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, 1999
SEC Exchange Act No. 000-23601
__________
Pathfinder Bancorp, Inc.
__________________________________
(Exact name of bank as specified in its charter)
New York
___________________________________
(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)
Bank'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 Bank (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 2,727,070 shares
of the Bank's common stock outstanding as of May 13, 1999.
<PAGE>
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
Item 2. Management's Discussion and Analysis of Financial 7 - 17
Condition and Results of Operations
PART II OTHER INFORMATION 18 - 19
SIGNATURES
<PAGE>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
March 31, 1999 (unaudited) and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
_________ ___________
ASSETS
______
<S> <C> <C>
Cash and due from banks $3,159,520 $4,716,238
Federal funds sold 2,000,000 1,800,000
Total cash and cash equivalents 5,159,520 6,516,238
Investment securities 53,181,278 53,443,039
Mortgage loans held-for-sale 4,783,616 2,841,931
Loans:
Real Estate 114,423,242 115,971,684
Consumer and other 10,760,153 10,536,151
Total loans 125,183,395 126,507,835
Less: Allowance for loan losses 999,161 939,161
Unearned discounts and origination fees 175,871 199,156
Loans Receivable, net 124,008,363 125,369,518
Premises and equipment 4,573,793 4,489,928
Accrued interest receivable 1,329,579 1,237,069
Other real estate 691,251 742,163
Intangible assets 3,210,182 3,289,121
Other assets 5,187,238 5,444,979
$202,124,820 $203,373,986
LIABILITIES AND SHAREHOLDERS' EQUITY
____________________________________
Deposits:
Interest bearing $146,883,485 $150,591,029
Non-interest bearing 9,156,604 9,628,125
Total deposits 156,040,089 160,219,154
Borrowed funds 22,024,000 18,691,000
Other liabilities 2,162,312 2,177,147
Total liabilities 180,226,401 181,087,301
Shareholders' equity:
Common stock, par value $.10 per share; authorized
9,000,000 shares; issued 2,877,470 shares; and
2,727,070 and 2,745,470 shares outstanding for
1999 and 1998, respectively. 287,747 287,747
Additional paid in capital 6,843,071 6,828,836
Retained earnings 17,947,194 17,820,409
Unearned stock based compensation (1,322,515) (1,428,746)
Unearned ESOP shares 566,197 1,012,462
Accumulated other comprehensive income (330,169) (346,917)
Treasury stock, at cost; 43,625 shares (2,093,106) (1,887,106)
Total shareholders' equity 21,898,419 22,286,685
$202,124,820 $203,373,986
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1999 and March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
________ ________
INTEREST INCOME:
<S> <C> <C>
Loans $2,665,329 $2,676,121
Interest and dividends on investments:
U.S. Treasury and agencies 7,586 76,059
State and political subdivisions 80,884 90,998
Corporate 350,698 297,493
Marketable equity securities 19,765 25,569
Mortgage-backed 325,669 371,178
Federal funds sold and interest-bearing deposits 35,728 12,104
Total interest income 3,485,659 3,549,522
INTEREST EXPENSE:
Interest on deposits 1,382,379 1,528,866
Interest on borrowed funds 273,083 254,275
Total interest expense 1,655,462 1,783,141
Net interest income 1,830,197 1,766,381
Provision for loan losses 97,129 75,298
Net interest income after provision for loan losses 1,733,068 1,691,083
OTHER INCOME:
Service charges on deposit accounts 142,950 111,954
Mortgage servicing fees 16,235 12,575
Net securities gains 31,571 228,839
Other charges, commission and fees 99,465 71,345
Total other income 290,221 424,713
OTHER EXPENSES:
Salaries and employee benefits 798,885 783,316
Building occupancy 178,470 161,816
Data processing expenses 160,116 113,277
Professional and other services 160,881 120,498
Deposit insurance premiums 7,904 12,314
Amortization of intangible asset 78,939 78,939
Other expenses 231,073 282,720
Total other expenses 1,616,268 1,552,880
Income before income taxes 407,021 562,917
Provision for income taxes 119,961 168,876
Net income $287,060 $ 394,041
Other comprehensive income, net of taxes:
Unrealized net gains on securities:
Unrealized holding (losses) gains arising during period (753,615) 21,146
Less: reclassification adjustment for gains included
in net income 9,840 52,734
(743,775) 73,880
Income tax benefit (provision) 297,510 (29,552)
Other comprensive (loss) income, net of tax (446,265) 44,328
Comprehensive income (159,205) $438,369
Net income per share - basic $ .11 $ .14
Net income per share - diluted $ .11 $ .14
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
2
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Accum.
