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 JUNE 30, 2003
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 2,431,632 shares
of the Company's common stock outstanding as of August 8, 2003.
PATHFINDER BANCORP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Income 2-3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial 8-13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market 14-16
Risk
Item 4. Control and Procedures 17
PART II OTHER INFORMATION 18-19
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
JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
June 30, December 31,
ASSETS 2003 2002
---------------------------------------------------------------------------------------------------------------
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,654,667 $ 7,026,126
Interest earning deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,523,271 6,714,279
------------- --------------
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 7,177,938 13,740,405
Investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,951,482 62,505,544
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . 5,644,987 3,616,711
Loans:
Real estate residential . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,592,960 119,560,715
Real estate commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,082,077 32,657,177
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,044,256 15,068,204
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,921,756 13,196,188
------------- --------------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,641,049 180,482,284
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . 1,582,076 1,480,874
------------- --------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,058,973 179,001,410
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,124,394 5,622,171
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,319,409 1,334,126
Other real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,582,622 1,395,714
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840,226 3,840,226
Intangible asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961,125 1,073,182
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,466,387 6,926,378
------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $283,127,543 $ 279,055,867
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------
Deposits:
Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $187,705,138 $ 188,757,723
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,817,591 15,764,382
------------- --------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,522,729 204,522,105
Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,160,000 42,860,000
Company obligated mandatorily redeemable preferred securities of subsidiary,
Pathfinder Statutory Trust I, holding solely junior subordinated debentures
of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,000,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,956,698 3,443,740
------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,639,427 255,825,845
------------- --------------
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01 and $.10 per share; authorized 10,000,000
shares; 2,916,919 shares issued; and 2,431,632 and 2,610,496
shares outstanding, respectively.. . . . . . . . . . . . . . . . . . . . . . 29,169 29,146
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 7,162,441 7,113,811
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,271,455 19,745,651
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . 592,683 280,905
Unearned ESOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,973) (124,467)
Treasury Stock, at cost; 485,287 and 304,173 shares, respectively . . . . . . (6,466,659) (3,815,024)
------------- --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 21,488,116 23,230,022
------------- --------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . $283,127,543 $ 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 JUNE 30, 2003 AND JUNE 30, 2002
(UNAUDITED)
For the three For the three
months ended months ended
June 30, 2003 June 30, 2002
-------------- --------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,214,487 $ 3,244,249
Interest and dividends on investments:
U.S. Treasury and agencies. . . . . . . . . . . . . . . . 47,564 26,465
State and political subdivisions. . . . . . . . . . . . . 59,131 78,260
Corporate obligations . . . . . . . . . . . . . . . . . . 184,393 310,436
Marketable equity securities. . . . . . . . . . . . . . . 52,287 37,740
Mortgage-backed securities. . . . . . . . . . . . . . . . 305,754 204,900
