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, 2000
SEC Exchange Act No. 000-23601
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Pathfinder Bancorp, Inc.
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(Exact name of issuer as specified in its charter)
Delaware
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(State or jurisdiction of incorporation or organization)
16-1540137
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(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
------------------------------ ---------
(Address of principal executive office) (Zip Code)
Companys's telephone number, including area code: (315) 343-0057
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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ----- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,617,245 shares
of the Company's common stock outstanding as of August 10, 2000.
<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 - 3
o Consolidated Statements of Shareholders' Equity 4
o Consolidated Statements of Cash Flows 5
o Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7 - 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 - 14
PART II OTHER INFORMATION 15 - 16
Item 1. Legal proceedings
Item 2. Change in securities
Item 3. Default 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
<PAGE>
<TABLE>
<CAPTION>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 2000 (unaudited) and December 31, 1999
June 30, December 31,
2000 1999
------------ -----------
ASSETS
<S> <C> <C>
Cash and due from banks $4,132,190 $4,280,255
Federal funds sold 88,569 -
----------- ----------------
Total cash and cash equivalents 4,220,759 4,280,255
Investment securities 64,642,263 66,397,491
Mortgage loans held-for-sale 727,004 697,405
Loans:
Real estate 123,278,447 119,167,708
Consumer and other 14,378,021 12,129,363
----------- -----------
Total loans 137,656,468 131,297,071
Less: Allowance for loan losses 1,227,238 1,149,677
Unearned discounts and origination fees
and costs, net 99,922 84,453
------------- -------------
Loans receivable, net 136,329,308 130,062,941
Premises and equipment, net 4,837,586 4,869,553
Accrued interest receivable 1,482,557 1,431,251
Other real estate 1,107,638 641,384
Intangible assets, net 2,815,487 2,973,365
Other assets 5,214,469 4,969,908
--------------- --------------
Total assets $221,377,071 $216,323,553
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $146,071,697 $142,690,583
Non-interest bearing 10,474,681 9,745,513
-------------- --------------
Total deposits 156,546,378 152,436,096
Borrowed funds 44,310,500 42,879,500
Other liabilities 1,053,095 933,345
--------------- ---------------
Total liabilities 201,909,973 196,248,941
Shareholders' equity:
Common stock, par value $.10 per share; authorized 9,000,000 shares; issued
2,884,720 shares; and 2,617,245 and 2,639,245 shares outstanding for
2000 and 1999, respectively 288,472 288,472
Additional paid in capital 6,919,053 6,912,580
Retained earnings 17,477,435 18,121,372
Unearned stock based compensation (545,984) (981,125)
Unearned ESOP shares (262,408) (287,609)
Accumulated other comprehensive loss (1,146,536) (895,894)
Treasury stock, at cost;
267,475 and 245,475 shares, respectively (3,262,934) (3,083,184)
----------- -----------
Total shareholders' equity 19,467,098 20,074,612
-------------- --------------
Total liabilities and shareholders' equity $221,377,071 $216,323,553
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-1-
<PAGE>
<TABLE>
<CAPTION>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME For
the three months ended June 30, 2000 and June 30, 1999
(unaudited)
June 30, June 30,
2000 1999
-------- -------
INTEREST INCOME:
<S> <C> <C>
Loans $2,798,442 $2,695,751
Interest and dividends on investments:
