12,514,787)
Realized loss/(gain) on:
Sale of real estate loans through foreclosure. . . . . . 9,253 33,602
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . (2,628) (16,714)
Available-for-sale investment securities . . . . . . . . (617,320) (446,229)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 351,083 351,108
Amortization of goodwill . . . . . . . . . . . . . . . . . - 236,817
Amortization of deferred financing costs . . . . . . . . . 1,312 -
Increase in surrender value of life insurance. . . . . . . (163,746) (143,040)
Net accretion of premiums and discounts
on investment securities . . . . . . . . . . . . . . . . (31,359) (7,675)
(Increase) decrease in interest receivable . . . . . . . . (2,777) 50,660
Net change in other assets and liabilities . . . . . . . . (442,323) (993,308)
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . 3,349,950 (2,689,670)
-------------- --------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale . . . (9,915,570) (1,823,332)
Proceeds from maturities and principle reductions of
investment securities available-for-sale . . . . . . . . 9,335,953 4,584,055
Proceeds from sale:
Real estate acquired through foreclosure . . . . . . . . 311,546 306,065
Available-for-sale investment securities . . . . . . . . 1,799,602 5,372,845
Net increase in loans. . . . . . . . . . . . . . . . . . . (11,005,831) (7,122,340)
Purchase of premises and equipment . . . . . . . . . . . . (660,273) (300,240)
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . (10,134,573) 1,017,053
-------------- --------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits. . . . . . . . . . . . . . . . . . . 6,542,303 8,361,232
Net increase (decrease) in time deposits . . . . . . . . . 3,687,675 (2,353,440)
Net repayments from borrowings . . . . . . . . . . . . . . (2,796,500) (2,457,000)
Proceeds from trust preferred obligation . . . . . . . . . 4,849,000 -
Proceeds from exercise of stock options. . . . . . . . . . 84,599 -
Cash dividends . . . . . . . . . . . . . . . . . . . . . . (208,719) (468,269)
Treasury stock purchased . . . . . . . . . . . . . . . . . (129,865) -
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . 12,028,493 3,082,523
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . 5,243,870 1,409,906
Cash and cash equivalents at beginning of period. . . . . . 7,593,956 4,155,343
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . 12,837,826 5,565,249
============== ==============
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 5,296,620 6,568,104
Income taxes paid. . . . . . . . . . . . . . . . . . . . . 690,000 419,618
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate . . . . . . . . . . 1,108,693 337,913
Increase in unrealized gains and losses on
available-for-sale investments securities. . . . . . . . . (135,341) (1,313,031)
Securitization of loans and held as an investment security - -
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid. . . . . . . . . . . . . . . 208,201 69,068
The accompanying notes are an integral part of the consolidated financial
statements
Pathfinder Bancorp, Inc.
Notes to Financial Statements
1) BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance with
the instructions for Form 10-Q and Regulation S-X and, therefore, do not include
information for footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The following material under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is written with the presumption that the users of the interim
financial statements have read, or have access to, the Company's latest audited
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations as of December 31,
2001 and for the three year period then ended. Therefore, only material changes
in financial condition and results of operations are discussed in the remainder
of part 1.
Operating results for the three months and nine months ended September 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
2) EARNINGS PER SHARE
Basic earnings per share have been computed based upon net income for the three
months and nine months ended September 30, using 2,579,602 and 2,575,993
weighted average common shares outstanding for 2002 and 2,567,722 and 2,565,364
for 2001. Diluted earnings per share for the three months and nine months ended
September 30, 2002 and 2001, has been computed using 2,617,651, 2,622,160,
2,626,470 and 2,592,793 shares, respectively. Dilutive earnings per share gives
effect to weighted average shares which would be outstanding assuming the
exercise of issued stock options using the treasury stock method.
3) RECLASSIFICATIONS
Certain prior period information has been reclassified to conform to the current
period's presentation. These reclassifications had no affect on net income as
previously reported.
4) DIVIDEND RESTRICTIONS
The Company maintains a restricted capital account with a $443,000 balance,
representing Pathfinder Bancorp, MHC's portion of dividends waived as of
September 30, 2002.
5) TRUST PREFERRED POOL TRANSACTION
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder
Statutory Trust I, a Connecticut business trust. The trust issued $5,000,000
of 30 year floating rate Company-obligated pooled capital securities of
Pathfinder Statutory Trust I. The Company borrowed the proceeds of the capital
securities from its subsidiary by issuing floating rate junior subordinated
deferrable interest debentures having substantially similar terms. The capital
securities mature in 2032 and are treated as Tier 1 capital by the Federal
Deposit Insurance Company and the Office of Thrift Supervision. The capital
securities of the trust are a pooled trust preferred fund of Preferred Term
Securities VI, Ltd, and are tied to the 3 month LIBOR plus 3.45%, with a five
year call provision. All of these securities are guaranteed by the Company.
