SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTER ENDED SEPTEMBER 30, 2003
SEC Exchange Act No. 000-23601
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Pathfinder Bancorp, Inc.
------------------------
(Exact name of Company as specified in its charter)
Federal
-------
(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 13126
-------------------------------------------------------------
(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 ____
-----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,433,132 shares
of the Company's common stock outstanding as of November 10, 2003.
PATHFINDER BANCORP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition 1
Consolidated Statements of Income 2-3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial 11-18
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market 19-21
Risk
Item 4. Control and Procedures 22
PART II OTHER INFORMATION 23
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, 2003 (UNAUDITED) AND DECEMBER 31, 2002
September 30, December 31,
2003 2002
----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,238,186 $ 7,026,126
Interest earning deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 352,766 6,714,279
--------------- --------------
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 8,590,952 13,740,405
Investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,681,278 62,505,544
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . 4,194,209 3,616,711
Loans:
Real estate residential . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,818,714 119,560,715
Real estate commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,420,789 32,657,177
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,299,445 15,068,204
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,686,682 13,196,188
--------------- --------------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,225,630 180,482,284
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . 1,699,859 1,480,874
--------------- --------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,525,771 179,001,410
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,449,249 5,622,171
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,393,418 1,334,126
Other real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,996 1,395,714
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840,226 3,840,226
Intangible asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905,503 1,073,182
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,535,008 6,926,378
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,477,610 $ 279,055,867
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Deposits:
Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,369,414 $ 188,757,723
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,724,645 15,764,382
--------------- --------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,094,059 204,522,105
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200,000 700,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,860,000 42,160,000
Company obligated mandatorily redeemable preferred securities of subsidiary. . . 5,000,000 5,000,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,949,170 3,443,740
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,103,229 255,825,845
--------------- --------------
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;
2,918,419 and 2,914,669 shares issued; and 2,433,132 and 2,610,496
shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . 29,184 29,146
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 7,194,509 7,113,811
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,520,702 19,745,651
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . 186,048 280,905
Unearned ESOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (89,403) (124,467)
Treasury Stock, at cost; 485,287 and 304,173 shares, respectively . . . . . . (6,466,659) (3,815,024)
--------------- --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 21,374,381 23,230,022
--------------- --------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . $ 287,477,610 $ 279,055,867
=============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
1
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
(UNAUDITED)
For the three For the three
months ended months ended
September 30, 2003 September 30, 2002
---------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,167,151 $ 3,191,513
Interest and dividends on investments:
U.S. Treasury and agencies . . . . . . . . . . . . . . . . . 41,291 53,370
Tax-exempt securities. . . . . . . . . . . . . . . . . . . . 53,670 77,429
Corporate obligations. . . . . . . . . . . . . . . . . . . . 148,428 279,202
Marketable equity securities . . . . . . . . . . . . . . . . 27,677 47,851
Mortgage-backed securities . . . . . . . . . . . . . . . . . 236,541 208,655
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,434 60,168
------------------- -------------------
Total interest income . . . . . . . . . . . . . . . . . . 3,677,192 3,918,188
INTEREST EXPENSE:
Interest on deposits . . . . . . . . . . . . . . . . . . . . . 884,128 1,139,458
Interest on borrowed funds . . . . . . . . . . . . . . . . . . 486,964 557,454
Interest on company obligated mandatorily redeemable preferred
securities of subsidiary. . . . . . . . . . . . . . . . . . 56,973 71,159
------------------- -------------------
Total interest expense. . . . . . . . . . . . . . . . . . 1,428,065 1,768,071
------------------- -------------------
Net interest income. . . . . . . . . . . . . . . . . . 2,249,127 2,150,117
Provision for loan losses. . . . . . . . . . . . . . . . . . . 126,004 138,424
------------------- -------------------
Net interest income after provision for loan losses. . 2,123,123 2,011,693
------------------- -------------------
OTHER INCOME:
Service charges on deposit accounts. . . . . . . . . . . . . . 212,938 155,111
Loan servicing fees. . . . . . . . . . . . . . . . . . . . . . 61,727 74,368
Increase in value of bank owned life insurance . . . . . . . . 56,567 43,582
Net gain on securities . . . . . . . . . . . . . . . . . . . . 2,111 -
Net gain on loans/real estate. . . . . . . . . . . . . . . . . 153,068 2,562
Other charges, commissions & fees. . . . . . . . . . . . . . . 114,388 94,321
------------------- -------------------
Total other income . . . . . . . . . . . . . . . . . . 600,799 369,944
------------------- -------------------
OTHER EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . 1,106,747 999,444
Building occupancy . . . . . . . . . . . . . . . . . . . . . . 248,707 184,435
Data processing expenses . . . . . . . . . . . . . . . . . . . 220,893 184,480
Professional and other services. . . . . . . . . . . . . . . . 222,775 189,538
Amortization of intangible asset . . . . . . . . . . . . . . . 55,622 -
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 419,063 354,535
Total other expenses . . . . . . . . . . . . . . . . . 2,273,807 1,912,432
------------------- -------------------