U.S. Treasury and agencies 195,896 44,901
State and political subdivisions 91,220 89,660
Corporate 371,663 390,248
Marketable equity securities 37,100 24,154
Mortgage-backed 366,961 321,894
Federal funds sold and interest-bearing deposits 731 20,549
------------ -----------
Total interest income 3,862,013 3,587,157
INTEREST EXPENSE:
Interest on deposits 1,384,011 1,334,465
Interest on borrowed funds 607,956 325,726
---------- ----------
Total interest expense 1,991,967 1,660,191
--------- ---------
Net interest income 1,870,046 1,926,966
Provision for loan losses 28,085 63,332
----------- ----------
Net interest income after provision for loan losses 1,841,961 1,863,634
--------- ---------
OTHER INCOME:
Service charges on deposit accounts 107,239 120,867
Loan fees 68,271 21,186
Cash surrender value 41,322 64,230
Net securities (losses) gains (1,756) 41,804
Other charges, commission and fees 62,190 83,700
---------- ------
Total other income 277,266 331,787
----------- -------
OTHER EXPENSES:
Salaries and employee benefits 754,296 812,934
Building occupancy 210,299 178,564
Data processing expenses 166,968 210,697
Professional and other services 159,991 248,472
Amortization of intangible asset 78,939 78,939
Other expenses 318,019 282,260
----------- ----------
Total other expenses 1,688,512 1,811,866
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Income before income taxes 430,715 383,555
Provision for income taxes 129,950 97,344
----------- -----------
Net income $ 300,765 $ 286,211
=========== ==========
Net income per share - basic $ .12 $ 0.11
============== =============
Net income per share - diluted $ .12 $ 0.11
============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-2-
<PAGE>
<TABLE>
<CAPTION>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 2000 and June 30, 1999
(unaudited)
June 30, June 30,
2000 1999
-------- -------
INTEREST INCOME:
<S> <C> <C>
Loans $5,530,273 $5,355,193
Interest and dividends on investments:
U.S. Treasury and agencies 405,745 52,487
State and political subdivisions 183,132 170,544
Corporate 730,204 740,946
Marketable equity securities 74,582 43,919
Mortgage-backed 770,005 647,563
Federal funds sold and interest-bearing deposits 1,561 56,277
-------------- -----------
Total interest income 7,695,502 7,066,929
INTEREST EXPENSE:
Interest on deposits 2,714,671 2,716,844
Interest on borrowed funds 1,236,783 598,809
------------ ----------
Total interest expense 3,951,454 3,315,653
--------- ---------
Net interest income 3,744,048 3,751,276
Provision for loan losses 143,409 160,461
---------- -----------
Net interest income after provision for loan losses 3,600,639 3,590,815
--------- ---------
OTHER INCOME:
Service charges on deposit accounts 221,346 230,547
Loan fees 107,799 43,308
Cash surrender value 82,644 114,322
Net securities (losses) gains (209,250) 73,375
Other charges, commission and fees 115,409 166,343
----------- -------
Total other income 317,948 627,895
----------- -------
OTHER EXPENSES:
Salaries and employee benefits 1,645,922 1,611,819
Building occupancy 414,581 357,034
Data processing expenses 356,927 370,813
Professional and other services 314,125 409,353
Amortization of intangible asset 157,878 157,878
Other expenses 809,965 521,237
Unusual items 578,176 -
---------- ---------------
Total other expenses 4,277,574 3,428,134
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(Loss) income before income taxes (358,987) 790,576
(Benefit) provision for income taxes (26,343) 217,305
--------- ---------
Net (loss) income $(332,644) $573,271
========== ========
Net (loss) income per share - basic $(0.13) $ 0.22
======= ========
Net (loss) income per share - diluted $(0.13) $ 0.21
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-3-
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Accum.