6) SUBSEQUENT EVENTS
On October 25, 2002, the Company's subsidiary, Pathfinder Bank, completed the
purchase of assets and the assumption of non-municipal deposits of the Lacona,
New York branch of Cayuga Bank. In addition, Pathfinder Commercial Bank has
received regulatory authorization to operate as a limited-purpose commercial
bank subsidiary of Pathfinder Bank. Pathfinder Commercial Bank has been
established to serve the depository needs of public entities in its market area
and has assumed the deposit liabilities of the municipal depositors of the
Lacona branch. The transactions include approximately $26.4 million in
deposits, $2.3 million in loans, vault cash and the facility and equipment and
reflects a deposit premium of approximately $2.5 million.
7) NEW ACCOUNTING PRONOUNCEMENTS
On October 1, 2002, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 147, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions." Statement 147 changes how the Company
accounts for goodwill arising from branch acquisitions. Under previous FASB
rulings, the goodwill arising from branch acquisitions was classified as an
"unidentifiable intangible asset" and therefore subject to amortization.
Statement 147 now classifies this intangible as goodwill. In accordance with
the provisions of Statement 147, previously issued statements will be restated
to remove the amortization expense recorded on the goodwill since January 1,
2002. Current FASB guidelines require goodwill not be amortized, but carried on
a company's books as an asset and reviewed periodically for impairment.
As of September 30, 2002, no impairment adjustment has been made to goodwill.
The impact of the pronouncement on the financial statements is as follows:
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------- ------------------- ------------------- -------------------
(in thousands except Earnings per Share Data)
Reported net income . . . . . . . . . . . . . $ 349 $ 443 $ 1,266 $ 1,066
Add back: goodwill amortization, net of tax . - 48 - 144
------------------- ------------------- ------------------- -------------------
Adjusted net income . . . . . . . . . . . . . $ 349 $ 491 $ 1,266 $ 1,210
=================== =================== =================== ===================
Basic earnings per share:
Reported net income . . . . . . . . . . . . . $ 0.11 $ 0.17 $ 0.49 $ 0.42
Goodwill amortization, net of tax . . . . . . - 0.02 - 0.05
------------------- ------------------- ------------------- -------------------
Adjusted net income . . . . . . . . . . . . . $ 0.11 $ 0.19 $ 0.49 $ 0.47
=================== =================== =================== ===================
Diluted earnings per share:
Reported net income . . . . . . . . . . . . . $ 0.11 $ 0.17 $ 0.48 $ 0.41
Goodwill amortization, net of tax . . . . . . - 0.02 - 0.05
------------------- ------------------- ------------------- -------------------
Adjusted net income . . . . . . . . . . . . . $ 0.11 $ 0.19 $ 0.48 $ 0.46
=================== =================== =================== ===================
In accordance with the provisions of Statement 147, the Company has adopted this
Statement retroactive to January 1, 2002, with the impact of the restatement on
previously issued Form 10Q's as of March 31, 2002 and June 30, 2002 contained
below:
For the three For the three For the six
months ended months ended months ended
March 31, 2002 June 30, 2002 June 30, 2002
-------------- ------------- -------------
(in thousands except Earnings per Share Data)
Reported net income . . . . . . . . . . . . $ 502 $ 312 $ 814
Add back: goodwill amortization, net of tax 48 48 96
--------------- -------------- --------------
Restated net income . . . . . . . . . . . . $ 550 $ 360 $ 910
=============== ============== ==============
Basic earnings per share:
Reported net income . . . . . . . . . . . . $ 0.20 $ 0.12 $ 0.32
Goodwill amortization, net of tax . . . . . 0.02 0.02 0.04
--------------- -------------- --------------
Restated net income . . . . . . . . . . . . $ 0.22 $ 0.14 $ 0.36
=============== ============== ==============
Diluted earnings per share:
Reported net income . . . . . . . . . . . . $ 0.19 $ 0.12 $ 0.31
Goodwill amortization, net of tax . . . . . 0.02 0.02 0.04
--------------- -------------- --------------
Restated net income . . . . . . . . . . . . $ 0.21 $ 0.14 $ 0.35
=============== ============== ==============
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
Throughout the Management's Discussion and Analysis the term, "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc., Pathfinder Bank,
Pathfinder REIT Inc., Whispering Oaks Development Corp and Pathfinder Statutory
Trust I. At September 30, 2002, Pathfinder Bancorp, Inc.'s only business was
the 100% ownership of Pathfinder Bank and Pathfinder Statutory Trust I.
Pathfinder Bank owns Pathfinder REIT, Inc. and Whispering Oaks Development Corp.