Federal funds sold and interest-bearing deposits. . . . . 13,133 11,288
-------------- --------------
Total interest income. . . . . . . . . . . . . . . . . 3,876,749 3,913,338
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . 979,717 1,170,377
Interest on borrowed funds. . . . . . . . . . . . . . . . . 552,086 558,570
-------------- --------------
Total interest expense . . . . . . . . . . . . . . . . 1,531,803 1,728,947
-------------- --------------
Net interest income . . . . . . . . . . . . . . . . 2,344,946 2,184,391
Provision for loan losses . . . . . . . . . . . . . . . . . 259,970 907,348
-------------- --------------
Net interest income after provision for loan losses 2,084,976 1,277,043
-------------- --------------
OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . 215,762 155,004
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 77,399 78,419
Increase in value of bank owned life insurance. . . . . . . 42,867 45,582
Net gain on securities. . . . . . . . . . . . . . . . . . . 355,206 573,364
Net gain on loans/real estate . . . . . . . . . . . . . . . 136,214 138,833
Other charges, commissions & fees . . . . . . . . . . . . . 147,014 120,260
-------------- --------------
Total other income. . . . . . . . . . . . . . . . . 974,462 1,111,462
-------------- --------------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . 1,083,580 950,666
Building occupancy. . . . . . . . . . . . . . . . . . . . . 248,704 189,495
Data processing expenses. . . . . . . . . . . . . . . . . . 218,221 183,382
Professional and other services . . . . . . . . . . . . . . 193,986 224,643
Amortization of intangible asset. . . . . . . . . . . . . . 55,623 -
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 540,195 341,515
Total other expenses. . . . . . . . . . . . . . . . 2,340,309 1,889,701
-------------- --------------
Income before income taxes. . . . . . . . . . . . . . . . . . 719,129 498,804
Provision for income taxes. . . . . . . . . . . . . . . . . . 202,534 138,833
-------------- --------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 516,595 $ 359,971
-------------- --------------
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . $ 0.21 $ 0.14
============== ==============
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . $ 0.21 $ 0.14
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
(UNAUDITED)
For the six For the six
months ended months ended
June 30, 2003 June 30, 2002
-------------- --------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,480,294 $ 6,501,611
Interest and dividends on investments:
U.S. Treasury and agencies. . . . . . . . . . . . . . . . 86,848 64,514
State and political subdivisions. . . . . . . . . . . . . 120,687 157,463
Corporate obligations . . . . . . . . . . . . . . . . . . 443,045 627,749
Marketable equity securities. . . . . . . . . . . . . . . 106,983 61,571
Mortgage-backed securities. . . . . . . . . . . . . . . . 615,075 474,373
Federal funds sold and interest-bearing deposits. . . . . 24,804 15,140
-------------- --------------
Total interest income. . . . . . . . . . . . . . . . . 7,877,736 7,902,421
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . 2,007,188 2,390,706
Interest on borrowed funds. . . . . . . . . . . . . . . . . 1,124,815 1,128,463
------------- --------------
Total interest expense . . . . . . . . . . . . . . . . 3,132,003 3,519,169
-------------- --------------
Net interest income . . . . . . . . . . . . . . . . 4,745,733 4,383,252
Provision for loan losses . . . . . . . . . . . . . . . . . 365,826 1,069,581
-------------- --------------
Net interest income after provision for loan losses 4,379,907 3,313,671
-------------- --------------
OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . 377,235 296,708
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 127,194 123,741
Increase in value of bank owned life insurance. . . . . . . 85,734 120,164
Net gain on securities. . . . . . . . . . . . . . . . . . . 520,600 617,320
Net gain on loans/real estate . . . . . . . . . . . . . . . 178,520 128,274
Other charges, commissions & fees . . . . . . . . . . . . . 249,158 225,130
------------- --------------
Total other income. . . . . . . . . . . . . . . . . 1,538,441 1,511,337
-------------- --------------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . 2,196,187 1,734,542
Building occupancy. . . . . . . . . . . . . . . . . . . . . 505,931 369,234
Data processing expenses. . . . . . . . . . . . . . . . . . 416,302 401,394
Professional and other services . . . . . . . . . . . . . . 357,163 405,677
Amortization of intangible asset. . . . . . . . . . . . . . 112,058 -