Add't Unearn Unearned Other
Common Stock Paid in Retained Stock-Based ESOP Comp Treasury
Shar Amount Capital Earnings Compensation Shares Loss Stock Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 2,884,720 $288,472 $6,912,580 $18,121,372 $(981,125) $(287,609) $(895,894) $(3,083,184) $20,074,612
Comprehensive loss:
Net loss (332,644) (332,644)
Other comprehensive loss,
net of tax:
Unrealized depreciation in
available-for-sale securities, net
of reclassification amount (Note 1) (250,642) (250,642)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss (332,644) (250,642) (583,286)
ESOP shares earned 6,473 25,201 31,674
Treasury stock purchased (179,750) (179,750)
Stock based compensation earned 435,141 435,141
Dividends declared (.12 per share) (311,293) (311,293)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 2000 2,884,720 $288,472 $6,919,053 $17,477,435 $(545,984) $(262,408) $(1,146,536) $(3,262,934) $19,467,098
=====================================================================================================
</TABLE>
Note 1 - Disclosure of reclassification amount
Unrealized net losses on securities:
Unrealized holding losses arising during the period $(631,087)
Less: reclassification adjustment for losses
Included in net loss 204,387
--------
(417,737)
Income tax benefit 167,095
-----------
$(250,642)
The accompanying notes are an integral part of the consolidated financial
statements
-4-
<PAGE>
<TABLE>
<CAPTION>
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2000 and June 30, 1999
(unaudited)
June 30, June 30,
2000 1999
----------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $(332,644) $573,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 143,409 160,461
ESOP and other stock-based compensation earned 466,815 274,400
Realized loss/(gain) on:
Sale of loans 5,116 22,756
Available-for-sale investment securities 204,387 (96,131)
Depreciation 236,210 199,521
Amortization of intangibles 157,878 157,878
Net accretion of premiums and discounts
on investment securities (7,561) (4,248)
(Increase)/decrease in interest receivable (51,306) 147,855
Net change in other assets and liabilities 77,331 237,753
-------------- --------------
Net cash provided by operating activities 899,636 1,673,516
------------- --------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (5,353,725) (18,338,720)
Proceeds from maturities and principle reductions of
investment securities available-for-sale 1,193,957 6,089,768
Proceeds from sale:
Real estate acquired through foreclosure 84,081 50,912
Loans 566,823 2,007,026
Available-for-sale investment securities 5,300,432 --
Net increase in loans (7,561,649) (4,890,053)
Purchase of premises and equipment (204,243) (230,347)
(Increase)/decrease in surrender value of life insurance (36,644) 179,637
Other investing activities - (11,094)
------------------ ---------------
Net cash used in investing activities (6,010,968) (15,142,871)
------------- -------------
FINANCING ACTIVITIES
Net increase (decrease) increase in demand deposits, NOW accounts savings
accounts, money market deposit accounts
and escrow deposits 1,974,611 (2,744,286)
Net increase (decrease) increase in time deposits 2,135,671 (843,692)
Net proceeds from borrowings 1,431,000 14,835,500
Cash dividends (309,696) (294,740)
Treasury stock purchased (179,750) (813,453)
------------ ------------
Net cash provided by financing activities 5,051,836 10,139,329
Decrease in cash and cash equivalents (59,496) (3,330,026)
Cash and cash equivalents at beginning of period 4,280,255 6,516,238
----------- -----------
Cash and cash equivalents at end of period $4,220,759 $3,186,212
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $3,924,890 $3,208,116
Income taxes paid 48,000 370,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $550,335 $ 37,547
Decrease (increase) in unrealized gains and losses on available
for sale investment securities 417,737 (1,375,995)
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $157,035 $160,426
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
-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, 1999 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 and six months ended June 31, 2000 and 1999.
Operating results for the three months and six months ended June 31, 2000
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
(2) Earnings per Share
Basic earnings per share have been computed by dividing net income (loss)
for the three months and six months ended June 30, using 2,553,341 and
2,556,924 weighted average common shares outstanding for 2000 and 2,635,988
and 2,656,349 for 1999. Diluted earnings per share for the three month
period ending June 30, 2000 and the three and six month periods ending June
30, 1999 have been computed using 2,554,894, 2,694,206 and, 2,714,567
weighted average common shares outstanding, respectively. Due to the loss
incurred by the company during the first six months of 2000, the impact of
outstanding options is anti-dilutive and, therefore, their impact has not
been included in the diluted earnings per share disclosure for the six
months ended June 30, 2000.
(3) Reclassifications
Certain prior period information has been reclassified to conform to the
current period's presentation. These reclassifications had no affect on net
income as previously reported.
-6-
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
This Quarterly Report contains certain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could
cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers
that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods
to differ materially from any opinions or statements expressed with respect
to future periods in any current statements.
