SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTER ENDED MARCH 31, 2002
SEC Exchange Act No. 000-23601
Pathfinder Bancorp, Inc.
(Exact name of Company as specified in its charter)
Federal
(State or jurisdiction of incorporation or organization)
16-1540137
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
---------------------------- ------------
(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
--------------
Not Applicable
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,603,580 shares
of the Company's common stock outstanding as of May 10, 2002.
PATHFINDER
BANCORP, INC. INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
o Consolidated Balance Sheets 1
o Consolidated Statements of Income 2
o Consolidated Statements of Shareholders' Equity 3
o Consolidated Statements of Cash Flows 4-5
o Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial 8-12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13-14
PART II OTHER INFORMATION 15
SIGNATURES
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
March 31, 2002 (unaudited) and December 31, 2001
March 31, December 31,
2002 2001
------------ ----------------
ASSETS
Cash and due from banks $6,132,207 $5,284,917
Interest earning deposits 1,397,889 2,160,927
-------------- -------------
Total cash and cash equivalents 7,530,096 7,445,844
Investment securities 50,566,046 53,422,149
Mortgage loans held-for-sale 6,029,818 5,270,999
Loans:
Real estate residential 122,742,915 116,101,197
Real estate commercial 31,097,795 30,454,798
Consumer 3,191,114 3,353,133
Commercial 14,631,617 14,357,635
----------- -----------
Total loans 171,663,441 164,266,763
Less: Allowance for loan losses 1,819,115 1,679,215
------------ -------------
Loans receivable, net 169,844,326 162,587,548
Premises and equipment, net 5,082,794 4,929,433
Accrued interest receivable 1,353,120 1,465,347
Other real estate 550,739 632,465
Intangible assets, net 2,262,915 2,341,854
Other assets 6,515,022 6,270,671
--------------- --------------
Total assets $249,734,876 $244,366,310
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $160,834,449 $156,553,658
Non-interest bearing 12,949,294 13,035,489
-------------- ---------------
Total deposits 173,783,743 169,589,147
Borrowed funds 50,070,500 49,440,500
Other liabilities 3,062,823 3,151,914
--------------- ---------------
Total liabilities 226,917,066 222,181,561
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; 2,899,470 and 2,894,220 shares
Issued and 2,602,597 and 2,601,495
outstanding, respectively. 28,995 28,942
Additional paid in capital 6,967,248 6,917,817
Retained earnings 19,448,740 19,015,639
Accumulated other comprehensive income 267,726 80,652
Unearned ESOP shares (160,905) (173,142)
Treasury stock, at cost;
296,873 and 293,225 shares, respectively (3,733,994) (3,685,159)
----------- -----------
Total shareholders' equity 22,817,810 22,184,749
-------------- --------------
Total liabilities and shareholders' equity $249,734,876 $244,366,310
============ ============
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 March 31, 2002 and March 31,
2001
(unaudited)
March 31, March 31,
2002 2001
----------- ------------
INTEREST INCOME:
Loans $3,257,362 $3,133,320
Interest and dividends on investments:
U.S. Treasury and agencies 38,049 121,594
State and political subdivisions 79,203 86,591
Corporate obligations 317,313 409,109
Marketable equity securities 23,831 42,899
Mortgage-backed 269,473 362,572
Federal funds sold and interest-bearing deposits 3,852 1,375
--------- ---------
Total interest income 3,989,083 4,157,460
--------- ---------
INTEREST EXPENSE:
Interest on deposits 1,220,329 1,617,788
Interest on borrowed funds 569,893 690,969
---------- ---------
Total interest expense 1,790,222 2,308,757
---------- ---------
Net interest income 2,198,861 1,848,703
Provision for loan losses 162,233 121,183
---------- ---------
Net interest income after provision for loan losses 2,036,628 1,727,520
---------- ---------
OTHER INCOME:
Service charges on deposit accounts 141,704 116,739
Loan servicing fees 45,322 36,124
Increase in value of Company owned life insurance 74,582 39,322
Net gain on securities, loans and other real estate 30,284 57,295
Other charges, commission and fees 107,983 102,018
-------- -------
Total other income 399,875 351,498
-------- -------
OTHER EXPENSES:
Salaries and employee benefits 783,876 759,562
Building occupancy 179,739 230,589
Data processing expenses 218,012 187,550
Professional and other services 181,034 169,518
Amortization of intangible asset 78,939 78,939
Other expenses 322,752 272,501
----------- ----------
Total other expenses 1,764,352 1,698,659
----------- ----------
Income before income taxes 672,151 380,359
Provision for income taxes 169,754 113,734
----------- ----------
Net income $ 502,397 $ 266,625
=========== =========
Net income per share - basic $ 0.20 $ 0.10
=========== =========
Net income per share - diluted $ 0.19 $ 0.10
=========== =========
The accompanying notes are an integral part of the consolidated financial
statements
-2-
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002
(unaudited)
Common Stock Add't
--------------------- Paid in Retained Compr.