Income before income taxes . . . . . . . . . . . . . . . . . . . 450,115 469,205
Provision for income taxes . . . . . . . . . . . . . . . . . . . 117,395 120,379
------------------- -------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 332,720 $ 348,826
------------------- -------------------
NET INCOME PER SHARE - BASIC. . . . . . . . . . . . . . . . $ 0.14 $ 0.14
=================== ===================
NET INCOME PER SHARE - DILUTED. . . . . . . . . . . . . . . $ 0.14 $ 0.13
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
2
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
(UNAUDITED)
For the nine For the nine
months ended months ended
September 30, 2003 September 30, 2002
----------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,647,445 $ 9,693,124
Interest and dividends on investments:
U.S. Treasury and agencies . . . . . . . . . . . . . . . . . 128,139 117,884
Tax-exempt securities. . . . . . . . . . . . . . . . . . . . 174,357 234,892
Corporate obligations. . . . . . . . . . . . . . . . . . . . 591,473 906,951
Marketable equity securities . . . . . . . . . . . . . . . . 134,660 109,422
Mortgage-backed securities . . . . . . . . . . . . . . . . . 851,616 683,028
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,238 75,308
------------------- -------------------
Total interest income . . . . . . . . . . . . . . . . . . 11,554,928 11,820,609
INTEREST EXPENSE:
Interest on deposits . . . . . . . . . . . . . . . . . . . . . 2,891,316 3,530,164
Interest on borrowed funds . . . . . . . . . . . . . . . . . . 1,491,752 1,685,917
Interest on company obligated mandatorily redeemable preferred
securities of subsidiary. . . . . . . . . . . . . . . . . . 177,000 71,159
------------------- -------------------
Total interest expense. . . . . . . . . . . . . . . . . . 4,560,068 5,287,240
------------------- -------------------
Net interest income. . . . . . . . . . . . . . . . . . 6,994,860 6,533,369
Provision for loan losses. . . . . . . . . . . . . . . . . . . 491,830 1,208,005
------------------- -------------------
Net interest income after provision for loan losses. . 6,503,030 5,325,364
------------------- -------------------
OTHER INCOME:
Service charges on deposit accounts. . . . . . . . . . . . . . 590,173 451,819
Loan servicing fees. . . . . . . . . . . . . . . . . . . . . . 188,921 198,109
Increase in value of bank owned life insurance . . . . . . . . 142,301 163,746
Net gain on securities . . . . . . . . . . . . . . . . . . . . 522,711 617,320
Net gain on loans/real estate. . . . . . . . . . . . . . . . . 331,588 137,255
Other charges, commissions & fees. . . . . . . . . . . . . . . 363,546 319,451
------------------- -------------------
Total other income . . . . . . . . . . . . . . . . . . 2,139,240 1,887,700
------------------- -------------------
OTHER EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . 3,302,934 2,733,986
Building occupancy . . . . . . . . . . . . . . . . . . . . . . 754,638 553,669
Data processing expenses . . . . . . . . . . . . . . . . . . . 637,195 585,874
Professional and other services. . . . . . . . . . . . . . . . 579,938 595,215
Amortization of intangible asset . . . . . . . . . . . . . . . 167,680 -
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,373,389 1,025,221
Total other expenses . . . . . . . . . . . . . . . . . 6,815,774 5,493,965
------------------- -------------------
Income before income taxes . . . . . . . . . . . . . . . . . . . 1,826,496 1,719,099
Provision for income taxes . . . . . . . . . . . . . . . . . . . 484,242 452,911
------------------- -------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,342,254 $ 1,266,188
=================== ===================
NET INCOME PER SHARE - BASIC. . . . . . . . . . . . . . . . $ 0.55 $ 0.49
=================== ===================
NET INCOME PER SHARE - DILUTED. . . . . . . . . . . . . . . $ 0.54 $ 0.48
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
3
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
(unaudited)
Additional
Common Stock Issued Paid in Retained
Shares Amount Capital Earnings
-------------------- -------- ----------
BALANCE, DECEMBER 31, 2002 . . . . . . . 2,914,669 $ 29,146 $7,113,811 $19,745,651
Comprehensive income
Net income . . . . . . . . . . . . . . . 1,342,254
Other comprehensive income, net of tax:
Unrealized net losses on securities
Total Comprehensive income
ESOP shares earned . . . . . . . . . . . 53,421
Stock options exercised. . . . . . . . . 3,750 38 27,277
Treasury stock purchased
Dividends declared ($.30 per share). . . (567,203)
---------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003. . . . . . 2,918,419 $ 29,184 $7,194,509 $20,520,702
=======================================================================================
Accumulated
Other Com- Unearned
prehensive ESOP Treasury
Income Shares Stock Total
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 . . . . . . . $ 280,905 $ (124,467) $(3,815,024) $23,230,022
Comprehensive income . . . . . . . . . . -
Net income . . . . . . . . . . . . . . . 1,342,254
Other comprehensive income, net of tax:. -
Unrealized net losses on securities. . . (94,857) (94,857)
Total Comprehensive income . . . . . . . 1,247,397
ESOP shares earned . . . . . . . . . . . 35,064 88,485
Stock options exercised. . . . . . . . . 27,315
Treasury stock purchased . . . . . . . . (2,651,635) (2,651,635)
Dividends declared ($.30 per share). . . (567,203)
------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003. . . . . . . $ 186,048 $ (89,403) $(6,466,659) $21,374,381
================================================================================================
Additional
Common Stock Issued Paid in Retained
Shares Amount Capital Earnings
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 . . . . . . . 2,894,220 $28,942 $6,917,817 $19,015,639
Net income . . . . . . . . . . . . . . . 1,266,188
Other comprehensive income, net of tax:
Unrealized net losses on securities
Total Comprehensive income
ESOP shares earned . . . . . . . . . . . 48,243
Stock options exercised. . . . . . . . . 12,466 125 84,474
Treasury stock purchased
Dividends declared ($.22 per share). . . (345,677)
--------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30,2002 . . . . . . . 2,906,686 $29,067 $7,050,534 $19,936,150
=======================================================================================
Accumulated
Other Com- Unearned
prehensive ESOP Treasury
Income Shares Stock Total
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 . . . . . . . $ 80,652 $(173,142) $(3,685,159) $22,184,749
Net income . . . . . . . . . . . . . . . $1,266,188
Other comprehensive income, net of tax:
Unrealized net losses on securities. . . 81,385 81,385
Total Comprehensive income . . . . . . . 1,347,573
ESOP shares earned . . . . . . . . . . . 41,554 89,797
Stock options exercised. . . . . . . . . 84,599
Treasury stock purchased . . . . . . . . (129,865) (129,865)
Dividends declared ($.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.