The Company does not undertake, and specifically declines any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
General
Throughout the Management's Discussion and Analysis the term, "the
Company", refers to the consolidated entity of Pathfinder Bancorp, Inc.,
Pathfinder Bank, Pathfinder REIT Inc., and Whispering Oaks Development
Corp. At June 30, 2000, Pathfinder Bancorp, Inc.'s only business was the
100% ownership of Pathfinder Bank. At June 30, 2000, 1,559,500 shares, or
59.6%, of the Company's common stock was held by Pathfinder Bancorp, MHC,
the Company's mutual holding company parent and 1,057,745 shares, or 40.4%,
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 loans,
investment securities, federal funds sold and interest-bearing deposits,
and its cost of funds consisting of interest expense on deposits and
borrowed funds. The Company's net income also is affected by its provision
for loan losses, non interest income and non interest expense. Non-interest
income is comprised of service charges on deposit accounts, loan fees, cash
surrender value, other charges, commissions and fees and net securities
gain and losses. Non-interest expense includes salaries and employee
benefits, building occupancy, data processing expenses, professional and
other services, amortization of intangible assets and income taxes.
Earnings of the Company are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities. These events are
beyond the control of the Company.
Trust Department
During the fourth quarter of 1999, the Company began providing trust and
custodial services. The Company incurred approximately $58,000 in expenses
during the first six months of 2000 associated with trust operations.
The following discussion presents material changes to the Company's
financial condition and the results of operations for the three and six
months ended June 30, 2000.
-7-
<PAGE>
Financial Condition
Assets
Total assets increased approximately $5.1 million, or 2.3%, to $221.4
million at June 30, 2000 from $216.3 million at December 31, 1999. The
increase in total assets was primarily the result of a $6.3 million
increase in net loans receivable, partially offset by a $1.8 million
decrease in investment securities. Additionally, the Company experienced a
$466,000, or 72.7%, increase in other real estate. The increase in net
loans receivable is due to a $1.1 million increase in residential real
estate loans, a $2.5 increase in commercial real estate loans, and a $2.2
million increase in commercial lines of credit. The increases in loan
balances are a result of the Company competitively pricing residential and
commercial mortgages and continued emphasis on increased commercial
customer relationships. The increase in Other Real Estate Owned is
primarily attributable to the foreclosure of 17 units of a multi-family
lending relationship. The Company expects the sale of these units over the
next six months at net pricing which approximates the carrying value of the
properties.
Liabilities
Total liabilities increased by $5.7 million, to $201.9 million at June 30,
2000 from $196.2 million at December 31, 2000. The increase is primarily
attributable to a $4.1 million, or 2.7%, increase in total deposits,
combined with an increase in borrowed funds of $1.4 million, or 3.3%. The
increase in deposits was comprised of a $1.7 million increase in time
deposits, a $1.6 million in other interest bearing deposits, and a $700,000
increase in non- interest bearing deposits. The increase in deposit
balances can be attributed to the company's competitive pricing of time
deposit products, additional deposit relationships garnered through
expanding commercial lending relationships, as well as funds moving out of
equity markets into fixed income products.
Liquidity and Capital Resources
Shareholders' equity decreased $608,000, or 3.0%, to $19.5 million at June
30, 2000 from $20.1 million at December 31, 1999. The decrease in
shareholder's equity is primarily the result of a $644,000 reduction in
retained earnings, a $251,000 reduction in accumulated other comprehensive
loss, and an increase in treasury stock of $180,000 relating to the
acquisition of 22,000 shares as part of the Company's share repurchase
program. The decrease in retained earnings is a result of the net loss
incurred by the Company during the first six months of 2000, combined with
dividends declared during the period. These decreases were partially offset
by a $467,000 reduction in unearned ESOP and other stock based
compensation.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and maturities of investment securities, federal funds
sold, earnings and funds provided from operations and borrowings. While
scheduled principal amortization on loans are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced
by general interest rates, economic conditions and competition. The Company
manages the pricing of deposits to maintain a desired deposit balance. In
addition, the Company invests excess funds in short-term interest-bearing
instruments and other assets which provide liquidity to meet lending
requirements. For additional information about cash flows from the
Company's operating, financing, and investing activities, see The
Statements of Cash Flows included in the Financial Statements. The Company
adjusts its liquidity levels in order to meet funding needs of deposit
outflows, payment of real estate taxes on mortgage loans and loan
commitments. The Company also adjusts liquidity as appropriate to meet its
assets and liability management objectives.