Shares Amount Capital Earnings Income
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 2,894,220 $28,942 $6,917,817 $19,015,639 $ -
Comprehensive income:
Net Income 502,397
Other comprehensive income, net of tax
Unealized 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 14,939
Stock options exercised 5,250 53 34,492
Treasury stock purchased
Dividends declared (.07 per share) (69,296)
-----------------------------------------------------------------------------
Balance, March 31, 2002 2,899,470 $28,995 $6,967,248 $19,448,740 $ -
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002
(unaudited)
Accum.
Other Unearned
Compr. ESOP Treasury
Income Shares Stock Total
-----------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $80,652 $(173,142) $(3,685,159) $22,184,749
Comprehensive income:
Net Income 502,397
Other comprehensive income, net of tax
Unealized gains on securities
Unrealized holding gains arising
during period 355,447
Reclassification adjustment for gains
Included in net income (43,956)
----------
Other comprehensive income, before tax 311,491
Income tax provision 124,417
----------
Other comprehensive income, net of tax 187,074 187,074 187,074
----------
Comprehensive income: 187,074
==========
ESOP shares earned 12,237 27,176
Stock options exercised 34,545
Treasury stock purchased (48,835) (48,835)
Dividends declared (.07 per share) (69,296)
--------------------------------------------------------------
Balance, March 31, 2002 $ 67,726 $(160,905) $(3,733,994) $22,817,810
==============================================================
-3-
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
March 31, 2002 and March 31, 2001
(unaudited)
March 31, March 31,
2002 2001
----------- ------------
OPERATING ACTIVITIES:
Net income $502,397 $ 266,625
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 162,233 121,183
ESOP and other stock-based compensation earned 27,176 14,702
Deferred income tax (benefit) provision (60,856) 62,633
Proceeds from sale of loans 5,779,247 893,387
Originations of loans held-for-sale (6,551,469) (849,704)
Realized (gain)/loss on:
Sale of real estate acquired through foreclosure (3,053) 15,060
Sale of loans 13,403 (69,306)
Available-for-sale investment securities (43,956) -
Depreciation 124,140 120,401
Amortization of intangibles 78,939 78,939
Increase in surrender value of life insurance (74,582) (39,322)
Net accretion of premiums and discounts
on investment securities (12,959) (4,480)
Decrease in interest receivable 112,227 2,717
Net change in other assets and liabilities (322,385) (20,785)
------------ -----------
Net cash (used in) provided by operating activities (269,498) 592,050
------------ -----------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (1,281,563) (834,081)
Proceeds from maturities and principle reductions of
investment securities available-for-sale 3,280,472 1,048,198
Proceeds from sale of:
Real estate acquired through foreclosure 154,279 64,178
Available-for-sale investment securities 1,225,602 -
Net increase in loans (7,488,511) (928,676)
Purchase of premises and equipment (277,501) (38,532)
----------- -------------
Net cash used in investing activities (4,387,222) (688,913)
----------- -------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts savings accounts, money market
deposit accounts
and escrow deposits 4,271,034 424,150
Net (decrease)/increase in time deposits (76,438) 3,177,055
Net proceeds/(repayments) from borrowings 630,000 (3,021,000)
Proceeds from exercise of stock options 34,545 -
Cash dividends (69,334) (154,714)
Treasury stock purchased (48,835) --
----------- ------------
Net cash provided by financing activities 4,740,972 425,491
----------- ------------
Increase in cash and cash equivalents 84,252 328,628
Cash and cash equivalents at beginning of period 7,445,844 4,155,343
------------ ------------
Cash and cash equivalents at end of period $7,530,096 $4,483,971
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $1,757,696 $2,377,213
Income taxes paid 400,000 --
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $69,500 $194,417
(Increase)/decrease in unrealized gains and losses on available
for sale investment securities (311,491) 506,413
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $71,243 $156,090
The accompanying notes are an integral part of the consolidated financial
statements
-4-
Pathfinder Bancorp, Inc.