Add't Unearn Other Unearned
Common Stock Paid in Retained Stock-Bas Compr. ESOP Treasury
Shares Amount Capital Earnings Compensation Income Shares Stock Total
___________ ______ _______ _________ ___________ ______ ________ ________ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 2,874,470 $287,747 $6,828,836 $18,820,409 $(1,426,746) $1,012,462 $(346,917) $(1,887,106) $22,286,685
Net Income 287,060 287,060
ESOP shares earned 14,235 16,478 30,983
Treasury stock purchased (206,000) (206,000)
Stock based compensation earned 106,231 106,231
Change in unrealized net
appreciation on investment securities (446,265) (446,265)
Dividends declared (.06 per share) (160,275) (160,275)
Balance, March 31, 1999 2,874,470 $287,747 $6,843,071 $17,947,194 $(1,322,515) $ 566,197 $(330,169) $(2,093,106) $21,898,419
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
March 31, 1999 and March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $287,060 $394,041
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 97,129 75,298
Deferred compensation 56,440 41,711
ESOP and other stock-based compensation earned 137,214 154,441
Deferred income taxes (20,491) --
Realized and unrealized gains on loans and investment securities (31,571) (228,839)
Depreciation 86,558 49,965
Amortization of intangibles 78,939 78,939
Net amortization of premiums and discounts on
investment securities 18,692 13,816
(Increase) decrease in interest receivable (92,510) 8,478
Decrease (Increase) in other assets 235,864 (77,922)
(Decrease) in other liabilities (84,091) (562,951)
Net cash provided by (used in) operating activities 769,233 (53,023)
INVESTING ACTIVITIES
Purchase of investment securities available for sale (5,043,225) (711,449)
Proceeds from maturities and principle reductions of
investment securities held to maturity 4,552,098 1,500,000
Proceeds from maturities and principle reductions of
investment securities available for sale -- 4,026,461
Proceeds from sale of investment securities -- 420,129
Net increase in loans (677,659) (5,334,976)
Purchase of premises and equipment (170,423) (250,238)
Proceeds from sale of other real estate owned 50,912 248,780
Surrender value of life insurance 214,411 (28,491)
Other investing activities -- (11,914)
Net cash used in investing activities (1,073,886) (141,698)
FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, NOW accounts savings accounts,
money market deposit accounts
and escrow deposits (4,089,492) 1,159,616
Net (decrease) increase in time deposits (89,573) 1,103,004
Net proceeds from (repayments of) short term borrowings 3,333,000 (1,972,000)
Repayments of borrowings -- (13,950)
Treasury stock acquired (206,000) (957,988)
Net cash (used in) financing activities (1,052,065) (681,318)
Decrease in cash and cash equivalents (1,356,718) (876,039)
Cash and cash equivalents at beginning of period 6,516,238 4,334,072
Cash and cash equivalents at end of period $5,159,520 $3,458,033
</TABLE>
4
<PAGE>
STATEMENT OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
CASH PAID DURING THE PERIOD FOR:
<S> <C> <C>
Interest $1,576,135 $1,827,700
Income taxes -- 240,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $-- $374,186
Unrealized holding gains arising during period (743,775) 73,880
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $160,275 $140,410
Stock awards granted -- 957,984
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE>
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
Bank'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, 1998 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, 1999 and 1998.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
(2) Earnings per Share
Earnings per share are based on the weighted average number of common
shares outstanding during the period. For purposes of computing earnings
per share, only Employee Stock Option Plan ("ESOP") shares that have been
committed to be released are considered outstanding.