At September 30, 2002, 1,583,239 shares, or 60.8%, of the Company's common stock
was held by Pathfinder Bancorp, MHC, the Company's mutual holding company parent
and 1,019,274 shares, or 39.2%, was held by the public.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage loans, investment securities and other loans, and its cost of funds
consisting of interest paid on deposits, borrowed funds and the interest paid on
the trust preferred obligation. The Company's net income also is affected by
its provision for loan losses, as well as by the amount of non interest income,
including income from fees and service charges, net gains and losses on sales of
securities, and non interest expense such as employee compensation and benefits,
occupancy and equipment costs, data processing and income taxes. Earnings of
the Company also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities, which events are beyond the control of
the Company. In particular, the general level of market rates tends to be
highly cyclical.
On October 1, 2002, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 147, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions." Statement 147 changes how the Company
accounts for goodwill arising from branch acquisitions. Under previous FASB
rulings, the goodwill arising from branch acquisitions was classified as an
"unidentifiable intangible asset" and therefore subject to amortization.
Statement 147 now classifies this intangible as goodwill. In accordance with
the provisions of Statement 147, previously issued statements will be restated
to remove the amortization expense recorded on the goodwill since January 1,
2002. Current FASB guidelines require goodwill not be amortized, but carried on
a company's books as an asset and reviewed periodically for impairment.
As of September 30, 2002, no impairment adjustment has been made to goodwill.
The impact of the pronouncement on the financial statements is as follows:
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------- ------------------- ------------------- -------------------
(in thousands except Earnings per Share Data)
Reported net income . . . . . . . . . . . . . $ 349 $ 443 $ 1,266 $ 1,066
Add back: goodwill amortization, net of tax . - 48 - 144
------------------- ------------------- ------------------- -------------------
Adjusted net income . . . . . . . . . . . . . $ 349 $ 491 $ 1,266 $ 1,210
=================== =================== =================== ===================
Basic earnings per share:
Reported net income . . . . . . . . . . . . . $ 0.11 $ 0.17 $ 0.49 $ 0.42
Goodwill amortization, net of tax . . . . . . - 0.02 - 0.05
------------------- ------------------- ------------------- -------------------
Adjusted net income . . . . . . . . . . . . . $ 0.11 $ 0.19 $ 0.49 $ 0.47
=================== =================== =================== ===================
Diluted earnings per share:
Reported net income . . . . . . . . . . . . . $ 0.11 $ 0.17 $ 0.48 $ 0.41
Goodwill amortization, net of tax . . . . . . - 0.02 - 0.05
------------------- ------------------- ------------------- -------------------
Adjusted net income . . . . . . . . . . . . . $ 0.11 $ 0.19 $ 0.48 $ 0.46
=================== =================== =================== ===================
In accordance with the provisions of Statement 147, the Company has adopted this
Statement retroactive to January 1, 2002, with the impact of the restatement on
previously issued Form 10Q's as of March 31, 2002 and June 30, 2002 contained
below:
For the three For the three For the six
months ended months ended months ended
March 31, 2002 June 30, 2002 June 30, 2002
-------------- ------------- -------------
(in thousands except Earnings per Share Data)
Reported net income . . . . . . . . . . . . $ 502 $ 312 $ 814
Add back: goodwill amortization, net of tax 48 48 96
--------------- -------------- --------------
Restated net income . . . . . . . . . . . . $ 550 $ 360 $ 910
=============== ============== ==============
Basic earnings per share:
Reported net income . . . . . . . . . . . . $ 0.20 $ 0.12 $ 0.32
Goodwill amortization, net of tax . . . . . 0.02 0.02 0.04
--------------- -------------- --------------
Restated net income . . . . . . . . . . . . $ 0.22 $ 0.14 $ 0.36
=============== ============== ==============
Diluted earnings per share:
Reported net income . . . . . . . . . . . . $ 0.19 $ 0.12 $ 0.31
Goodwill amortization, net of tax . . . . . 0.02 0.02 0.04
--------------- -------------- --------------
Restated net income . . . . . . . . . . . . $ 0.21 $ 0.14 $ 0.35
=============== ============== ==============
The following discussion reviews the financial condition at September 30, 2002
and the results of operations of the Company for the three months and nine
months ended September 30, 2002 and September 30, 2001.
Financial Condition
Assets
- ------
Total assets increased approximately $13.7 million, or 5.6%, to $258.2 million
at September 30, 2002 from $244.5 million at December 31, 2001. The increase in
total assets is primarily attributable to a $5.2 million increase in cash and
cash equivalents, an $8.7 million increase in net loans receivable, a $788,000
increase in other real estate and an $893,000 increase in other assets,
partially offset by a decrease of $1.8 million in mortgage loans held-for-sale.
The increase in net loans receivable is primarily due to a $7.6 million increase
in residential real estate loans, a $1.5 million increase in commercial real
estate and commercial loans, partially offset by a $400,000 decrease in consumer
loans. The increase in loans was principally funded by an increase of $10.2
million in deposits and proceeds from amortization, maturities, and sales of
investment securities.