Notes to Financial Statements
(1) Basis of Presentation
The accompanying unaudited financial statements were prepared in accordance
with the instructions for Form 10-Q and Regulation S-X and, therefore, do
not include information for footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. The following material under
the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is written with the presumption that the users
of the interim financial statements have read, or have access to, the
Company's latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 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.
All adjustments (consisting of only normal recurring accruals) which, in
the opinion of management, are necessary for a fair presentation of the
financial statements have been included in the results of operations for
the three months ended March 31, 2002 and 2001.
Operating results for the three months ended March 31, 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 ended March 31, 2002 and 2001, using 2,571,520 and 2,562,825
weighted average common shares outstanding. Diluted earnings per share for
the three month period ending March 31, 2002 has been computed using
2,621,986 weighted average common shares outstanding. For the three months
ended March 31, 2001, the calculation of diluted earnings per share
excludes the effect of incremental common stock equivalents aggregating
84,000 shares since the exercise price was greater than the market price of
the shares.
(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
For the first quarter ending March 31, 2002, the Company's parent,
Pathfinder Bancorp, MHC, waived its right to receive its portion, or
$111,0000, of the cash dividends declared on March 19, 2002. The Company
maintains a restricted capital account with a $332,000 balance,
representing its portion of dividends waived as of March 31, 2002.
-5-
Pathfinder Bancorp, Inc.
Notes to Financial Statements
(5) New Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under this pronouncement, goodwill will no longer be
amortized, but is subject to annual impairment tests in accordance with the
statements. Goodwill arising from branch acquisitions continues to be
amortized. As the Company's intangible assets represent goodwill arising
from branch acquisitions, there is no impact on the financial statements as
a result of the adoption of this pronouncement.
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., and Whispering Oaks Development Corp. At
March 31, 2002, Pathfinder Bancorp, Inc.'s only business was the 100% ownership
of Pathfinder Bank, which in turn owns Pathfinder REIT, Inc. and Whispering Oaks
Development Corp. At March 31, 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 1,019,358 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 and borrowed funds. 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.
The following discussion reviews the financial condition at March 31, 2002
and the results of operations of the Company for the three months ended March
31, 2002.
Financial Condition
Assets
Total assets increased approximately $5.4 million, or 2.2%, to $249.7
million at March 31, 2002 from $244.4 million at December 31, 2001. The increase
in total assets was primarily the result of an increase in net loans receivable
of $7.3 million and a $759,000 increase in mortgage loans held-for-sale.
-6-
These increases were partially offset by a $2.9 million decrease in
investment securities. The increase in net loans receivable is primarily due to
a $6.6 million increase in residential real estate loans, and a $917,000
increase in commercial real estate and commercial loans, partially offset by a
decrease in consumer loans of $162,000. The increases in loan balances are a
result of the Company originating secondary market eligible residential real
estate mortgages. The increase in loans was principally funded by an increase of
$4.2 million in deposits, proceeds from sales of loans in the secondary market,
and by proceeds from amortization, maturities and sales of investment
securities.