Earnings per share have been computed based upon net income for the three
months ended March 31, 1999 and 1998, using 2,676,936 and 2,819,904,
weighted average common shares outstanding, respectively.
6
<PAGE>
Pathfinder Bancorp, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operation
General
Throughout the Management's Discussion and Analysis the term, 'the Company',
refers to the consolidated entity of Pathfinder Bancorp, Inc., Oswego City
Savings Bank, and Whispering Oakes Development Corp. At December 31, 1998,
Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Oswego City
Savings Bank. At March 31, 1999, 1,552,500 shares, or 57.0%, of the Company's
common stock was held by Pathfinder Bancorp, MHC, the Company's mutual holding
company parent and 1,174,570 shares, or 43.0%, 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, deposit insurance premiums, 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.
Termination of Merger Agreement
On January 28, 1999, the Company announced that in conference and concurrence
with the Board of Trustees of Oswego County Savings Bank, the merger agreement
between the two banks, which was originally signed on September 5, 1997 was
terminated. The Company cited the failure to gain regulatory approval for a
transaction that was deemed unique as the reason for the cancellation of the
merger plans. For the year ended December 31, 1998, the Company recognized costs
of $379,000 in connection with the merger. These costs were for professional
services rendered in legal, tax, and accounting work, as well as for filing
fees. There were no further costs associated with the canceled merger
Whispering Oaks Development Corporation
On October 31, 1998, the Company incorporated Whispering Oaks Development Corp.
('WODC') as a wholly owned subsidiary of Oswego City Savings Bank. The assets of
WODC were formerly held by the Company as a component of other real estate
owned. The Company is in the process of liquidating the development property.
The subsidiary was formed to comply with regulatory requirements regarding the
development of the property. The net book value of the assets transferred is
$638,000. Management does not anticipate any loss associated with the
liquidation of the assets held in the subsidiary.
7
<PAGE>
Stock Split
On January 13, 1998, the Board of Directors of the Company declared a three for
two stock split in the form of a dividend on the holdings company's outstanding
common stock. The stock dividend was paid on February 5, 1998 to shareholders of
record as of January 26, 1998. The stock dividend was applied retroactively to
all per share data reported in the financial statements and presented in this
report.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs that have date sensitive software may recognize a date using '00' as
the year 1900 rather than the year 2000. Left unresolved, the Year 2000 issue
could result in a system failure or miscalculations causing disruptions of
operations including, but not limited to, a temporary inability to process
transactions, calculate interest, or engage in similar normal business
activities. In early 1997, the Company formed a Year 2000 committee to address
the issues surrounding the problem. The committee has adopted a policy statement
and plan of action to identify, correct, test, and implement solutions to ensure
that the Company's systems are ready to process in the Year 2000 and beyond. The
policy statement comprises three phases: the assessment phase, the renovation
phase, and the validation phase. During 1997, the Company completed its
assessment phase and identified five systems critical to its continued
operations. These systems include the loan, deposit, investment, general ledger,
and electronic funds transfer systems.. The committee has determined that the
required changes are minimal, and that such changes will resolve the Company's
Year 2000 computer systems issues. The committee has segregated the issues
between those that affect information technology ('IT') and those that do not
('non-IT'). At May 15, 1999, the implementation of modifications for Year 2000
readiness of mission critical systems is complete. Testing for non-IT systems is
95% complete at May 15, 1999. Testing of solutions for IT commenced in
September 1998 with a goal to be fully tested by June 30, 1999. At May 15,
1999, IT testing was approximately 80% complete.
The Company has utilized both internal and external resources to program,
replace, and test the software for Year 2000 modifications. The Company is also
communicating with its third party data processing vendors, as well as its
significant suppliers and commercial customers, to determine the Company's
exposure should any of these parties fail to resolve their own significant Year
2000 issues. The committee is evaluating the risk from these third parties and,
where appropriate, will establish action plans to reduce or eliminate the risk.
In some cases, the Company will rely on third party information which may be
inaccurate and unverifiable. Should third party entities, including Federal and
State governments and agencies fail to resolve their own Year 2000 issues, an
adverse effect on the Company could result.