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 954,326 664,267
Total other expenses. . . . . . . . . . . . . . . . 4,541,967 3,575,114
-------------- --------------
Income before income taxes. . . . . . . . . . . . . . . . . . 1,376,381 1,249,894
Provision for income taxes. . . . . . . . . . . . . . . . . . 366,847 339,373
-------------- --------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,009,534 $ 910,521
============== ==============
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . $ 0.42 $ 0.36
============== ==============
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . $ 0.41 $ 0.35
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
(unaudited)
Additional
Common Stock Issued Paid in Retained Comprehensive
Shares Amount Capital Earnings Income(Loss)
-------------------- ---------- ---------- -------------- ------------
BALANCE, DECEMBER 31, 2002 . . . . . . . . . . . . . 2,914,669 $ 29,146 $7,113,811 $ 19,745,651
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . 1,009,534 1,009,534
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period. 1,046,230
Reclassification adjustment for gains included
in net income . . . . . . . . . . . . . . . . (520,600)
-----------
Other comprehensive income, before tax . . . . . . 525,630
Income tax provision . . . . . . . . . . . . . . . (213,852)
-----------
Other comprehensive income, net of tax . . . . . . 311,778
-----------
Comprehensive income:. . . . . . . . . . . . . . . . 1,321,312
==========
ESOP shares earned . . . . . . . . . . . . . . . . . 33,848
Stock option exercised . . . . . . . . . . . . . . . 2,250 23 14,782
Treasury stock purchased
Dividends declared ($.20 per share). . . . . . . . . (483,730)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 . . . . . . . . . . . . . . . 2,916,919 $ 29,169 $7,162,441 $ 20,271,455
================================================================================================================================
Accumulated
Other Com- Unearned
prehensive ESOP Treasury
Income(Loss) Shares Stock Total
-----------------------------------------------------
Balance, December 31, 2002 . . . . . . . . . . . . . $ 280,905 $ (124,467) $(3,815,024) $23,230,022
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . 1,009,534
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period
Reclassification adjustment for gains included
in net income
Other comprehensive income, before tax
Income tax provision
Other comprehensive income, net of tax . . . . . . 311,778 311,778
Comprehensive income:
ESOP shares earned . . . . . . . . . . . . . . . . . 23,494 57,342
Stock option exercised . . . . . . . . . . . . . . . 14,805
Treasury stock purchased . . . . . . . . . . . . . . (2,651,635) (2,651,635)
Dividends declared ($.20 per share). . . . . . . . . (483,730)
-----------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 . . . . . . . . . . . . . . . $ 592,683 $ (100,973) $(6,466,659) $21,488,116
=================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
June 30, 2003 and June 30, 2002 (Unaudited)
June 30, June 30,
2003 2002
------------- -------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,009,534 $ 910,521
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses. . . . . . . . . . . . . . 365,826 1,069,581
ESOP and other stock-based compensation earned . . . 57,342 58,577
Proceeds from sale of loans. . . . . . . . . . . . . 6,571,595 13,202,434
Originations of loans held-for-sale. . . . . . . . . (8,513,718) (10,945,433)
Realized (gain)/loss on:
Sale of real estate loans through foreclosure. . . (86,360) 1,788
Loans. . . . . . . . . . . . . . . . . . . . . . . (86,153) (17,083)
Available-for-sale investment securities . . . . . (520,600) (617,320)
Depreciation . . . . . . . . . . . . . . . . . . . . 247,704 235,698
Amortization of intangible . . . . . . . . . . . . . 112,057 -
Amortization of deferred financing costs . . . . . . 15,102 -
Increase in surrender value of life insurance. . . . (85,734) (120,164)
Net accretion of premiums and discounts
on investment securities . . . . . . . . . . . . . 83,028 (11,470)
Decrease in interest receivable. . . . . . . . . . . 14,717 249,595
Net change in other assets and liabilities . . . . . 670,642 (628,124)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES. . (145,018) 3,388,600
------------- -------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (22,237,847) (3,299,497)
Proceeds from maturities and principal reductions of
investment securities available-for-sale . . . . . 11,079,486 4,936,777
Proceeds from sale:
Real estate acquired through foreclosure . . . . . 415,167 295,946