Liabilities
Total liabilities increased by $4.7 million, or 2.1%, to $226.9 million at
March 31, 2002 from $222.2 million at December 31, 2001. The increase is
primarily attributable to a $4.2 million, or 2.5%, increase in deposits and a
$630,000, or 1.3%, increase in borrowed funds. The increase in deposits was
primarily comprised of a $4.3 million increase in interest bearing deposits,
offset by a $86,000 decrease in noninterest bearing deposits. The increase in
interest bearing deposits was comprised of a $1.1 million increase in NOW
deposit accounts, a $2.9 million increase in money management accounts, and a
$1.0 million increase in savings accounts, partially offset by a decrease in
time deposits of $76,000. 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 fixed returns of bank
deposits.
Liquidity and Capital Resources
Shareholders' equity increased $633,000, or 2.9%, to $22.8 million at March
31, 2002 from $22.2 million at December 31, 2001. The increase in shareholders'
equity is primarily the result of a $433,000 increase in retained earnings and a
$187,000 increase in accumulated other comprehensive income. The increase in
retained earnings is a result of net income of $502,000 offset by dividends
declared of $69,000 during the first three 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 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. The Company also adjusts liquidity as appropriate to meet its
assets and liability management objectives.
Results of Operations
The Company recorded net income of approximately $502,000 for the three
months ended March 31, 2002, as compared to $267,000 for the same period during
2001. The increase in net income of $236,000, or 88.4%, for the three months
ended March 31, 2002, resulted primarily from an increase of $309,000, or 17.9%,
in net interest income after provision for loan losses, an increase in other
income of $48,000, or 13.8%, partially offset by an increase of $66,000, or
3.9%, in operating expenses and a $56,000, or 49.3%, increase in provision for
income taxes.
Annualized return on average assets and return on average shareholders'
equity were .82% and 8.81%, respectively, for the three months ended March 31,
2002 compared to .46% and 4.47% for the first quarter of 2001. Earnings per
share - basic was $.20 for the first quarter of 2002 compared to $.10 for the
same period in 2001.
-7-
Interest Income
Interest income, on a tax-equivalent basis, totaled $4.0 million for the
quarter ended March 31, 2002, as compared to $4.2 million for the quarter ended
March 31, 2001, a decrease of $173,000, or 4.1%. Interest income was affected by
an increase in the average balance of interest-earning assets to $226.2 million
for the three months ended March 31, 2002 from $214.2 million in the prior year
period, offset by a decrease in the tax equivalent yield on average interest-
earning assets to 7.13% from 7.85%. The decrease in the tax equivalent yield was
a result of a lower interest rate environment during the first quarter of 2002
as compared to the same quarter in 2001. The yield decrease was somewhat
mitigated by increased originations of residential and commercial real estate
loans.
Interest income on loans receivable increased $125,000, or 4.0%, to $3.3
million for the three months ended March 31, 2002 as compared to the same period
in the prior year. The increase in interest income on loans occurred from an
increase in the average balance of loans receivable of $22.2 million, or 14.7%
to $173.3 million at March 31, 2002, from $151.1 million at March 31, 2001,
partially offset by a decrease in the average yield on loans receivable to 7.52%
from 8.29%.
Interest income on the mortgage-backed securities portfolio decreased by
$93,000, or 25.7%, to $269,000 for the three months ended March 31, 2002, from
$363,000 for the three months ended March 31, 2001. The decrease in interest
income on mortgage-backed securities resulted generally from a reduction in the
average balance on mortgage-backed securities of $4.8 million and the decrease
in the average yield on mortgage-backed securities to 6.37% from 6.68%.