Liabilities
- -----------
Total liabilities increased by $12.6 million, or 5.7%, to $235.0 million at
September 30, 2002 from $222.4 million at December 31, 2001. The increase is
primarily attributable to a $10.2 million, or 6.0%, increase in deposits, and
the issuance of $5.0 million of subordinated debt securities, issued in
connection with the Company's participation in a trust preferred pooled
transaction. The subordinated debt securities and corresponding trust preferred
securities have a term of thirty years and have an adjustable rate of interest
indexed to the three-month LIBOR plus 3.45%. Under applicable regulatory
guidelines, the debt instrument from the sale of trust preferred securities
qualifies as capital for regulatory purposes. These increases were partially
offset by a $2.8 million, or 5.7%, decrease in borrowed funds. The increase in
deposits was primarily attributable to an increase in interest bearing deposits.
The increase in interest bearing deposits was comprised of a $7.9 million
increase in money management accounts, a $4.0 million increase in time deposits,
partially offset by a $1.7 million decrease in NOW accounts. The increase in
deposit accounts is primarily due to the Company's active efforts in sales
training and relationship building during a period when consumers are seeking
the safety and relatively stable returns of bank deposits.
Liquidity and Capital Resources
- ----------------------------------
Shareholders' equity increased $1.0 million, or 4.7%, to $23.2 million at
September 30, 2002 from $22.2 million at December 31, 2001. The increase in
shareholders' equity is primarily the result of a $921,000 increase in retained
earnings. The increase in retained earnings is a result of net income of $1.3
million, offset by dividends declared of $346,000 during the first nine months
of 2002.
The Company's primary sources of funds are deposits, amortization and prepayment
of loans and maturities of investment securities and other short-term
investments, earnings and funds provided from operations and borrowings. 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-bearing instruments and
other assets, which provide liquidity to meet lending requirements. For
additional information about cash flows from the Company's operating, financing,
and investing activities, see the Statements of Cash Flows included in the
Financial Statements. The Company adjusts its liquidity levels in order to meet
funding needs of deposit outflows, payment of real estate taxes on mortgage
loans and loan commitments. At the quarter ended September 30, 2002, the
Company has $20.0 million in outstanding commitments to extend credit and
management believes the Company has the ability to meet these outstanding credit
commitments. The Company adjusts liquidity as appropriate to meet its assets
and liability management objectives.
Results of Operations
- -----------------------
The Company recorded net income of approximately $349,000 for the three months
ended September 30, 2002, as compared to $443,000 for the same period during
2001. The decrease in net income of $94,000, or 21.3%, for the three months
ended September 30, 2002, was primarily the result of a $100,000 increase in the
provision for loan losses and a $223,000, or 13.2%, increase in other operating
expenses, partially offset by an increase in net interest income of $173,000, or
8.8%, and in other income of $38,000, or 11.5% and a $17,000, or 12.4%, decrease
in the provision for income taxes.
For the nine months ended September 30, 2002, the Company recorded net income of
$1.3 million, as compared to $1.1 million for the same period in the prior year.
The increase in the year to date earnings reflects an increase in net interest
income of $814,000 and an increase in other income of $473,000, partially offset
by an increase in the provision for loan losses of $629,000, an increase in
operating expenses of $396,000, and an increase in the provision for income
taxes of $61,000. Net income for the six months ending June 30, 2002 has been
restated to remove $96,000 of goodwill amortization, net of taxes, in accordance
with the adoption of Statement of Financial Accounting Standards No. 147.
Annualized return on average assets and return on average shareholders' equity
were 0.54% and 6.02%, respectively, for the three months ended September 30,
2002 compared to 0.75% and 7.99% for the third quarter of 2001. Earnings per
share - basic was $.11 for the third quarter of 2002 compared to $.17 for the
same period in 2001. For the nine months ended September 30, 2002, the same
performance measurements were 0.68% and 7.32%, as compared to 0.60% and 6.58%
for the same period in the prior year. Earnings per share-basic for the nine
months ended September 30, 2002 was $.49 compared to $.42 for the same period in
2001.
Interest Income
- ----------------
Three month period
Interest income, on a tax equivalent basis, totaled $3.9 million for the quarter
ended September 30, 2002, as compared to $4.1 million for the quarter ended
September 30, 2001, a decrease of $154,000, or 3.8%. Interest income was
affected by a decrease in the tax equivalent yield on average interest-earning
assets to 6.55% from 7.52% in the prior period, offset by an increase in the
average balance of interest-earning assets to $240.8 million for the three
months ended September 30, 2002 from $218.1 million in the prior year period.
The decrease in the tax equivalent yield was a result of a lower interest rate
environment during the third quarter of 2002 as compared to the same quarter in
2001. The yield decrease was mitigated by increased originations of residential
and commercial real estate loans.