4
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
September 30, 2003 and September 30, 2002 (Unaudited)
For the nine For the nine
months ended months ended
September 30, September 30,
2003 2002
----------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . $ 1,342,254 $ 1,266,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . 491,830 1,208,005
ESOP and other stock-based compensation earned. . . . 88,485 89,797
Deferred income tax expense (benefit) . . . . . . . . 181,798 (139,214)
Proceeds from sale of loans . . . . . . . . . . . . . 14,845,966 15,873,671
Originations of loans held-for-sale . . . . . . . . . (15,236,408) (14,049,992)
Realized (gain) loss on:
Sale of real estate loans through foreclosure . . . (144,532) 9,253
Loans . . . . . . . . . . . . . . . . . . . . . . . (187,056) (2,628)
Available-for-sale investment securities. . . . . . (522,711) (617,320)
Depreciation. . . . . . . . . . . . . . . . . . . . . 392,587 351,083
Amortization of intangible. . . . . . . . . . . . . . 167,680 -
Amortization of deferred financing costs. . . . . . . 22,653 1,312
Increase in surrender value of life insurance . . . . (142,301) (163,746)
Net accretion of premiums and discounts
on investment securities. . . . . . . . . . . . . . 180,649 (31,359)
Increase in interest receivable . . . . . . . . . . . (59,292) (2,777)
Net change in other assets and liabilities. . . . . . 905,850 (442,323)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . 2,327,452 3,349,950
--------------- ---------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale. (23,187,784) (9,915,570)
Proceeds from maturities and principal reductions of
investment securities available-for-sale. . . . . . 17,171,958 9,335,953
Proceeds from sale:
Real estate acquired through foreclosure. . . . . . 1,718,394 311,546
Available-for-sale investment securities. . . . . . 6,024,059 1,799,602
Net increase in loans . . . . . . . . . . . . . . . . (14,565,406) (11,005,831)
Purchase of premises and equipment. . . . . . . . . . (1,219,665) (660,273)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . (14,058,444) (10,134,573)
--------------- ---------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits . . . . . . . . . . . . . . . . 10,861,516 6,542,303
Net (decrease) increase in time deposits. . . . . . . (3,289,562) 3,687,675
Net repayments from short term borrowings . . . . . . 4,500,000 (13,646,500)
Payments on long-term borrowings. . . . . . . . . . . (8,000,000) (3,000,000)
Proceed from long-term borrowings . . . . . . . . . . 5,700,000 13,850,000
Proceeds from issuance of trust preferred securities. - 4,849,000
Proceeds from exercise of stock options . . . . . . . 27,315 84,599
Cash dividends. . . . . . . . . . . . . . . . . . . . (566,095) (208,719)
Treasury stock purchased. . . . . . . . . . . . . . . (2,651,635) (129,865)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . 6,581,539 12,028,493
--------------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . (5,149,453) 5,243,870
Cash and cash equivalents at beginning of period . . . 13,740,405 7,593,956
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $ 8,590,952 $ 12,837,826
=============== ===============
CASH PAID DURING THE PERIOD FOR:
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 4,601,663 $ 5,296,620
Income taxes paid . . . . . . . . . . . . . . . . . . 200,000 690,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate. . . . . . . . 549,215 1,108,693
The accompanying notes are an integral part of the consolidated financial
statements.
5
PATHFINDER BANCORP, INC.
Notes to Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance
with the instructions for Form 10-Q and Regulation S-X and, therefore, do
not include information for footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. The following material under
the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is written with the presumption that the users
of the interim financial statements have read, or have access to, the
Company's latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2002 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,
2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.
(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 2,415,681 and
2,426,206 weighted average common shares outstanding for 2003 and 2,579,602
and 2,575,993 for 2002, respectively. Diluted earnings per share for the
three month and nine month period ending September 30, 2003 and 2002 have
been computed using 2,464,041, 2,472,789, 2,617,651 and 2,622,160 shares,
respectively. Diluted earnings per share gives effect to weighted average
shares that would be outstanding assuming the exercise of outstanding stock
options using the treasury stock method.
(3) STOCK-BASED COMPENSATION
The Company's stock-based compensation plan is accounted for based on the
intrinsic value method set forth in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
provisions. Compensation expense for employee stock options is generally
not recognized if the exercise price of the option equals or exceeds the
fair value of the stock on the date of the grant.