-8-
<PAGE>
Results of Operations
The Company recorded net income of $301,000 and $286,000 for the three
months ended June 30, 2000 and 1999, respectively. The increase in net
income of $15,000, or 5.2%, for the three months ended June 30, 2000,
resulted primarily from a reduction of $123,000, or 6.8%, in operating
expenses partially offset by decreases of $22,000 in net interest income
after provision for loan losses, and $55,000 in other income. For the six
months ended June 30, 2000, the Company recorded a net loss of
approximately $333,000 as compared to net income of $573,000 for the same
period in the prior year. The net loss recorded for the first six months of
2000 was a direct result of the net loss recorded by the Company during the
first three months of the year. The Company's first quarter earnings were
adversely impacted by certain unusual items, totaling approximately
$578,000, and non-recurring charges totaling approximately $270,000.
Additionally, the Company incurred losses of approximately $195,000 on the
sale of investment securities during the first quarter of 2000. The unusual
items charge consists primarily of amounts relating to the early retirement
of certain employees and officers of $239,000, the acceleration of stock
based benefits to retired officers of $314,000, and employee relocation
charges of $25,000. The non-recurring charges consist of one time expenses
associated with the change in name of the Company's banking subsidiary of
approximately $114,000, and loan and ORE write-downs of approximately
$156,000.
Annualized return on average assets and return on average shareholders
equity were .55% and 6.27%, respectively for the three months ended June
30, 2000 as compared to .55% and 5.26% for the second quarter of 1999. For
the six months ended June 30, 2000, the same performance measurements were
-.30% and -3.38%, as compared to .56% and 5.20% for the same period in the
prior year.
Interest Income
Interest income, on a tax-equivalent basis, totaled $3.9 million for the
quarter ended June 30, 2000, as compared to $3.6 million for the quarter
ended June 30, 1999, an increase of $270,000, or 7.5%. The increase
resulted primarily from an increase in the average balance of
interest-earning assets to $201.4 million for the three months ended June
30, 2000 from $186.0 million in the prior year period, partially offset by
a decrease in the yield on average interest-earning assets to 7.73% from
7.79%. The increase in the average balance of interest earning assets was
comprised of a $5.5 million increase in the average balance of loans
receivable, and an $11.6 million increase in the average balance of
investment securities, partially offset by a $1.8 million decrease in
interest bearing deposits. The yield reduction is principally the result of
mortgage loan originations occurring at rates below the weighted average
coupon of the existing loan portfolio which lowered the total portfolio
yield.
Interest income, on a tax equivalent basis, totaled $7.8 million for the
six months ended June 30, 2000, as compared to $7.1 million for the same
period in 1999, an increase of $623,000, or 8.7%. The increase resulted
primarily from an increase in the average balance of interest-earning
assets of $16.9 million, or 9.1%, partially offset by a reduction in the
tax-equivalent yield on interest-earning assets to 7.71% from 7.74%.
Interest income on loans receivable increased $103,000, or 3.8%, to $2.8
million for the three months ended June 30, 2000 as compared to the same
period in the prior year. The increase in interest income on loans occurred
from an increase in the average balance of loans receivable of $5.5
million, or 4.2%, to $135.6 million at June 30, 2000, from $130.1 million
at June 30, 1999, offset by a reduction in the average yield on loans
receivable to 8.26% from 8.29%. For the six months ended June 30, 2000 and
1999, interest income on loans receivable increased $175,000, or 3.3%.
Average loans receivable increased $4.4 million while the yield on average
loans receivable decreased to 8.25% from 8.27%. The increase in the average
balance of loans receivable is comprised
-9-
<PAGE>
of originations of one-to-four family adjustable rate mortgage loans. 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.
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 initial rates charged on 5/1 ARMS.