The costs of the remedial actions and the date on which the Company plans to
complete the Year 2000 modifications, are based on management's best estimates
and assumptions including the continued availability of third party services,
their modification plans, and other factors. Costs related to the Year 2000
issue will be expensed as they are incurred, except for the cost, if any for new
hardware or software that is purchased which will be capitalized and expensed in
conformity with generally accepted accounting principles. The Company's costs of
preparing its data processing systems for the impact of the Year 2000
8
<PAGE>
were approximately $45,000 in non-capitalized costs to date with the majority of
expenditures for software and hardware upgrades being capitalized upon
implementation in February 1999. The total amount capitalized was $575,000 and
is being depreciated over an average of approximately four and one-third years.
The depreciation will result in additional annual expenses of approximately
$133,000 over this period. Exclusive of these expenses, management does not
anticipate costs exceeding $75,000 in additional expenses associated with Year
2000 readiness issues.
As of May 15, 1999, the Company believes that the progress it has made to
date, along with the expected completion of mission critical testing in 1999,
will result in the Company's being well prepared to meet the Year 2000. There
can be no assurance that the Company's third party data service providers will
be able to satisfactorily address the Year 2000 issue, or that the costs
associated with Year 2000 readiness and compliance issues will not exceed
management's estimate. The Company has established contingency plans for all
mission critical systems and will evaluate the implementation of such plans
throughout 1999
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.
For other matters affecting the Company, Including events which may affect the
Company's operations and financial performance, see 'Recent Events'.
The following discussion reviews the financial condition at March 31, 1999 and
the results of operations of the Company for the three months ended March 31,
1999.
Financial Condition
Assets
Total assets decreased approximately $1.3 million, or .6%, to $202.1 million at
March 31, 1999 from $203.4 million at December 31, 1998. The decrease in total
assets was primarily incurred as a result of reductions in the Company's cash
and due from banks. Cash inflows from automatic direct deposits on December 31,
1998 resulted in higher than normal cash inventory positions. A portion of the
direct
9
<PAGE>
deposits was subsequently withdrawn in the normal course of business, causing a
reduction in total assets for the period. Mortgage loans held-for-sale increased
by a net $1.9 million, or 68.3%, to $4.8 million at March 31, 1999 from $2.8
million at December 31, 1998. The increase in mortgage loans held-for-sale
results from orginations of $3.0 million, less sales of $1.1 million. The
origination and sale of secondary market qualifying mortgages reflects
management's continued emphasis on pursuing a diversification of revenue lines.
The retention of mortgage servings and the recognition of income derived from
the servicing rights, combined with the sale of the loans produces fee income
and mitigates the Company's credit and interest rate risks. The increase in
mortgage loans held-for-sale was partially offset by decreases in total loans
(held in the Company's portfolio) and investment securities. Total loans
decreased by $1.3 million, or 1.0%, to $125.2 million at March 31, 1999 from
$126.5 million at December 31, 1998 and investment securities decreased by
$262,000, or .5%, to $53.2 million from $53.4 million. The decline in asset base
also reflects the lack of significant growth and economic development in the
Company's market area.
Non-earning assets decreased by $211,000, or 1.4%, at March 31, 1999 when
compared to December 31, 1998. The decrease in non-earning assets is principally
due to reductions in other real estate owned and the amortization of the
Company's intangible asset.
Liabilities
Total liabilities decreased by $861,000, to $180.2 million at March 31, 1999
from $181.1 million at December 31, 1998. The decrease is primarily attributable
to a $4.2 million, or 2.6%, net outflow of deposits, partially offset by an
increase in borrowed funds of $3.3 million, or 17.8%. The decrease in deposits
is principally the result of net withdrawals on savings and checking accounts
from direct deposits credited to customers' accounts on December 31, 1998. The
timing of direct deposits, especially social security deposits, which occurred
on the last day of 1998, did not reflect the normal withdrawal of such deposits
for customers' day-to-day uses. The majority of these withdrawals occurred
during the first week of 1999. Exclusive of the direct deposit timing, net
deposit account activity remained relatively flat during the first quarter of
1999. The absence of net deposit inflows reflects both the lack of significant
growth in the Company's market area and the availability of alternative
investment products, particularly mutual funds. The increased borrowings are
comprised of advances from the Federal Home Loan Bank of New York used to
supplement the Company's deposit flows.