The following table illustrates the effect on net income and earnings per
share as if the Black-Scholes fair value method described in SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended, had been applied to
the Company's stock-based compensation plan:
6
For quarter ended September 30,
2003 2002
--------------------------------
Net Income:
As reported . . . . . . . . . . . . . . . . . $ 332,720 $348,826
Less: Total stock-based employee compensation
expense determined under Black-Scholes option
pricing model, net of tax effect. . . . . . . 7,070 27,192
--------------------------------------------- --------------------------------
Pro forma net income. . . . . . . . . . . . . $ 325,650 $321,634
For the quarter ended September 30,
2003 2002
-----------------------------------
Earnings per share: Basic Diluted Basic Diluted
------------------- ------ -------- ------ --------
As reported . . . . $ 0.14 $ 0.14 $ 0.14 $ 0.13
Pro forma . . . . . $ 0.13 $ 0.13 $ 0.12 $ 0.12
For nine months ended September 30,
2003 2002
------------------------------------
Net Income:
As reported . . . . . . . . . . . . . . . . . $ 1,342,254 $1,266,188
Less: Total stock-based employee compensation
expense determined under Black-Scholes option
pricing model, net of tax effect. . . . . . . 21,210 81,576
--------------------------------------------- --------------------------------
Pro forma net income. . . . . . . . . . . . . $ 1,321,044 $1,184,612
For the nine months ended September 30,
2003 2002
----------------------------------------
Earnings per share: Basic Diluted Basic Diluted
------------------- ------ -------- ------ --------
As reported . . . . $ 0.55 $ 0.54 $ 0.49 $ 0.48
Pro forma . . . . . $ 0.54 $ 0.53 $ 0.46 $ 0.45
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. Therefore,
the foregoing pro forma results are not likely to be representative of the
effects of reported net income of future periods due to additional years of
vesting. Since changes in the subjective input assumptions can materially
affect the fair value estimates, the existing model, in management's
opinion does not necessarily provide a single reliable measure of the fair
value of its stock options. In addition, the pro forma effect on reported
net income and earnings per share for the periods presented should not be
considered representative of the pro forma effects on reported net income
and earnings per share for future periods.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which provides alternative
methods of transition for an entity that voluntary changes to the fair
value based method of accounting for stock-based employee compensation. It
also amends to disclosure provisions of FASB Statement No. 123 to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. This statement also amends APB No. 28, "Interim Financial
Reporting", to require disclosure about those effects in interim financial
information. The Company will continue to account for stock-based
compensation in accordance with APB Opinion No. 25.
7
(4) 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.
(5) DIVIDEND RESTRICTIONS
The Company maintains a restricted capital account with a $728,000 balance,
representing Pathfinder Bancorp, M.H.C.'s portion of dividends waived as of
September 30, 2003.
(6) COMPREHENSIVE INCOME
The components of other comprehensive income (loss) and related tax effects
for the three and nine month periods ended September 30, 2003 and 2002 are
as follows:
For the three months For the nine months
ended September 30, ended September 30,
2003 2002 2003 2002
---------------------- ---------------------
Gross change in unrealized gains on
securities available for sale. . . . $ (681,614) $ 46,015 $ 364,616 $ 752,661
Reclassification adjustment for gains
included in net income . . . . . . . (2,111) - (522,711) (617,320)
Tax effect. . . . . . . . . . . . . . 277,090 (18,405) 63,238 (53,956)
---------------------------------------------------------------------------------------
Net of tax amount . . . . . . . . . . $ (406,635) $ 27,610 $ (94,857) $ 81,385
=======================================================================================
(7) NEW ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board issued Statement No.
146, "Accounting for Costs Associated with Exit or Disposal Activities,"
which nullifies EITF Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement
delays recognition of these costs until liabilities are incurred, rather
than at the date of commitment to the plan, and requires fair value
measurement. It does not impact the recognition of liabilities incurred in
connection with a business combination or the disposal of long-lived
assets. The provisions of this statement are effective for exit or disposal
activities initiated after December 31, 2002 and did not result in any
significant impact on the Company's financial condition or results of
operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), " Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation expands the disclosures to be
8
made by a guarantor in its financial statements about its obligations under
certain guarantees and requires the guarantor to recognize a liability for
the fair value of an obligation assumed under certain specified guarantees.
FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies." In general, FIN 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying factor that is related
to an asset, liability or equity security of the guaranteed party which
would include financial and standby letters of credit. Certain guarantee
contracts are excluded from both the disclosure and recognition
requirements of this Interpretation, including, among others, guarantees
related to commercial letters of credit and loan commitments. The
disclosure requirements of FIN 45 require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the
guarantor could be required to make under the guarantee and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The accounting recognition requirements of FIN 45 are to be
applied prospectively to guarantees issued or modified after December 31,
2002. Adoption of FIN 45 did not have a significant impact on the Company's
financial condition or results of operations.
Outstanding letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's exposure to credit loss in the event of noncompliance by the
other party to the financial instrument for standby letters of credit is
represented by the contractual amount of those instruments. The Company had
$783,000 of outstanding letters of credit as of September 30, 2003. The
Company uses the same credit policies in making conditional obligations as
it does for on-balance sheet instruments.
Of these letters of credit, $0 automatically renew within the next twelve
months, $657,000 will expire within the next twelve months and $7,500 will
expire within thirteen to one hundred and eighty months. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending other loan commitments. The Company may require
collateral and personal guarantees supporting these letters of credit as
deemed necessary. Management believes that the proceeds obtained through a
liquidation of such collateral and the enforcement of personal guarantees
would be sufficient to cover the maximum potential amount of future
payments required under the corresponding guarantees.