Available-for-sale investment securities . . . . . 7,675,625 1,801,851
Net increase in loans. . . . . . . . . . . . . . . . (4,939,104) (9,538,990)
Purchase of premises and equipment . . . . . . . . . (749,927) (480,377)
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . (8,756,600) (6,284,290)
------------- -------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits. . . . . . . . . . . . . . . . 1,362,039 7,536,973
Net (decrease) increase in time deposits . . . . . . (1,361,415) 220,324
Net proceeds from borrowings . . . . . . . . . . . . 5,300,000 -
Proceeds from issuance of trust preferred securities - 5,000,000
Proceeds from exercise of stock options. . . . . . . 14,805 56,633
Cash dividends . . . . . . . . . . . . . . . . . . . (324,643) (138,791)
Treasury stock purchased . . . . . . . . . . . . . . (2,651,635) (48,835)
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . 2,339,151 12,626,304
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . (6,562,467) 9,730,614
Cash and cash equivalents at beginning of period. . . 13,740,405 7,445,844
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . $ 7,177,938 $ 17,176,458
============= =============
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 3,156,422 $ 3,520,084
Income taxes paid. . . . . . . . . . . . . . . . . . - 625,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate . . . . . . . 515,715 104,359
Increase in unrealized gains and losses on
available-for-sale investments securities. . . . . . (525,630) (89,326)
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid. . . . . . . . . . . . 244,188 71,713
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 six months ended June 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 six months ended June 30, using 2,416,888 and 2,431,556 weighted
average common shares outstanding for 2003 and 2,576,769 and 2,574,159 for 2002,
respectively. Diluted earnings per share for the three month and six month
period ending June 30, 2003 and 2002 have been computed using 2,463,962,
2,626,890, 2,477,236 and 2,624,452 shares, respectively. Dilutive earnings per
share gives effect to weighted average shares that would be outstanding assuming
the exercise of issued stock options using the treasury stock method.
(3) 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. Compensation expense for restricted share awards is
ratably recognized over the period of vesting, usually the restricted period,
based on the fair value of the stock on the grant date.
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:
For quarter ended June 30,
2003 2002
---------------------------------------------------------------------
Net Income:
As reported . . . . . . . . . . . . . . . . . $516,595 $359,971
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. . . . . . . . . . . . . $509,525 $332,779
-6-
For quarter ended June 30,
2003 2002
-------------------------------------------------------
Earnings per share: Basic Diluted Basic Diluted
------------------- ------ -------- ------ --------
As reported . . . . $ 0.21 $ 0.21 $ 0.14 $ 0.14
Pro forma . . . . . $ 0.21 $ 0.21 $ 0.13 $ 0.13
For six months ended June 30,
2003 2002
--------------------------------------------------------------------------------
Net Income:
As reported . . . . . . . . . . . . . . . . . $1,009,534 $910,521
Less: Total stock-based employee compensation
expense determined under Black-Scholes option
pricing model, net of tax effect. . . . . . . 14,140 54,384
--------------------------------------------------------------------------------
Pro forma net income. . . . . . . . . . . . . $995,394 $856,137
For six months ended June 30,
2003 2002
-------------------------------------------------------
Earnings per share: Basic Diluted Basic Diluted
------------------- ------ -------- ------ --------
As reported . . . . $ 0.42 $ 0.41 $ 0.36 $ 0.35
Pro forma . . . . . $ 0.41 $ 0.40 $ 0.33 $ 0.33
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.
(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 $570,000 balance,
representing Pathfinder Bancorp, M.H.C.'s portion of dividends waived as of June
30, 2003.
-7-
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
June 30, 2003, Pathfinder Bancorp, Inc.'s only business was the 100% ownership
of Pathfinder Bank and Pathfinder Statutory Trust I. At June 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
848,393 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.
-8-
The following discussion reviews the Company's financial condition at June 30,
2003 and the results of operations for the three months and six months ended
June 30, 2003 and June 30, 2002.