Liquidity and Capital Resources
Shareholders' equity decreased $388,000, or 1.7%, to $21.9 million at March 31,
1999 from $22.3 million at December 31, 1998. The decrease in shareholder's
equity is primarily the result of a $446,000 reduction in accumulated and other
comprehensive income, an increase in treasury stock of $206,000 for the
acquisition of 18,400 shares as part of the Company's share repurchase program
(see 'Recent Events'), and dividends declared of $160,000. The decrease in
accumulated and other comprehensive income results from a decrease in the
unrealized appreciation of the Company's available-for-sale investment
securities portfolio caused by rising interest rates at the end of the quarter.
Partially offsetting the decreases in shareholder's equity were increases
resulting from net income totaling $287,000, and ESOP and other stock-based
compensation earned of $137,000.
10
<PAGE>
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.
Management of Market Risk - Interest Rate 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
11
<PAGE>
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, 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, five year/one year ARM loans (mortgage loans which are fixed
rate for the first 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 it's 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.
At March 31, 1999, the total interest bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $20.0 million, representing a cumulative one-year gap ratio
of a negative 7.21%. Simulation and net present value analysis demonstrate
percentage changes to net interest income and net portfolio value (the fair
value of assets minus the fair value of liabilities) of a negative 13.41% and a
negative 21.87%, respectively, in an upward 200 basis point parallel shift in
the yield curve.
Results of Operations
The Company had net income of approximately $287,000, and $394,000 for the three
months ended March 31, 1999, and 1998, respectively. The decrease in net income
of $107,000, or 27.1%, resulted primarily from a decrease in non-interest income
of $135,000, or 31.7%, and increases in noninterest expense of $63,000, or 4.1%,
and provisions for loan losses of $22,000, or 29.0%, partially offset by an
increase in net interest income of $64,000, or 3.6%, and a reduction in income
tax provision of $49,000.
12
<PAGE>
As a result of the decrease in net income between the comparative periods,
annualized return on average assets and return on average shareholders' equity
were .57% and 5.16%, respectively, for the three months ended March 31, 1999
compared to .81% and 6.71% for the first quarter of 1998. Earnings per share '
basic was $.11 for the first quarter of 1999 compared to $.14 for the same
period in 1998.
Interest Income
Interest income, on a tax-equivalent basis, totaled $3.5 million for the quarter
ended March 31, 1999, as compared to $3.6 million for the quarter ended March
31, 1998, a decrease of $66,000, or 1.8%. The decrease resulted primarily from a
decrease in the tax-equivalent yield on average interest-earning assets to 7.70%
for the three months ended March 31, 1999 from 8.02% in the prior year period,
partially offset by an increase of $4.0 million in average interest-earning
assets. The yield reduction is principally the result of mortgage loan
originations, primarily in the held-for-sale portfolio, at rates over 90 basis
points below the weighted average coupon of the existing loan portfolio which
lowered the total portfolio yield, and the reinvestment of security principal
maturities and prepayments at rates over 75 basis points less than the existing
portfolio yield. The decline in yield on investments and mortgages was caused by
a general decline in market interest rates. To illustrate, the yield on 1 year
and 30 year treasury bonds declined by 71 basis points and 31 basis points,
respectively from March 31, 1998 to March 31, 1999.