Interest income on loans receivable increased $58,000, or 1.9%, to $3.2 million
for the three months ended September 30, 2002 as compared to the same period in
the prior year. The increase in interest income on loans resulted from an
increase in the average balance of loans receivable of $20.4 million, or 13.1%
to $176.6 million at September 30, 2002, from $156.2 million at September 30,
2001, partially offset by a decrease in the average yield on loans receivable to
7.23% from 8.03%.
Interest income on mortgage-backed securities decreased by $100,000, or 32.6%,
to $209,000 for the three months ended September 30, 2002, from $309,000 for the
three months ended September 30, 2001. The decrease in interest income on
mortgage-backed securities resulted generally from a reduction in the average
balance on mortgage-backed securities of $4.7 million and a decrease in the
average yield on mortgage-backed securities to 5.67% from 6.36%.
Interest income on investment securities, on a tax equivalent basis, decreased
$139,000, or 22.3%, for the three months ended September 30, 2002 to $484,000
from $623,000 for the same period in 2001. The decrease resulted primarily from
a decrease in the average balance of investment securities, of $3.2 million,
combined with a decrease in the tax equivalent yield of investment securities to
5.43% from 6.42%. The decrease in the average balance of investment securities
resulted from the proceeds from calls and maturities of investments primarily
being utilized to fund the Company's loan portfolio growth.
Nine Month Period
Interest income, on a tax equivalent basis, totaled $11.9 million for the nine
months ended September 30, 2002, as compared to $12.4 million for the same
period in 2001, a decrease of $473,000, or 3.8%. The decrease resulted
primarily from a decrease in the tax-equivalent yield on interest-earning assets
to 6.82% from 7.63%, partially offset by an increase in the average balance of
interest-earning assets of $16.7 million, or 7.7%, to $232.8 million from $216.1
million.
For the nine months ended September 30, 2002, interest income on loans
receivable increased $340,000, or 3.6%, as compared to the same period in the
prior year. Average loans receivable increased $22.9 million while the yield on
average loans receivable decreased to 7.35% from 8.15%.
For the nine months ended September 30, 2002 and 2001, interest income on
mortgage-backed securities was $683,000 and $1.0 million, respectively, a
decrease of $323,000, or 32.1%. The decrease resulted primarily from a decrease
in the average balance of mortgage-backed securities of $5.1 million, or 24.7%,
combined with a decrease in the average yield on mortgage-backed securities to
5.81% from 6.45%. The decrease in the average balance of mortgage backed
securities reflects the increase in prepayments experienced during the first
nine months of 2002 in response to the declining interest rate environment. The
proceeds were utilized to fund the Company's loan growth.
For the nine months ended September 30, 2002, tax equivalent interest income on
investment securities decreased $509,000, or 26.0%, to $1.5 million compared to
$2.0 million for the same period in 2001. The decrease resulted primarily from
a decrease in the average balance of investment securities of $5.0 million and a
decrease in the tax equivalent yield on investment securities to 5.49% from
6.50%.
Interest Expense
- -----------------
Three Month Period
Interest expense for the quarter ended September 30, 2002 decreased by
approximately $329,000, or 15.7%, to $1.8 million from $2.1 million when
compared to the same quarter for 2001. The decrease in interest expense for the
period was principally the result of the decrease in the average cost of
interest bearing deposits to 2.72% from 3.91% and the decrease in the average
cost of borrowed funds to 4.60% from 5.10%. These decreases were partially
offset by an increase of $9.8 million in the average balance of interest bearing
deposits, a $5.1 million increase in the average balance of borrowed funds and a
$5.0 million increase of trust preferred debt.
Nine Month Period
For the nine months ended September 30, 2002, interest expense decreased $1.3
million, or 19.7%, when compared to the first nine months of 2001. The decrease
in interest expense for the period was principally the result of the decrease in
the average cost of interest bearing deposits to 2.90% from 4.08% and the
decrease in the average cost of borrowed funds to 4.48% from 5.56%. These
decreases were partially offset by an increase of $6.9 million, or 4.42%, in the
average balance of interest earning deposits, a $6.4 million increase in the
average balance of borrowed funds and a $1.8 million increase in the average
balance of trust preferred debt.
Net Interest Income
- ---------------------
Net interest income increased $175,000, or 8.7%, to $2.2 million, on a tax
equivalent basis, for the quarter ended September 30, 2002, when compared to the
same period in the prior year.
For the nine months ended September 30, 2002, net interest income increased
$826,000, or 14.3%, when compared to the same period in the prior year.
Net interest margin for the quarter ended September 30, 2002 decreased to 3.62%
from 3.67% when compared to the same period in the prior year. For the nine
months ended September 30, 2002, net interest margin increased to 3.79% from
3.57%. The increase in the net interest margin is the result of an increase in
net interest income, on a tax equivalent basis, partially offset by the increase
in the average balance of interest earning assets for the periods presented.