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 in considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated balance sheet. Note 1 to the consolidated financial
statements 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 $4.1 million, or 1%, to $283.1 million at
June 30, 2003 from $279.1 million at December 31, 2002. The increase in total
assets was primarily the result of a $4.4 million increase in investment
securities, an increase in net loans receivable of $4.1 million, and a $2.0
million increase in mortgage loans held for sale. The increase in net loans
-9-
receivable is primarily due to a $6.0 million increase in residential real
estate loans and a $726,000 increase in commercial loans, partially offset by a
decrease in commercial real estate loans of $2.6 million and consumer loans of
$24,000. These increases were partially offset by a $6.6 million decrease in
cash and cash equivalents. The decrease in cash and cash equivalents primarily
resulted from $5.0 million in cash proceeds received in June 2002 from the
Company's participation in a pooled trust preferred issuance. The proceeds have
since been invested in the Company's investment and loan portfolios and
facilitated the purchase of $2.3 million of treasury stock relating to a
privately negotiated stock repurchase agreement in January of 2003.
LIABILITIES
-----------
Total liabilities increased by $5.8 million, or 2%, to $261.6 million at June
30, 2003 from $255.8 million at December 31, 2002. The increase is primarily
attributable to a $5.3 million, or 12%, increase in borrowed funds and a
$513,000 increase in other liabilities. Borrowed funds were utilized to fund
the Company's growth in its investment and loan portfolios.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
Shareholders' equity decreased $1.7 million, or 8%, to $21.5 million at June 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, offset
by an increase in retained earnings of $526,000 and a $312,000 increase in
accumulated other comprehensive income. 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. The repurchase represented approximately 6% of the Company's
outstanding common stock as of December 31, 2002. The increase in retained
earnings is the result of net income of $1.0 million, partially offset by
dividends declared of $484,000 during the first six months of 2003. The
Company's mutual holding company parent, Pathfinder Bancorp, M.H.C, accepted the
dividends for the quarter ended June 30, 2003 in order to meet its current
liquidity obligations.
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, 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
June 30, 2003, the Company has $30.4 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.
-10-
RESULTS OF OPERATIONS
-----------------------
The Company recorded net income of approximately $517,000 for the three months
ended June 30, 2003, as compared to $360,000 for the same period during 2002.
The increase in net income of $157,000, or 44%, for the three months ended June
30, 2003, resulted primarily from an increase of $808,000, or 63%, in net
interest income after provision for loan losses, offset by a decrease of
$137,000, or 12%, in other income, an increase of $450,000, or 24%, in operating
expenses and an increase of $64,000, or 46%, in provision for income taxes.
For the six months ended June 30, 2003, the Company recorded net income of $1.0
million as compared to $911,000 for the same period in the prior year. The
increase in net income of $99,000, or 11%, for the six months ended June 30,
2003, was primarily the result of an increase in net interest income after
provision for loan losses of $1.1 million, or 32%, and an increase of $27,000 in
other income, offset by an increase in other operating expenses of $967,000, or
27%, and an increase in provision for income taxes of $27,000, or 8%.
Annualized return on average assets and return on average shareholders' equity
were 0.73% and 9.71%, respectively, for the three months ended June 30, 2003
compared to 0.57% and 6.21% for the second quarter of 2002. Earnings per share -
basic was $0.21 for the second quarter of 2003 compared to $0.14 for the same
period in 2002. For the six months ended June 30, 2003, the same performance
measurements were 0.72% and 9.56%, as compared to 0.73% and 7.95% for the same
period in the prior year. Earnings per share-basic for the six months ended
June 30, 2003 was $0.42 compared to $0.36 for the same period in 2002.
INTEREST INCOME
----------------
Three month period
Interest income, on a tax-equivalent basis, remained relatively consistent, at
$3.9 million for the quarter ended June 30, 2003, as compared to the quarter
ended June 30, 2002. The average balance of interest-earning assets increased
to $253.0 million for the three months ended June 30, 2003 from $231.6 million
in the prior year period, offset by a decrease in the tax equivalent yield on
average interest-earning assets to 6.16% from 6.81%. 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
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 June 30, 2003 as compared to the same period in the prior
-11-
year. The average balance of loans receivable increased $9.1 million, or 5%, to
$186.7 million at June 30, 2003 from $177.6 million at June 30, 2002. The
increase in the average balance was partially offset by a decrease in the
average yield on loans receivable to 6.89% from 7.30%.