Interest income on loans receivable totaled $2.7 million for the three months
ended March 31, 1999 and 1998, respectively. The stability in interest income on
loans occurred from an increase in the average balance of loans receivable of
$5.0 million, or 4.4% to $118.8 million at March 31, 1999, from $113.8 million
at March 31, 1998, offset by a reduction in the average yield on loans
receivable to 8.08% from 8.43%. The increase in the average balance in loans
receivable was primarily due to the origination of 15 and 30 year term
one-to-four family fixed rate mortgage loans held-for-sale to the secondary
market and one-to-four family adjustable rate mortgage loans retained in the
Company's portfolio. The mortgage loans held-for-sale into the secondary market
is part of a strategy to increase and retain the Company's customer base by
offering competitively priced mortgages to qualifying home buyers and retaining
the servicing on these loans as a source of fee income. The Company originated
$3.0 million in mortgage loans held-for-sale during the first quarter of 1999
and sold $1.1 into the secondary market. The origination of adjustable rate
mortgage loans is primarily comprised of '5/1 ARMS' which have interest rates
which are fixed for the first five years and are adjustable annually thereafter,
and amortize over 30 years. To a lesser degree, the Company also experienced an
increase in the origination of commercial real estate and business loans. The
decrease in the yield on average loans receivable was attributable to the lower
rates charged on mortgage loans held-for-sale, the initial rates charged on 5/1
ARMS, and the downward repricing of the one year adjustable rate mortgage
portfolio caused by the relatively lower interest rate environment.
Interest income on consumer and other loans decreased $13,000, or 4.7%, to
$265,000 for the quarter ended March 31, 1999 from $278,000 for the period ended
March 31, 1998. The decrease in interest income on consumer and other loans
resulted from a decrease in both the average balance and average yield on these
loans. The average balance on consumer and other loans decreased $390,000, or
3.7%, to $10.3 million from $10.6 million for the periods ended March 31, 1999
and 1998, respectively. The
13
<PAGE>
average yield on consumer and other loans declined to 10.33% from 10.44%. The
decrease in the average balance on consumer and other loans reflects the
relatively low demand by qualified borrowers in the Company's market area.
Interest income on the mortgage-backed securities portfolio decreased by
$45,000, or 12.1%, to $326,000 for the three months ended March 31, 1999, from
$371,000 for the three months ended March 31, 1998. The decrease in interest
income on mortgage-backed securities resulted generally from a decrease in the
average balance on mortgage-backed securities of $3.1 million, partially offset
by an increase in the average yield on mortgage-backed securities to 6.72% from
6.59%. The decrease in the average balance of mortgage-backed securities
resulted from the scheduled amortization and prepayments of principal on the
underlying mortgage loans. Prepayments accelerated during the first quarter of
1999 as the relatively low interest rate environment continues to foster
significant refinancing activity. The cash flow from the mortgage-backed
securities portfolio was utilized to fund the origination of loans by the
Company, rather than the purchase of additional mortgage-backed securities.
Interest income on investment securities, on a tax equivalent, decreased
$34,000, or 6.4%, for the three months ended March 31, 1999 to $494,000 from
$528,000 for the same period in 1998. The decrease resulted primarily from a
decrease in the tax equivalent average yield on investment securities to 6.25%
from 6.79%, partially offset by an increase in the average balance of investment
securities of $508,000 for the quarter ended March 31, 1999 as compared to the
first quarter of 1998. The average yield on investment securities declined as
higher coupon securities purchased three to five years ago were either called
due to the lower interest rate environment or matured and were replaced by lower
yielding securities.
Interest income on interest-earning deposits increased $24,000, or 200.0%, to
$36,000 from $12,000 for the three months ended March 31, 1999 and 1998,
respectively. The increase was primarily the result of an increase of $2.0
million in the average balance of interest-earning deposits, partially offset by
a reduction in the average yield on interest-earning deposits to 5.12% from
6.02%. The increase in the average balance on interest-earning deposits was
primarily due to short term placement of security principal amortization. The
decrease in the average yield on interest-earning deposits was principally due
the decrease in the federal funds rate brought about by the general reduction in
interest rates.
Interest Expense
Interest expense for the quarter ended March 31, 1999 decreased by approximately
$128,000, or 7.2%, to $1.7 million when compared to the same quarter for 1998.
The decrease in interest expense for the period was the result of a decrease in
the average cost of deposits to 3.97% for the three months ended March 31, 1999
from 4.43% for the three months ended March 31, 1998, partially offset by a $5.7
million increase in the average balance on interest-bearing liabilities to
$166.7 million from $161.1 million for the periods ended March 31, 1999 and
1998, respectively. The decrease in the average cost of interest-beating
liabilities resulted from the general reduction in interest rates throughout the
economy which led to reductions in product pricing and the cost of borrowings.