Provision for Loan Losses
- ----------------------------
The Company maintains an allowance for loan losses based upon a monthly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio.
Loan loss reserves are based upon a methodology that uses loss factors applied
to loan balances and reflects actual loss experience, delinquency trends, and
current economic conditions, as well as standards applied by the Federal Deposit
Insurance Corporation. The Company established a provision for loan losses for
the three months ended September 30, 2002 of $138,000, as compared to a
provision of $39,000 for the three months ended September 30, 2001. For the
nine months ended September 30, 2002, the provision for loan losses was $1.2
million as compared to $579,000 for the same period in 2001. In the prior
quarter, the Company took actions to increase reserves to recognize the
deterioration in credit quality of two significant lending relationships.
During the third quarter of 2002, the Company foreclosed on the assets of one of
these borrowers, charging off $598,000 of the loan balance and transferring the
net realizable value of the assets to other real estate owned. The Company's
allowance for loan losses to non-performing loans ratio improved to 99.82% at
September 30, 2002 as compared to 61.15% at June 30, 2002. Similar improvement
was noted when comparing the ratio of non-performing loans to total loans of
0.95% at September 30, 2002 to the June 30, 2002 ratio of 2.01%. The Company
had non-performing loans of $1.7 million at September 30, 2002.
Other Income
- -------------
The Company's non-interest income is principally comprised of fees on deposit
accounts and transactions, loan servicing, commissions, and net securities gains
and losses. Non-interest income, net of gains and losses from the sale of
securities, loans, and other real estate, decreased $4,000, or 1.1%, for the
quarter ended September 30, 2002, as compared to the same period in the prior
year. The decrease in non-interest income is primarily attributable to a $25,000
decrease in other charges, commissions and fees, and an $18,000 decrease in the
value of bank owned life insurance. These decreases were partially offset by
increases of $19,000 and $20,000 in service charges on deposit accounts and loan
servicing fees, respectively. Gains and losses on the sale of securities, loans
and other real estate increased $42,000 for the quarter ended September 30, 2002
compared to the same period in the prior year.
For the nine months ended September 30, 2002, non-interest income increased
$473,000, or 33.4%, compared to the same period in 2001. Non-interest income,
net of gains and losses from the sale of securities, loans and other real
estate, increased $148,000, or 15.0%, for the nine months ended September 30,
2002 as compared to September 30, 2001. Gains and losses on the sale of
securities, loans and other real estate increased $325,000 for the period ending
September 30, 2002 as compared to the same period in 2001.
Other Expense
- --------------
Non-interest expense increased $223,000, or 13.2%, to $1.9 million for the
quarter ended September 30, 2002, when compared to the same period in the prior
year. The increase in operating expense was due to a $247,000, or 32.8%,
increase in salary expenses, a $50,000, or 16.3%, increase in other expenses and
a $19,000, or 11.5%, increase in professional and other services. The increase
in salary expense was primarily the result of the creation of two new officer
positions, a 15% increase in customer service representatives' hourly rate
combined with an increase in their hours worked associated with the extension of
the Bank's business hours. In addition, other employee benefits increased
$62,000 as a result of increases in insurance premiums and pension expense.
These increases were partially offset by decreases in amortization of goodwill,
data processing and building occupancy of $79,000, $8,000 and $6,000,
respectively. The decrease in the amortization of goodwill is the result of
the adoption of FASB Statement No. 147.
For the nine months ending September 30, 2002, operating expenses increased
$396,000, or 7.8%, to $5.5 million from $5.1 million for the same period in
2001. The increase in operating expenses was the result of a $494,000, or 22.1%,
increase in salary expenses, a $114,000, or 12.5%, increase in other expenses, a
$70,000, or 13.2%, increase in professional services and a $19,000, or 3.4%,
increase in data processing expenses. These expenses were offset by a reduction
of $237,000, or 100.0%, in amortization of goodwill resulting from the adoption
of FASB Statement No. 147 and a $64,000, or 10.3%, in building occupancy
charges.
Income Taxes
- -------------
The Company's effective income rate was 25.7% for the quarter ended September
30, 2002 as compared to $23.7% for the same period in 2001.
For the nine months ended September 30, 2002, the Company's effective tax rate
was 26.3% compared to 26.9% for the nine months ended September 30, 2001.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's most significant form of market risk is interest rate risk, as the
majority of the Company's assets and liabilities are sensitive to changes in
interest rates. The Company's mortgage loan portfolio, consisting primarily of
loans on residential real property located in Oswego County, is subject to risks
associated with the local economy. The Company's interest rate risk management
program focuses primarily on evaluating and managing the composition of the
Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
The extent to which such assets and liabilities are "interest rate sensitive"
can be measured by an institution's interest rate sensitivity "gap". An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
that amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.