Interest income on the mortgage-backed securities portfolio increased by
$101,000, or 49%, to $306,000 for the three months ended June 30, 2003, from
$205,000 for the three months ended June 30, 2002. The increase in interest
income on mortgage-backed securities resulted from an increase in the average
balance of mortgage-backed securities of $13.6 million, or 88%, partially offset
by a decrease in the average yield on mortgage-backed securities to 4.23% from
5.35%.
Interest income on investment securities, on a tax equivalent basis, decreased
$116,000, or 24%, for the three months ended June 30, 2003 to $364,000 from
$480,000 for the same period in 2002. The decrease resulted primarily from a
decrease in the tax equivalent yield of investment securities to 4.35% from
5.48% and a decrease in the average balance of investment securities of $1.5
million, or 4%.
Interest income on interest-earning deposits increased $2,000, to $13,000 from
$11,000 for the three months ended June 30, 2003. The increase is the result of
a $416,000 increase in the average balance of interest-earning deposits,
combined with an increase in the average yield to 1.31% from 1.22% for the same
period in the prior year.
Six Month Period
Interest income, on a tax equivalent basis, remained relatively consistent at
$7.9 million for the six months ended June 30, 2003 and the same period in 2002.
The tax-equivalent yield on interest-earning assets decreased to 6.36% from
6.95%, partially offset by an increase in the average balance of
interest-earning assets of $20.3 million, or 9%, to $249.2 million from $228.9
million.
For the six months ended June 30, 2003, interest income on loans receivable
decreased $19,000 as compared to the same period in the prior year. Average
loans receivable increased $10.4 million, or 6%, while the yield on average
loans receivable decreased to 6.98% from 7.41%.
For the six months ended June 30, 2003 and 2002, interest income on
mortgage-backed securities was $615,000 and $474,000, respectively, an increase
of $141,000, or 30%. The increase resulted primarily from an increase in the
average balance of mortgage-backed securities of $9.1 million, or 56%, offset by
a decrease in the average yield on mortgage-backed securities to 4.88% from
5.88%. The increase in the average balance of mortgage backed securities
resulted from purchases of $17.9 million, partially offset by maturities and
principal redemptions.
For the six months ended June 30, 2003, tax equivalent interest income on
investment securities decreased $155,000, or 16%, to $802,000 compared to
$957,000 for the same period in 2002. The decrease resulted primarily from a
decrease in the average balance of investment securities of $888,000 and a
decrease in the tax equivalent yield on investment securities to 4.68% from
5.44%.
-12-
INTEREST EXPENSE
-----------------
Three Month Period
Interest expense for the quarter ended June 30, 2003 decreased by approximately
$197,000, or 11%, to $1.5 million from $1.7 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 2.04% from 2.90%, partially offset by an increase of $30.7 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
increased to 4.67% from 4.52%, partially offset by a $2.1 million decrease in
the average balance of borrowings. The increase in the cost of borrowings was
primarily due to the June 2002 issuance of the $5.0 million in debentures
underlying the mandatory redeemable trust preferred security having an average
cost of funds of 4.81% for the six months ending June 2003.
Six Month Period
For the six months ended June 30, 2003, interest expense decreased $387,000, or
11%, when compared to the first six months of 2002. The decrease in interest
expense for the period was the result of a decrease in the average cost of
interest bearing liabilities to 2.66%, from 3.35%, offset by an increase in the
average balance of interest bearing liabilities of $25.6 million, or 12%. The
decrease primarily resulted from the average cost of interest-bearing deposits
decreasing to 2.08% from 2.99%, partially offset by 21% increase in the average
balance of interest-bearing deposits.
NET INTEREST INCOME
---------------------
Net interest income, on a tax equivalent basis, increased $157,000, or 7%, to
$2.4 million for the quarter ended June 30, 2003, when compared to the same
period in the prior year.