The increase in the average balance on interest-bearing liabilities was
principally the result of a $1.5 million increase in the average balance on Now
14
<PAGE>
accounts, a $1.8 million increase in the average balance on certificates of
deposit, and a $2.5 million increase in the average balance of borrowed funds.
Net Interest Income
Net interest income totaled $1.8 million for the three months ended March 31,
1999 and $1.7 million for the same period in 1998, an increase of $64,000, or
3.6%. The increase in net interest income for the quarter ended March 31, 1999
occurred as the result of the cost of interest-bearing liabilities repricing
downward more sharply than the yield on interest-earning assets. This led to a
widening of the Company's net interest rate spread. In the prior three quarters
the declining interest rate environment resulted in a compression of net
interest rate spread. However, during the fourth quarter of 1998, short term
interest rate reductions by the Federal Reserve Bank combined with an 85 basis
point reduction in the base rate on the Company's passbook savings account, have
resulted in a widening of the net interest rate spread. Net interest rate spread
for the quarter ended March 31, 1999 rose to 3.82% from 3.68% for the quarter
ended March 31, 1998.
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 provisions are based upon management's estimate of the fair value of the
collateral and the Company's actual loss experience, as well as standards
applied by the FDIC. The Company established a provision for possible loan
losses for the three months ended March 31, 1999 of $97,000, as compared to a
provision of $75,000 for the three months ended March 31, 1998. The increase in
provision for loan losses reflects higher net charge-offs for the period as well
as the increased risks associated with expanded commercial lending. The
Company's ratios of allowance for loan losses to total loans receivable and to
non-performing loans at March 31, 1999 were .78% and 57.17%, respectively.
Non-interest Income
Non-interest income consists of servicing income, fee income and gain (loss) on
sales of loans and investment securities and other operating income.
Non-interest income decreased approximately $135,000, or 31.7%, to $290,000 for
the three months ended March 31, 1999 as compared to $425,000 for the prior year
quarter. This decrease is primarily attributable to a decrease of $197,000, or
86.2%, in net securities gains and losses, partially offset by a 31,000, or
27.7%, increase in deposit account service charges, a $4,000 increase in
mortgage servicing fees, and a $28,000, or 39.4%, increase in other charges,
commissions, and fees. The decrease in net securities gains and losses results
from a mark to market gain recognition of unrealized market value appreciation
in the Company's investment in the IIMF mutual fund which was $154,000 lower in
1999 compared to 1998, and a $43,000 gain on the sale of two investment
securities during the first quarter of 1998. The increase in deposit account
service charges resulted primarily from increased ATM surcharge fees, which
reflects higher charges and an expansion of the ATM network. The increase in
other charges, commissions and fees resulted principally from higher fees
derived
15
<PAGE>
from investment services and increases in the cash surrender value of life
insurance policies held by the Company.
Noninterest Expense
Noninterest expense increased $63,000, or 4.1%, to $1.6 million for the three
months ended March 31, 1999, as compared to the same period in 1998. This
increase was primarily attributable to a $47,000, or 41.3%, increase in data
processing costs, a $40,000, or 33.5%, increase in professional services, a
$17,000, or 10.3%, increase in building occupancy, and a $16,000, or 2.0%
increase in salaries and employee benefits. These increased expenses were
partially offset by a reduction in other expenses of $52,000, or 18.3%. The
increase in data processing costs primarily results from increases in
depreciation and maintenance on upgraded hardware and software placed into
service during the first quarter of 1999. The on-going equipment and software
depreciation expenses result from capitalized costs of approximately $575,000
amortized over approximately 4 and one-third years. These upgrades to hardware
and software represent the principal efforts of the Company to perform remedial
actions for Year 2000 and bring the Company's Year 2000 readiness to over 90
percent complete. Management of the Company believes that, in addition to the
Year 2000 readiness issue, the enhanced information systems increase the
Company's ability to expand and compete over the near term. The increase in
professional service costs is primarily comprised of increased fees for
information system consulting, investment and risk management, and attorney
fees. The increase in building occupancy expense is principally due to
depreciation and maintenance increases from renovations in the Company's main
office. The increase in salaries and employee benefits is primarily due to
annual salary increases. The reduction in other expenses primarily reflects
lower costs to maintain other real estate owned and lower security costs.