Interest income on the mortgage-backed securities portfolio increased by
$45,000, or 14.0%, to $367,000 for the three months ended June 30, 2000,
from $322,000 for the three months ended June 30, 1999. The increase in
interest income on mortgage-backed securities resulted generally from an
increase in the average balance on mortgage-backed securities of $2.7
million, partially offset by an decrease in the average yield on mortgage-
backed securities to 6.73% from 6.75%. For the six months ended June 30,
2000 and 1999, interest income on mortgage-backed securities was $770,000
and $648,000, respectively, an increase of $122,000, or 18.8%. The increase
in the average balance of mortgage backed securities reflects the continued
utilization of mortgage- backed securities in repurchase agreement
transactions by the Company, as well as a decline in prepayments
experienced during the first six months of 2000 in response to the rising
interest rate environment.
Interest income on investment securities, on a tax equivalent basis,
increased $147,000, or 25.3%, for the three months ended June 30, 2000 to
$728,000 from $581,000 for the same period in 1999. The increase resulted
primarily from an increase in the average balance of investment securities
of $8.9 million, or 25.3%, to $43.9 million for the three months ended June
30, 2000, while the tax equivalent yield of investment securities remained
relatively consistent at 6.63% for the quarters ended June 30, 2000 and
1999. The increase in average balance resulted from the purchase of
investment securities in connection with the Company's wholesale growth
strategy.
For the six months ended June 30, 2000, tax equivalent interest income on
investment securities increased $391,000, or 36.6%, to $1.5 million
compared to $1.1 million for the same period in 1999. The increase resulted
primarily from an increase in the average balance of investment securities
of $11.2 million, combined with an increase in the tax equivalent yield on
investment securities to 6.56% from 6.41%.
Interest income on interest-earning deposits decreased $20,000, to $1,000
from $21,000 for the three months ended June 30, 2000 and 1999,
respectively. The decrease was primarily the result of a decrease of $1.8
million in the average balance of interest-earning deposits, combined with
a decrease in the average yield on interest- earning deposits to 3.74% from
4.50%. For the six months ended June 30, 2000, interest income on interest-
earning deposits decreased $55,000. This decrease is principally due to a
reduction in the average balance of interest-earning deposits of $2.3
million when compared to the same period in the prior year.
Interest Expense
Interest expense for the quarter ended June 30, 2000 increased by
approximately $332,000, or 20.0%, to $2.0 million from $1.7 million when
compared to the same quarter for 1999. The increase in interest expense for
the period was principally the result of an increase in the average balance
of borrowed funds of $17.2 million, or 71.3%, to $41.2 million for the
three months ended June 30, 2000 from $24.0 for the three months ended June
30, 1999, combined with an increase in the average cost of borrowed funds
to 5.90% from 5.42%, and an increase in the average cost of interest
bearing deposits to 3.82% from 3.65% for the same periods. These increases
were partially offset by a decrease in the average balance of interest
bearing deposits of $1.5 million, or 1.0%, to $144.9 million from $146.4
million for the periods ending June 30, 2000 and 1999 respectively. The
increase in the average balance of borrowed funds is a result of the
continued implementation of the Company's wholesale growth strategy. The
increase in the average cost of borrowed funds and interest-bearing
deposits was caused by increases in short term interest rates when
comparing the second quarters of 2000 and 1999.
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<PAGE>
For the six months ended June 30, 2000, interest expense increased
$636,000, or 19.2%, when compared to the first six months of 1999. The
increase in interest expense for the period was the result of an increase
in the average balance of interest bearing liabilities of $20.5 million,
combined with an increase in the average cost of interest bearing
liabilities to 4.17% from 3.92%.
Net Interest Income
Net interest income decreased $58,000, or 3.0%, to $1.9 million, on a tax
equivalent basis, for the three months ended June 30, 2000 when compared to
the same period in the prior year. The decrease in net interest income for
the quarter ended June 30, 2000, was primarily the result of the cost of
interest-bearing liabilities increasing faster than the yield on interest
earning assets during a period of rising short-term interest rates.