The Company does not generally maintain in its portfolio fixed interest rate
loans with terms exceeding 20 years. However, beginning the fourth quarter of
2002, 30-year fixed rate mortgages meeting a minimum credit score rating will be
held in portfolio. The Company will hold qualifying 30-year fixed rate
mortgages up to a maximum level of 5% of the total loan portfolio. 30-year
fixed rate loans that do not meet the minimum credit standard or exceed 5% of
the loan portfolio will be held for sale into the secondary market. The Company
manages interest rate and credit risk associated on the mortgage loans held for
sale and outstanding loan commitments through utilization of forward sale
commitments of mortgage-backed securities for the purpose of passing along these
risks to acceptable third parties. Management generally enters into forward
sale commitments to minimize the exposure to longer term fixed rate mortgages in
mortgage loans held for sale and mortgage commitments where interest rate locks
have been granted. The fair value of forward sale commitments was not material
at September 30, 2002. To manage interest rate risk within the portfolio, ARM
loans are originated with terms that provide that the interest rate on such
loans cannot adjust below the initial rate. Generally, the Company tends to
fund longer-term loans and mortgage-backed securities with shorter-term time
deposits, repurchase agreements, and advances. The impact of this
asset/liability mix creates an inherent risk to earnings in a rising interest
rate environment. In a rising interest rate environment, the Company's cost of
shorter-term deposits may rise faster than its earnings on longer-term loans and
investments. Additionally, the prepayment of principal on real estate loans and
mortgage-backed securities tends to decrease as rates rise, providing less
available funds to invest in the higher rate environment. Conversely, as
interest rates decrease, the prepayment of principal on real-estate loans and
mortgage-backed securities tends to increase, causing the Company to invest
funds in a lower rate environment. The potential impact on earnings from this
mismatch is mitigated to a large extent by the size and stability of the
Company's savings accounts. Savings accounts have traditionally provided a
source of relatively low cost funding and have demonstrated historically a low
sensitivity to interest rate changes. The Company generally matches a
percentage of these, which are deemed core deposits, against longer-term loans
and investments. In addition, the Company has sought to extend the terms of its
time deposits. In this regard, the Company has, on occasion, offered
certificates of deposits with three and four year terms which allow depositors
to make a one-time election, at any time during the term of the certificate of
deposit, to adjust the rate of the certificate of deposit to the then prevailing
rate for a certificate of deposit with the same term. The Company has further
sought to reduce the term of a portion of its rate sensitive assets by
originating one year ARM loans, three year/one year and five year/one year ARM
loans (mortgage loans which are fixed rate for the first three or five years and
adjustable annually thereafter), and by maintaining a relatively short term
investment securities (original maturities of three to five years) portfolio
with staggered maturities.
The Company manages its interest rate sensitivity by monitoring (through
simulation and net present value techniques) the impact on its GAP position, net
interest income, and the market value of portfolio equity (net portfolio value)
to changes in interest rates on its current and forecast mix of assets and
liabilities. The Company has an Asset-Liability Management Committee which is
responsible for reviewing the Company's assets and liability policies, setting
prices and terms on rate-sensitive products, and monitoring and measuring the
impact of interest rate changes on the Company's earnings. The Committee meets
monthly on a formal basis and reports to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements. The
Company does not have a targeted gap range; rather the Board of Directors has
set parameters of percentage change by which net interest margin and the net
portfolio value are affected by changing interest rates. The Board and
management deem these measures to be a more significant and realistic means of
measuring interest rate risk.
Management anticipates that the Company's net interest margin ratio for the last
quarter of 2002 and the first two quarters of 2003, will decrease as the Company
invests, into the current interest rate environment, the cash proceeds
associated with the trust preferred security issuance and the deposits received
from the Cayuga Bank branch acquisition.
GAP ANALYSIS. At September 30, 2002, the total interest-earning assets maturing
or repricing within one year exceeded total maturing or repricing
interest-bearing liabilities in the same period by $2.0 million, representing a
cumulative one-year gap ratio of a positive 0.78%.
CHANGES IN NET INTEREST INCOME AND NET PORTFOLIO VALUE. The following table
measures the Company's interest rate risk exposure in terms of the percentage
change in its net interest income and net portfolio value as a result of
hypothetical changes in 50 basis point increments in market interest rates. Net
portfolio value (also referred to as market value of portfolio equity)
represents the fair value of net assets (determined as the market value of
assets minus the market value of liabilities). The table quantifies the changes
in net interest income and net portfolio value to parallel shifts in the yield
curve. The column "Net Interest Income Percent Change" measures the change to
the next twelve months' projected net interest income, due to parallel shifts in
the yield curve. The column "Net Portfolio Value Percent Change" measures
changes in the current net mark-to-market value of assets and liabilities due to
parallel shifts in the yield curve. The base case assumes September 30, 2002
interest rates. The Company uses these percentage changes as a means to measure
interest rate risk exposure and quantifies those changes against guidelines set
by the Board of Directors as part of the Company's Interest Rate Risk policy.