Interest income on investment securities, on a tax equivalent basis,
decreased $207,000 or 29.3%, for the three months ended March 31, 2002 to
$499,000 from $706,000 for the same period in 2001. The decrease resulted
primarily from the decrease in the average balance of investment securities, of
$6.2 million, combined with a decrease in the tax equivalent yield of investment
securities to 5.67% from 6.82%. 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.
Interest income on interest-earning deposits increased $3,000, to $4,000
from $1,000 for the three months ended March 31, 2002 and 2001, respectively.
The increase is the result of a $805,000 increase in the average balance of
interest earning deposits.
Interest Expense
Interest expense for the quarter ended March 31, 2002 decreased by
approximately $519,000, or 22.5%, to $1.8 million from $2.3 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 3.10% from 4.23% and the decrease in the average
cost of borrowed funds to 4.47% from 6.08%. These decreases were partially
offset by an increase of $4.8 million in the average balance of interest bearing
deposits and a $5.5 million increase in the average balance of borrowed funds.
Net Interest Income
Net interest income increased $346,000, or 18.3%, to $2.2 million, on a tax
equivalent basis, for the quarter ended March 2002, when compared to the same
period in the prior year.
Net interest margin for the quarter ended March 31, 2002 increased to 3.96%
from 3.54% when compared to the same period in the prior year.
-8-
Provision 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 March 31, 2002 of $162,000, as compared to a provision of $121,000 for the
three months ended March 31, 2001. The increase in provision for loan losses is
attributable to an increase in the loan receivable balance, an increase in the
risk rating of a commercial loan relationship, and an increase in the overall
delinquencies in the portfolio. The Company's ratios of allowance for loan
losses to total loans receivable and to non-performing loans at March 31, 2002
were 1.06% and 47.42%, respectively, as compared to .089% and 66.93% at March
31, 2001.
Non-interest 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 increased $48,000, or 13.8%,
for the quarter ended March 31, 2002, as compared to the same period in the
prior year. The increase in non-interest income is primarily attributable to a
$25,000 increase in service charges on deposit accounts, a $9,000 increase in
loan servicing fees, an increase in the value of bank owned life insurance of
$35,000 and an increase in other charges, commissions and fees of $6,000. These
increases are partially offset by a decrease in the net gain on securities,
loans and other real estate of $27,000.
Non-interest Expense
Non-interest expense increased $66,000, or 3.9%, to $1.8 million for the
quarter ended March 31, 2002, when compared to the same period in the prior
year. The increase in operating expenses was due to a $24,000 increase in salary
expenses, or 3.2%, a $30,000 increase in data processing expenses, a $12,000
increase in professional and other services and a $50,000 increase in other
expenses. These increases were partially offset by a decrease in building
occupancy expenses of $51,000.
Income Taxes
Income taxes increased $56,000 for the quarter ended March 31, 2002 as
compared to the same period in the prior year. This increase was attributable to
a $292,000 increase in the Company's pre-tax income.
-9-
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. In addition, 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 that have
demonstrated historically a low sensitivity to interest rate changes. The
Company generally matches a percentage of these, which are deemed core,
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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 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 March 31, 2002, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $22.0 million, representing a
cumulative one- year gap ratio of a negative 9.83%.
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 March 31, 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 -11.27% -25.69%
200 - 7.16% -17.51%
100 - 3.22% -8.66%
Base Case
(100) - 0.09% 7.59%
(200) - 3.30% 9.71%
(300) - 7.67% 14.55%
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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 March 19, 2002 the Board of Directors declared a $.07 cash dividend to
shareholders of record as of March 31, 2002, payable on April 15, 2002.
Exhibits and Reports on Form 8-K
None
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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: May 14, 2002 Thomas W. Schneider
--- --- ---- President, Chief Executive Officer
/s/ James A. Dowd
------------------------------------
Date: May 14, 2002 James A. Dowd
--- --- ---- Vice President,
Chief Financial Officer
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