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, "Amendment of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities". This statement clarifies the
definition of a derivative and incorporates certain decisions made by the
Board as part of the Derivatives Implementation Group process. This
statement is effective for contracts entered into or modified, and for
hedging relationships designated after September 30, 2003 and should be
applied prospectively. The provisions of the Statement that relate to
implementation issues addressed by the Derivatives Implementation Group
that have been effective should continue to be applied in accordance with
their respective effective dates. Adoption of this standard is not expected
to have a significant impact on the Corporation's financial condition or
results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This interpretation provides new guidance
9
for the consolidation of variable interest entities (VIEs) and requires
such entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risk among parties involved. The
interpretation also adds disclosure requirements for investors that are
involved with unconsolidated VIEs. The disclosure requirements apply to all
financial statements issued after January 31, 2003. The consolidation
requirements apply immediately to VIEs created after January 31, 2003 and
are effective for the first fiscal year or interim period beginning after
December 15, 2003 for VIEs acquired before February 1, 2003. The adoption
of this interpretation is not anticipated to have any material impact on
the Corporation's financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity.' This Statement requires that an issuer
classify a financial instrument that is within its scope as a liability.
Many of these instruments were previously classified as equity. This
Statement was effective for financial instruments entered into or modified
after May 31, 2003 and otherwise was effective beginning July 1, 2003. The
adoption of this standard did not have any impact on the Corporation's
financial condition or results of operations.
10
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 that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
Throughout the Management's Discussion and Analysis the term, "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank
and Pathfinder Statutory Trust I are wholly owned subsidiaries of Pathfinder
Bancorp, Inc. Pathfinder Commercial Bank, Pathfinder REIT, Inc. and Whispering
Oaks Development Corp. are wholly owned subsidiaries of Pathfinder Bank. At
September 30, 2003, Pathfinder Bancorp, Inc.'s only business was the 100%
ownership of Pathfinder Bank and Pathfinder Statutory Trust I. At September 30,
2003, 1,583,239 shares, or 65.1%, of the Company's common stock were held by
Pathfinder Bancorp, M.H.C., the Company's mutual holding company parent and
849,893 shares, or 34.9%, were 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 and borrowed funds. The Company's net
income is also affected by its provision for loan losses, as well as by the
amount of noninterest income, including income from fees and service charges,
net gains and losses on sales of securities, loans and other real estate, and
non interest expense such as employee compensation and benefits, occupancy and
equipment costs, data processing and income taxes. Earnings of the Company also
are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Company.
In particular, the general level of market rates tends to be highly cyclical.
The following discussion reviews the Company's financial condition at September
30, 2003 and the results of operations for the three months and nine months
ended September 30, 2003 and September 30, 2002.
11
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry. Application of these principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value or when an asset or liability needs to
be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available. When third party information is not
available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements included in the 2002 Annual
Report on Form 10-K. These policies, along with the disclosures presented in
the other financial statement notes and in this discussion, provide information
on how significant assets and liabilities are valued in the financial statements
and how those values are determined. Based on the valuation techniques used and
the sensitivity of financial statement amounts to the methods, assumptions and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses to be the accounting area that requires the
most subjective and complex judgments, and as such could be the most subject to
revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated statement of condition. Note 1 to the consolidated
financial statements in the Annual Report on Form 10-K describes the methodology
used to determine the allowance for loan losses.
FINANCIAL CONDITION
ASSETS
------
Total assets increased approximately $8.4 million, or 3%, to $287.5 million at
September 30, 2003 from $279.1 million at December 31, 2002. The increase in
total assets was primarily the result of a $13.5 million increase in net loans
12
receivable, partially offset by a $5.1 million decrease in cash and cash
equivalents. The increase in net loans receivable is primarily due to a $10.3
million increase in residential real estate loans, a $5.5 million increase in
commercial loans and a $1.2 million increase in consumer loans, partially offset
by a decrease in commercial real estate loans of $3.2 million. The increase in
residential mortgages resulted from the continued period of low market interest
rates and customers refinancing into mortgages with term less than 20 years in
which the Company holds in portfolio. The increase in commercial loans resulted
primarily from originating $5.5 million in short term bond anticipation notes to
municipalities. The decrease in cash and cash equivalents primarily resulted
from the investment of the remaining cash received from the assumption of
deposits in October 2002 relating the branch acquisition into the investment and
loan portfolio combined with the purchase of $2.3 million of treasury stock
relating to a privately negotiated stock repurchase agreement in January 2003.
LIABILITIES
-----------
Total liabilities increased by $10.3 million, or 4%, to $266.1 million at
September 30, 2003 from $255.8 million at December 31, 2002. The increase is
primarily attributable to a $7.6 million, or 4%, increase in deposits, a $2.2
million increase in borrowed funds and a $505,000 increase in other liabilities.
Borrowed funds were utilized to fund the Company's growth in its investment and
loan portfolios.