The Company's current interest rate risk exposure is within those guidelines set
forth.
CHANGE IN INTEREST RATES
INCREASE(DECREASE)
BASIS POINTS NET INTEREST INCOME NET PORTFOLIO VALUE
(RATE SHOCK) PERCENTAGE CHANGE PERCENTAGE CHANGE
- ---------------------- ------------------- ------------------
300. . . . . . . - 7.61% - 15.85%
200. . . . . . - 4.59% - 9.37%
100. . . . . . . - 2.02% -3.44%
Base Case
(100). . . . . . . - 2.24% -4.90%
(200). . . . . . . - 3.87% -9.76%
(300). . . . . . . - 6.81% -12.89%
The negative percentage change from the base case in the downward interest rate
scenario is the result of deposit product interest rate floors incorporated into
the modeling, causing the assets to continue to reprice downward while the cost
of funds remains relatively stable.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and Chief Financial Officer have concluded, based on their
evaluation within 90 days prior to the filing date of this report, that the
Company's disclosure controls and procedures (as defined in Securities
Exchange Act Rules 13a-14(c) and 15d-14(c)) 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 have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
foregoing evaluation.
CHANGES IN INTERNAL CONTROLS. There were no significant changes made in our
internal controls during the period covered by this report or, to our knowledge,
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART II - OTHER INFORMATION
- -------------------------------
LEGAL PROCEEDINGS
- ------------------
From time to time, the Company is involved as a plaintiff or defendant in
various legal actions incident to its business. None of these actions
individually or in the aggregate is believed to be material to the financial
condition of the Company
On November 28, 2001, the Company and its Board of Directors were named as
defendants in Jewelcor Management, Inc. ("Jewelcor") v. Pathfinder Bancorp,
----------------------------------------------------------------
Inc., et al. This action was filed in the United States District Court,
---------
Northern District. In its complaint, Jewelcor alleges that the Company's
---
directors breached their fiduciary duties to the Company by failing to consider
--
an offer from Fulton Savings Bank for the sale of the Company. Jewelcor is
seeking damages in excess of $1 million, punitive damages in excess of $10
million and equitable relief. Management and the Board of Directors of the
Company have carefully reviewed Jewelcor's complaint and believes that it is
without merit. The Company has filed a motion to dismiss the complaint. Oral
arguments for the motion to dismiss were heard on April 5, 2002 before the
United States District Court for the Northern District of New York. No decision
on the motion has been rendered at this date.
CHANGES IN SECURITIES
- -----------------------
Not applicable
DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------
Not applicable
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable
OTHER INFORMATION
- ------------------
On September 17, 2002 the Board of Directors declared a $.08 cash dividend to
shareholders of record as of September 30, 2002, payable on October 15, 2002.
EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------
(a) The following exhibits are filed herewith:
Exhibit 99.1 - Officers' Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
23
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PATHFINDER BANCORP, INC.
------------------------
Date: November 13, 2002 /s/ Thomas W. Schneider
---------------------- --------------------------------------
Thomas W. Schneider
President, Chief Executive Officer
Date: November 13, 2002 /s/ James A. Dowd
--------------------- -------------------------------------
James A. Dowd
Vice President, Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas W. Schneider, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pathfinder Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/Thomas W. Schneider
- ------------------- ------------------------------------------
Date President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pathfinder Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ James A. Dowd
- ------------------- ------------------------------------------------
Date Vice President and Chief Financial Officer
23
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PATHFINDER BANCORP, INC.
------------------------
Date: November 13, 2002 /s/ Thomas W. Schneider
------------------- --------------------------
Thomas W. Schneider
President, Chief Executive Officer
Date: November 13, 2002 /s/ James A. Dowd
------------------- --------------------
James A. Dowd
Vice President, Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas W. Schneider, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pathfinder Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/Thomas W. Schneider
- ------------------- ------------------------
Date President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pathfinder Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ James A. Dowd
- ------------------- --------------------
Date Vice President and Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Thomas W. Schneider, President and Chief Executive Officer and James A. Dowd,
Vice President and Chief Financial Officer of Pathfinder Bancorp, Inc. (the
"Company") each certify in his capacity as an officer of the Company that he has
reviewed the quarterly report of the Company on Form 10-Q for the quarter ended
September 30, 2002 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.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
November 13, 2002 /s/ Thomas W. Schneider
- ---------------------- ------------------------------------------
Date President and Chief Executive Officer
November 13, 2002 /s/ James A. Dowd
- -------------------- -----------------------------------------------
Date Vice President and Chief Financial Officer