For the six months ended June 30, 2000, net interest income declined $1,000
compared to the first half of 1999.
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 June 30, 2000 of
$28,000, as compared to a provision of $63,000 for the three months ended
June 30, 1999. For the six months ended June 30, 2000 and 1999, the
provision for loan losses was $143,000 and $161,000, respectively. The
decrease in provision for loan losses reflects lower net charge-offs for
the periods compared. The Company's ratios of allowance for loan losses to
total loans receivable and to non-performing loans at June 30, 2000 were
.89% and 85.76%, respectively, as compared to .88% and 45.03% at June 30,
1999.
Non-interest Income
Non-interest income consists of servicing income on deposit accounts, loan
fee income, cash surrender value from Bank owned life insurance, gain
(loss) on sales of loans and investment securities and other operating
income. Non-interest income decreased approximately $55,000, to $277,000
for the three months ended June 30, 2000 as compared to $322,000 for the
prior year quarter. The decrease in non-interest income is attributable to
a reduction in net securities gains and losses of $44,000, to a loss of
$2,000, from a gain of $42,000, combined with reductions in the income
recognized from investment services and the cash value of bank owned life
insurance policies. This decrease was partially offset by increases in
other service charges and loan servicing fees.
For the six months ended June 30, 2000, non-interest income decreased
$310,000, or 49.4%, compared to the same period in 1999. Non-interest
income, exclusive of securities gains and losses, decreased $27,000, or
4.9%, for the six months ended June 30, 2000 as compared to the same period
in the prior year. Net securities gains (losses) decreased $282,000, to a
net loss of $209,000 for the period ending June 30, 2000, as compared to a
gain of $73,000 in the prior year. These securities losses were incurred,
in the first quarter of 2000, in conjunction with the reorganization of the
Company's earning assets in an effort to improve future profitability.
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<PAGE>
Noninterest Expense
Non-interest expense decreased $123,000, or 6.8%, to $1.7 million for the
three months ended June 30, 2000, as compared to the same period in 1999.
The decrease in non-interest expense is primarily the result of an $88,000,
or 35.6%, decrease in professional and other services, a $59,000, or 7.2%,
decrease in salaries and employee benefits, and a $44,000, or 20.8%,
decrease in data processing costs. These decreases were partially offset by
an approximately $32,000 increase in building occupancy expenses, and a
$36,000 increase in other expenses. The decrease in professional and other
services is the result of non-recurring computer consulting expenses
incurred in the in the second quarter of 1999, combined with reductions in
legal service expense. The decrease in salary and employee benefits is the
result of a workforce reorganization occurring at the end of the first
quarter of 2000. The decrease in data processing expenses is the result of
reductions in ongoing maintenance charges relating to the company's
operating systems, combined with non-recurring expenses associated with
preparation for Year 2000 during the second quarter of 1999. The increase
in building occupancy expense is primarily the result of depreciation and
other related expenses associated with a significant facility expansion
that occurred during the fourth quarter of 1999. The majority of the
increase in other expenses relates to the expenditure for supplies
necessitated by the Bank's name change.
For the six months ended June 30, 2000, non-interest expense increased
$849,000, or 24.8%, to $4.3 million as compared to $3.4 million for the
same period in 1999. Non-interest expenses for the first quarter of 2000
were adversely impacted by unusual items and non-recurring charges of
approximately $789,000. Exclusive of the unusual and non-recurring charges,
non-interest expenses increased $60,000, or 1.8%, to $3.5 million for the
six months ended June 30, 2000 from $3.4 million when compared to the same
period in the prior year.
Income Taxes
Income taxes increased approximately $33,000, or 33.5%, for the quarter
ended June 30, 2000 as compared to the same period in the prior year. The
increase is primarily a result of an increase in pretax income for the
second quarter of 2000.
For the six months ended June 30, 2000 and 1999, income tax (benefit)
expense was a benefit of $26,000 and expense of $217,000, respectively.