For further information regarding the Company's efforts and costs associated
with the Year 2000 issue, see 'General ' Year 2000'.
Income Taxes
Income taxes decreased approximately $49,000, or 29.0%, for the quarter ended
March 31, 1999 as compared to the same period in the prior year. This decrease
was directly attributable to a $156,000 decrease in the Company's pretax income.
Recent Events
Real Estate Investment Trust Formation
On March 31, 1999, the Company filed a notice with the New York State Banking
Department of its intention to establish a new operating subsidiary of Oswego
City Savings Bank (the 'Bank'), which will issue securities in the nature of
common stock and perpetual, cumulative preferred stock. The Company intends that
the subsidiary will be treated as a real estate investment trust ('REIT')
pursuant to Section 856 of the Internal Revenue Code of 1986, as amended, and
that the REIT primarily will acquire, hold, and invest in certain real
estate-related and other assets, which would constitute permissible investments
by the
16
<PAGE>
Bank. Prior to commencement of activities, the REIT will receive from the Bank
loans currently owned by the Bank, and the Bank will receive 100% of the
outstanding common stock of the REIT and also shares of a class of perpetual,
cumulative preferred stock. It is anticipated that the REIT, to be
known as Pathfinder REIT, Inc., will commence operation by May 14, 1999.
Share Repurchase Program
On January 22, 1999, the Company announced the adoption of it's second share
repurchase program to acquire up to 135,000 shares of the Company's common
stock, which represents approximately 5% of the common stock outstanding. At
April 30, 1999, the Company had purchased 73,775 shares commensurate with the
plan at an aggregate cost of $813,000. In November 1998, the Company completed
it's first share repurchase program, acquiring 132,000 shares of common stock at
an aggregate cost of $1.9 million.
17
<PAGE>
Part II - Other Information
Legal Proceedings
From time to time, the Bank 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 Bank
Changes in Securities
Not applicable
Defaults upon Senior Securities
Not applicable
Submission of Matters to a Vote of Security Holders
The Bank's Meeting of Shareholders was held on April 28, 1999. The following are
the items voted on and the results of the shareholder voting.
1. The election of Chris C. Gagas, Chris R. Burritt and Raymond W. Jung to
serve as directors of the Bank each for a term of three years or until his
successor has been elected and qualified. For Against
Chris C. Gagas 2,439,192 174,206
Chris R. Burritt 2,439,192 174,206
Raymond W. Jung 2,439,192 174,206
Set forth below are the names of the other directors of the
Bank and their terms of office.
Name Term Expires
Bruce Manwaring 2000
L. William Nelson 2000
Victor S. Oakes 2000
Lawrence O'Brien 2001
Corte Spencer 2001
Janette Resnick 2001
2. The ratification of the appointment of Coopers and Lybrand, L.L.P. as
auditors for the fiscal year ending December 31, 1999.
For Against Abstain
Number of Votes 2,449,704 160,160 3,534
18
<PAGE>
3. A shareholder proposal calling on the Board of Directors to take steps to
amend the Company's Certificate of Incorporation and Bylaws.
For Against Abstain
231,803 1,849,157 6,430
4. A shareholder proposal to take steps to sell or merge the company.
For Against Abstain
242,546 1,836,354 8,490
19
<PAGE>
SIGNATUARES
Under the requirements of the Securities Exchange Act of 1934, the Bank
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
OSWEGO CITY SAVINGS BANK
/s/ Chris C. Gagas
___________________________________
Date: May 12, 1999 Chris C. Gagas
____________ Chairman, President, Chief Executive Officer
/s/ Thomas W. Schneider
____________________________________
Date: May 12, 1999 Thomas W. Schneider
____________ Executive Vice President, Chief Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,160
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<COMMON> 288
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