SHAREHOLDERS' EQUITY
---------------------
Shareholders' equity decreased $1.9 million, or 8%, to $21.4 million at
September 30, 2003 from $23.2 million at December 31, 2002. The decrease in
shareholders' equity primarily results from a $2.7 million increase in treasury
stock, partially offset by an increase in retained earnings of $775,000. The
increase in treasury stock represented the Company's privately negotiated
purchase of 160,114 shares of common stock for a price of $2.3 million, or
$14.60 per share during the first quarter of 2003 and other treasury stock
purchases of $350,000. The increase in retained earnings is the result of net
income of $1.3 million, partially offset by dividends declared of $567,000
during the first nine months of 2003. The Company's mutual holding company
parent, Pathfinder Bancorp, M.H.C, waived its right to receive the dividend for
the quarter ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
The Company's primary sources of funds are deposits, amortization, prepayment,
and sales 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, refer to 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, loan commitments, the acquisition of fixed
assets and the general operating needs of the Company. At the quarter ended
13
September 30, 2003, the Company had $24.9 million in outstanding commitments to
extend credit. Management believes the Company has the ability to meet these
outstanding credit commitments. The Company also adjusts liquidity as
appropriate to meet its assets and liability management objectives. The
available liquidity as a percentage of core deposits and total assets exceed the
minimum standards established by the liquidity management policy.
RESULTS OF OPERATIONS
-----------------------
The Company recorded net income of approximately $333,000 for the three months
ended September 30, 2003, as compared to $349,000 for the same period during
2002. The decrease in net income of $16,000, or 5%, for the three months ended
September 30, 2003, resulted primarily from an increase in operating expenses of
$361,000, or 19%, offset by an increase of $111,000, or 6%, in net interest
income after provision for loan losses, a $231,000 increase in other income and
a $3,000 decrease in provision for income taxes. The higher expenses and
earnings are primarily attributable to the operation of an additional branch
location.
For the nine months ended September 30, 2003, net income increased $76,000, or
6%, to $1.3 million when compared to the same period in the prior year. The
increase in net income for the nine months ended September 30, 2003, was
primarily the result of an increase in net interest income after provision for
loan losses of $1.2 million, or 22%, and an increase of $252,000 in other
income, offset by an increase in other operating expenses of $1.3 million, or
24%, and an increase in provision for income taxes of $31,000, or 7%.
Annualized return on average assets and return on average shareholders' equity
were 0.47% and 6.29%, respectively, for the three months ended September 30,
2003 compared to 0.54% and 6.02% for the third quarter of 2002. Earnings per
share - basic was $.14 for the third quarters of 2003 and 2002. For the nine
months ended September 30, 2003, the same performance measurements were 0.63%
and 8.47%, as compared to 0.68% and 7.32% for the same period in the prior year.
Earnings per share-basic for the nine months ended September 30, 2003 was $.55
compared to $.49 for the same period in 2002.
INTEREST INCOME
----------------
Three month period
Interest income, on a tax-equivalent basis, totaled $3.7 million for the quarter
ended September 30, 2003, a decrease of $246,000, or 6%, when compared to the
same period of 2002. The average balance of interest-earning assets increased
to $250.5 million for the three months ended September 30, 2003 from $240.8
million in the prior year period, offset by a decrease in the tax equivalent
yield on average interest-earning assets to 5.91% from 6.55%. The decrease in
the tax equivalent yield resulted from the continued period of historically low
market interest rates. The decrease in the average yield was mitigated by
increased originations of residential real estate loans and an increase in the
average balance of investment securities. The increase in loans was primarily
due to the Company's continued emphasis on residential real estate financing and
the Company competitively pricing home equity loans and lines of credit combined
with a marketing effort to increase demand for those loans. The increase in
14
investment securities was primarily due to the investment of excess liquidity
arising from the assumption of deposits in connection with the acquisition of
the Lacona, New York branch of Cayuga Bank in October of 2002 and proceeds from
residential mortgage loan sales.
Interest income on loans receivable remained constant at $3.2 million for the
three months ended September 30, 2003 as compared to the same period in the
prior year. The average balance of loans receivable increased $16.9 million, or
10%, to $193.6 million at September 30, 2003 from $176.6 million at September
30, 2002. The increase in the average balance was partially offset by a
decrease in the average yield on loans receivable to 6.56% from 7.23%.
Interest income on the mortgage-backed securities portfolio increased $28,000,
or 13%, to $237,000 for the three months ended September 30, 2003, from $209,000
for the three months ended September 30, 2002. The increase in interest income
on mortgage-backed securities resulted from an increase in the average balance
of mortgage-backed securities of $13.0 million, or 88%, partially offset by a
decrease in the average yield on mortgage-backed securities to 3.42% from 5.67%.
Interest income on investment securities, on a tax equivalent basis, decreased
$197,000, or 41%, for the three months ended September 30, 2003 to $287,000 from
$484,000 for the same period in 2002. The decrease resulted primarily from a
decrease in the tax equivalent yield of investment securities to 4.07% from
5.43% and a decrease in the average balance of investment securities of $7.4
million, or 21%.
Interest income on interest-earning deposits decreased $58,000, to $2,000 from
$60,000 for the three months ended September 30, 2003. The decrease is the
result of a $12.8 million decrease in the average balance of interest-earning
deposits, combined with a decrease in the average yield to .80% from 1.75% for
the same period in the prior year.
Nine Month Period
Interest income, on a tax-equivalent basis, decreased $279,000, or 2%, to $11.6
million, when compared to the same period in 2002. The tax-equivalent yield on
interest-earning assets decreased to 6.07% from 6.82%, partially offset by an
increase in the average balance of interest-earning assets of $22.6 million, or
10%, to $255.4 million from $232.8 million.
Interest income on loans receivable for the nine months ended September 30,
2002, decreased $37,000 as compared to the same period in the prior year.