For the six months ended June 30, 2003, net interest income, on a tax equivalent
basis, increased $363,000, or 8%, when compared to the same period in the prior
year.
Net interest margin for the quarter ended June 30, 2003 decreased to 3.74% from
3.82% when compared to the same period in the prior year. For the six months
ended June 30, 2003, net interest margin decreased to 3.85%, from 3.87%.
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 June 30, 2003 of $260,000, as compared to a provision of $907,000 for the
three months ended June 30, 2002.
-13-
In the first six months of 2002, the Company took actions to increase reserves
to address the deterioration in credit quality of two commercial lending
relationships. During the second half of 2002, the Company foreclosed on the
assets of one of the borrowers and transferred the net realizable value of the
assets to other real estate owned and charged-off the other relationship. The
Company's allowance for loan losses to nonperforming loans ratio improved to
124.37% at June 30, 2003 as compared to 61.15% at June 30, 2002. Similar
improvement was noted when comparing the ratio of nonperforming loans to total
loans of .69% at June 30, 2003 to the June 30, 2002 ratio of 2.01%. The Company
had nonperforming loans of $1.3 million at June 30, 2003. The Company has
experienced a reduction in delinquent loans (greater than 30 days past due) to
$3.5 million from $6.1 million at December 31, 2002. $2.0 million of the
reduction in delinquencies related to the modification of a commercial lending
relationship that is now current under the new terms. The decrease in
delinquent loans is attributable to management's efforts to improve loan
collection procedures, loss mitigation efforts and the retention of an outside
consulting firm to perform a review of the commercial loan portfolio.
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 gains and losses.
Noninterest income, net of gains and losses from the sale of securities, loans
and other real estate, increased 21% to $483,000 for the quarter ended June 30,
2003 compared to $399,000 for the same period in the prior year. The increase in
noninterest income is primarily attributable to a $61,000 increase in service
charges on deposit accounts and a $27,000 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 decreased $218,000 to $355,000 for the quarter ended June 30, 2003
compared to $573,000 for the same period in the prior year.
For the six months ended June 30, 2003, noninterest income, net of gain and
losses from the sale of securities, loans and other real estate, increased 10%
to $839,000 compared to $766,000 for the same period in the prior year. The
increase in noninterest income is primarily attributable to an $81,000 increase
in service charges on deposit accounts and a $24,000 increase in other charges,
commissions and fees. Net gains and losses from the sale of securities
decreased $97,000 to $521,000 from $617,000 for same period in the prior year.
The $50,000 increase in net gain on loans and other real estate resulted from an
increase in gain recognized on real estate loans sold to the secondary market.
NONINTEREST EXPENSE
--------------------
Noninterest expenses increased 24% to $2.3 million for the quarter ended June
30, 2003, when compared to the same period in the prior year. The increase in
noninterest expenses was due to a $133,000 increase in salary and employee
benefits, a $59,000 increase in building occupancy expenses, a $35,000 increase
in data processing expenses, a $56,000 increase in the amortization of
intangible asset and an $199,000 increase in other expenses. The increases in
-14-
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. In addition, the increase in other expenses resulted primarily from
$164,000 in nonrecurring expenses relating to personnel realignment. These
increases were partially offset by a $31,000 decrease in professional and other
services.
For the six months ended June 30, 2003, noninterest expense increased $967,000,
or 27%, compared to the same period in 2002. The increase in noninterest
expense was the result of a $462,000, or 27%, increase in salary and employee
benefits, a $137,000, or 37%, in building occupancy expenses, an $112,000
increase in amortization expenses and a $290,000, or 44%, 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
$49,000, or 12%, in professional and other service expense.
INCOME TAXES
-------------
Income taxes increased $64,000 for the quarter ended June 30, 2003 as compared
to the same period in the prior year. This increase was primarily attributable
to a $220,000 increase in the Company's pre-tax income. The effective tax rate
is consistent at 28% when compared to the same period in the prior year.