Average loans receivable increased $13.6 million, or 8%, while the yield on
average loans receivable decreased to 6.80% from 7.35%.
For the nine months ended September 30, 2003 and 2002, interest income on
mortgage-backed securities was $852,000 and $683,000, respectively, an increase
of $169,000, or 25%. The increase resulted primarily from an increase in the
average balance of mortgage-backed securities of $13.3 million, or 85%, offset
by a decrease in the average yield on mortgage-backed securities to 3.92% from
5.81%. The increase in the average balance of mortgage backed securities
resulted from purchases of $15.6 million, partially offset by maturities and
principal redemptions.
15
For the nine months ended September 30, 2003, tax equivalent interest income on
investment securities decreased $362,000, or 25%, to $1.1 million compared to
$1.5 million for the same period in 2002. The decrease resulted primarily from
a decrease in the average balance of investment securities of $1.7 million and a
decrease in the tax equivalent yield on investment securities to 4.33% from
5.49%.
INTEREST EXPENSE
-----------------
Three Month Period
Interest expense for the quarter ended September 30, 2003 decreased by
approximately $340,000, or 19%, to $1.4 million from $1.8 million when compared
to the same quarter for 2002. The decrease in interest expense for the period
was principally the result of the decrease in the average cost of
interest-bearing deposits to 1.85% from 2.72%, partially offset by an increase
of $23.2 million in the average balance of interest-bearing deposits. The
increase in the average balance of interest-bearing deposits primarily resulted
from the branch acquisition, which included the assumption of $26.4 million in
deposits, occurring in the fourth quarter of 2002. The average cost of
borrowings decreased to 4.46% from 4.70%, combined with a $4.6 million decrease
in the average balance of borrowings. The decrease in the cost of borrowings
was primarily due to the downward repricing of the debentures underlying the
mandatory redeemable trust preferred security having an average cost of funds of
4.36% for the three months ending September 2003, compared to 5.33% for the same
period in 2002. The interest rate on the borrowing is tied to LIBOR (London
InterBank Offered Rate)
Nine Month Period
For the nine months ended September 30, 2003, interest expense decreased
$727,000, or 14%, when compared to the first nine months of 2002. The decrease
in interest expense for the period was primarily the result of a decrease in the
average cost of interest bearing deposits to 1.98%, from 2.90%, offset by an
increase in the average balance of interest bearing deposits of $32.3 million,
or 20%.
NET INTEREST INCOME
---------------------
Net interest income, on a tax equivalent basis, increased $94,000, or 4%, to
$2.3 million for the quarter ended September 30, 2003, when compared to the same
period in the prior year.
For the nine months ended September 30, 2003, net interest income, on a tax
equivalent basis, increased $448,000, or 7%, when compared to the same period in
the prior year.
Net interest margin for the quarter ended September 30, 2003 increased to 3.63%
from 3.62% when compared to the same period in the prior year. For the nine
months ended Septemer 30, 2003, net interest margin decreased to 3.69%, from
3.79%.
16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
--------------------------------------------
The Company maintains an allowance for loan losses based upon a quarterly
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 FDIC. The
Company established a provision for possible loan losses for the three months
ended September 30, 2003 of $126,000, as compared to a provision of $138,000 for
the three months ended September 30, 2002.
The Company's allowance for loan losses to nonperforming loans ratio was 71.19%
at September 30, 2003 as compared to 86.57% at September 30, 2002. The ratio of
nonperforming loans to total loans was 1.23% at September 30, 2003 as compared
to the September 30, 2002 ratio of .95%. The Company had nonperforming loans of
$2.4 million at September 30, 2003. The Company has experienced an increase in
delinquent loans (greater than 30 days past due) to $7.7 million from $6.1
million at December 31, 2002. Management anticipates that loss mitigation
efforts will result in no additional provisions being required.
NONINTEREST INCOME
-------------------
The Company's noninterest income is principally comprised of fees on deposit
accounts and transactions, loan servicing, commissions, and net gains and losses
on the sale of securities, loans and other real estate. Noninterest income, net
of gains and losses from the sale of securities, loans and other real estate,
increased 21% to $446,000 for the quarter ended September 30, 2003 compared to
$367,000 for the same period in the prior year. The increase in noninterest
income is primarily attributable to a $58,000 increase in service charges on
deposit accounts and a $20,000 increase in other charges, commissions and fees.
The increase in service charges on deposit accounts is primarily attributable to
an increase in the number of deposit accounts and the introduction of new
services to depositors. Net gains and losses from the sale of securities, loans
and other real estate increased $153,000, to $155,000 for the quarter ended
September 30, 2003 compared to $2,000 for the same period in the prior year.
The increase resulted primarily from an increase in gains recognized on loan
sales to the secondary market and the gains recognized on other real estate.
For the nine months ended September 30, 2003, noninterest income, net of gain
and losses from the sale of securities, loans and other real estate, increased
13% to $1.3 million, compared to $1.1 million for the same period in the prior
year. The increase in noninterest income is primarily attributable to a
$138,000 increase in service charges on deposit accounts and a $44,000 increase
in other charges, commissions and fees. Net gains and losses from the sale of
securities decreased $95,000, to $523,000, from $617,000 for same period in the
prior year. A $194,000 increase in net gain on loans and other real estate
resulted from a $156,000 increase in gain recognized on real estate loans sold
to the secondary market, and a $38,000 increase in gain recognized on sales of
other real estate.
17
NONINTEREST EXPENSE
--------------------
Noninterest expense increased 19% to $2.3 million for the quarter ended
September 30, 2003, when compared to the same period in the prior year. The
increase in noninterest expense was due to increases of $107,000 in salary and
employee benefits, $64,000 in building occupancy expenses, $36,000 in data
processing expenses, $33,000 in professional and other services, $56,000 in the
amortization of intangible asset and $65,000 in other expenses. The increases
in operating costs are primarily attributable to the operation of an additional
branch location acquired in October 2002. Salaries and employee benefits were
also impacted by increases in pension benefit costs and health insurance
benefits. The increase in professional and other services related to the
payment of television commercial production costs relating to a new advertising
campaign.
For the nine months ended September 30, 2003, noninterest expense increased $1.3
million, or 24%, compared to the same period in 2002. The increase in
noninterest expense was the result of a $569,000, or 21%, increase in salary and
employee benefits, a $201,000, or 36%, increase in building occupancy expenses,
a $51,000, or 9% increase in data processing expenses, a $168,000 increase in
amortization expenses and a $348,000, or 34%, increase in other expenses.
Expense increases primarily resulted from the operation of an additional branch
and the amortization of branch acquisition intangibles. In addition, included
in other expenses is $164,000 in nonrecurring expenses relating to personnel
realignment. These expenses were offset by a reduction of $15,000, or 3%, in
professional and other service expense.
INCOME TAXES
-------------
Income taxes decreased $3,000 for the quarter ended September 30, 2003 as
compared to the same period in the prior year. This decrease was primarily
attributable to a $19,000 decrease in the Company's pre-tax income. The
effective tax rate is consistent at 26% when compared to the same period in the
prior year.
For the nine months ended September 30, 2003, income taxes increased $31,000, or
7%, as compared to the nine months ended September 30, 2002. The effective tax
rate is consistent at 26% when compared to the same period in the prior year.
18
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.
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 that has
demonstrated a historically low sensitivity to interest rate changes. The
Company generally matches a percentage of these, which are deemed core, 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
19
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
seven years) portfolio with staggered maturities. The Company generally
maintains in its portfolio fixed interest rate loans with terms less than 20
years. By policy, the Company may only maintain up to 5% of the loan portfolio
in fixed rate loans exceeding 20 years. Thirty-year fixed rate loans not held
in portfolio are held for sale into the secondary market. The Company manages
interest rate and credit risk associated with 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. At September 30, 2003, there were $5.0 million in
outstanding forward sale commitments. To manage interest rate risk within the
loan portfolio, ARM loans are originated with terms that provide that the
interest rate on such loans cannot adjust below the initial rate.
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 ("earnings at risk"), and the market value of portfolio equity
("value at risk") 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 market value of portfolio equity 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.
GAP ANALYSIS. At September 30, 2003, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $31.6 million, representing a
cumulative one-year gap ratio of a negative 10.98%.
EARNINGS AT RISK AND VALUE AT RISK. The following table measures the Company's
interest rate risk exposure in terms of the percentage change in its net
interest income and net portfolio value as a result of hypothetical changes in
100 basis point increments in market interest rates. 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 "Earning at
Risk" measures the percentage change to the next twelve months' projected net
interest income, due to parallel shifts in the yield curve. The column "Value
at Risk" measures the percentage 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, 2003 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.
20
CHANGE IN INTEREST RATES
INCREASE (DECREASE)
BASIS POINTS EARNINGS VALUE
(RATE SHOCK) AT RISK AT RISK
--------------------------------------------------------------------------------
300 -11.16% - 31.00%
200 -7.19% - 19.24%
100 -3.38% - 8.15%
Base Case
(100) 1.38% 3.64%
(200) .40% 11.30%
(300) -3.88% 19.29%
21
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this quarterly
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.
22
PART II - OTHER INFORMATION
-------------------------------
LEGAL PROCEEDINGS
------------------
None
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 16, 2003, the Board of Directors declared a $.10 cash dividend to
shareholders of record as of September 30, 2003, payable on October 13, 2003.
EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
Exhibits
Exhibit No. Description
------------ -----------
Exhibit 31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief
Executive Officer
Exhibit 31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief
Financial Officer
Exhibit 32.1 Section 1350 Certification of the Chief Executive and
Chief Financial Officer
Reports on Form 8-K
The Company filed two Current Reports on Form 8-K during the third quarter
ending September 30, 2003 dated July 21, 2003 and August 12, 2003 reporting the
second quarter earnings release and the Board's approval of a change in
auditors, respectively.
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.
--------------------------
/s/ Thomas W. Schneider
--------------------------
Date: November 14, 2003 Thomas W. Schneider
------------------- President, Chief Executive Officer
/s/ James A. Dowd
-------------------
Date: November 14, 2003 James A. Dowd
------------------- Vice President, Chief Financial
Officer
Exhibit 31.1
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 14, 2003 /s/ Thomas W. Schneider
------------------- --------------------------
Date President and Chief Executive Officer
Exhibit 31.2
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 14, 2003 /s/ James A. Dowd
------------------- --------------------
Date Vice President and Chief Financial
Officer
Exhibit 32.1
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, 2003 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 14, 2003 /s/Thomas W. Schneider
------------------- ------------------------
Date President and Chief Executive Officer
November 14,2003 /s/ James A. Dowd
----------------- --------------------
Date Vice President and Chief Financial Officer