For the six months ended June 30, 2003, income taxes increased $27,000, or 8%,
as compared to the six months ended June 30, 2002. The effective tax rate is
consistent at 27% when compared to the same period in the prior year.
-15-
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
-16-
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 June 30, 2003, there were $6.0 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 June 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 $25.6 million, representing a cumulative
one-year gap ratio of a negative 9.03%.
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
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 "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 June 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. The Company's current interest rate risk
exposure is within those guidelines set forth.
CHANGE IN INTEREST RATES
INCREASE (DECREASE)
BASIS POINTS EARNINGS VALUE
(RATE SHOCK) AT RISK AT RISK
--------------------------------------------------------------------------------
300 -8.47% -24.77%
200 -5.16% -14.72%
100 -2.06% - 5.57%
Base Case
(100) 1.52% 1.32%
(200) -1.12% 6.49%
(300) -6.81% 13.89%
-17-
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.
-18-
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
-----------------------------------------------------------
The Company's Meeting of Shareholders was held on April 30, 2003. The following
are the items voted on and the results of the shareholder voting.
1. The election of Bruce E. Manwaring, L. William Nelson and George P. Joyce
to serve as directors of the Company, each for a term of three years or until
his successor has been elected and qualified.
Name For Withheld
-------------------- --------- --------
Bruce E. Manwaring 2,379,273 8,074
L. William Nelson 2,379,273 8,074
George P. Joyce 2,373,119 14,228
Set forth below are the names of the other directors of the Bank and their terms
of office.
Name Term Expires
---------------------- --------------
Steven W. Thomas 2004
Corte J. Spencer 2004
Janette Resnick 2004
Chris C. Gagas 2005
Thomas W. Schneider 2005
Chris R. Burritt 2005
Raymond W. Jung 2005
2. The ratification of the appointment of Pricewaterhouse Coopers, LLP as
auditors for the fiscal year ending December 31, 2003.
For Against Abstain
--------- ------- -------
Number of Votes 2,441,882 7,624 1,918
-19-
OTHER INFORMATION
------------------
On June 17, 2003, the Board of Directors declared a $.10 cash dividend to
shareholders of record as of June 30, 2003, payable on July 15, 2003. On July
24, 2003, the Board of Directors named Janette Resnick Chair of the Pathfinder
Bancorp, Inc. and Pathfinder Bank. Mrs. Resnick replaces Chris C. Gagas who
stepped down as chairman. Mrs. Resnick, who joined the board in 1996, assumes
the role of chair effective immediately.
EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
Exhibit 31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley act
of 2002.
Exhibit 31.2 - Certification pursuant to Section 302 of the Sarbanes-Oxley act
of 2002.
Exhibit 32.1 - Officers' Certification Pursuant to Section 906 of the
Sarbanes-Oxley act of 2002.
The Company had two Current Reports on Form 8-K during the second quarter ending
June 30, 2003 dated April 25, 2003 and May 14, 2003 reporting the first quarter
earnings release and an adjustment to the first quarter earnings release,
respectively.
-20-
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-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
d) disclosed in this quarterly report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003 /s/ Thomas W Schneider
----------------------------------------------------------------------
Thomas W. Schneider, President and
Chief Executive Officer
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, James A. Dowd, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pathfinder Bancorp,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
d) disclosed in this quarterly report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003 /s/ James A . Dowd
----------------------------------------------------------------------
James A. Dowd, Vice President and
Chief Financial Officer
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: August 14, 2003 Thomas W. Schneider
----------------- President, Chief Executive Officer
/s/ James A. Dowd
-------------------
Date: August 14, 2003 James A. Dowd
----------------- Vice President, 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
June 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.
August 14, 2003 /s/Thomas W. Schneider
----------------- ------------------------
Date President and Chief Executive Officer
August 14,2003 /s/ James A. Dowd
--------------- --------------------
Date Vice President and Chief Financial Officer