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<PAGE>
Item 3 - Quantitative and Qualitative Disclosure about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of the Company's assets and liabilities are sensitive to
changes in interest rates. The Company's mortgage loan portfolio,
consisting primarily of loans on residential real property located in
Oswego County, is subject to risks associated with the local economy. The
Company's interest rate risk management program focuses primarily on
evaluating and managing the composition of the Company's assets and
liabilities in the context of various interest rate scenarios.
Factors beyond management's control, such as market interest rates and
competition, also have an impact on interest income and interest expense.
The extent to which such assets and liabilities are "interest rate
sensitive" can be measured by an institution's interest rate sensitivity
"gap". An asset or liability is said to be interest rate sensitive within a
specific time period if it will mature or reprice within that time period.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific
time period and that amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap
would tend to positively affect net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to positively
affect net interest income while a positive gap would tend to adversely
affect net interest income.
The Company does not generally maintain in its portfolio fixed interest
rate loans with terms exceeding 20 years. In addition, ARM loans are
originated with terms that provide that the interest rate on such loans
cannot adjust below the initial rate. Generally, the Company tends to fund
longer-term loans and mortgage-backed securities with shorter-term time
deposits, repurchase agreements, and advances. The impact of this
asset/liability mix creates an inherent risk to earnings in a rising
interest rate environment. In a rising interest rate environment, the
Company's cost of shorter-term deposits may rise faster than its earnings
on longer-term loans and investments. Additionally, the prepayment of
principal on real estate loans and mortgage-backed securities tends to
decrease as rates rise, providing less available funds to invest in the
higher rate environment. Conversely, as interest rates decrease, the
prepayment of principal on real-estate loans and mortgage-backed securities
tends to increase, causing the Company to invest funds in a lower rate
environment. The potential impact on earnings from this mismatch is
mitigated to a large extent by the size and stability of the Company's
savings accounts. Savings accounts have traditionally provided a source of
relatively low cost funding that have demonstrated historically a low
sensitivity to interest rate changes. The Company generally matches a
percentage of these, which are deemed core, 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 its GAP
position, net interest income, and the market value of portfolio equity to
changes in interest rates on its current and forecast mix of assets and
liabilities. The Company has an Asset-
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<PAGE>
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, 2000, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning
assets maturing or repricing in the same period by $26.5 million,
representing a cumulative one-year gap ratio of a negative 11.90%.
Changes in Net Interest Income and Net Portfolio Value. The following table
measures the Company's interest rate risk exposure in terms of the
percentage change in its net interest income and net portfolio value as a
result of hypothetical changes in 50 basis point increments in market
interest rates. Net portfolio value (also referred to as market value of
portfolio equity) represents the fair value of net assets (determined as
the market value of assets minus the market value of liabilities). The
table quantifies the changes in net interest income and net portfolio value
to parallel shifts in the yield curve. The column "Net Interest Income
Percent Change" measures the change to the next twelve months' projected
net interest income, due to parallel shifts in the yield curve. The column
"Net Portfolio Value Percent Change" measures changes in the current net
mark-to-market value of assets and liabilities due to parallel shifts in
the yield curve. The base case assumes March 31, 2000 interest rates. The
Company uses these percentage changes as a means to measure interest rate
risk exposure and quantifies those changes against guidelines set by the
Board of Directors as part of the Company's Interest Rate Risk policy. The
Company's current interest rate risk exposure is within those guidelines
set forth.
Change in Interest Rates
Increase(Decrease)
Basis Points Net Interest Income Net Portfolio Value
(Rate Shock) Percentage Change Percentage Change
---------- ----------------- -----------------
300 -26.12% -21.92%
200 -12.84% -14.86%
100 - 6.36% - 7.56%
Base Case
-100 5.61% 6.57%
-200 9.24% 8.93%
-300 4.66% 6.32%
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<PAGE>
Part II - Other Information
Legal Proceedings
From time to time, the Company is involved as a plaintiff or defendant in
various legal actions incident to its business. None of these actions
individually or in the aggregate is believed to be material to the
financial condition of the Company
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 26, 2000. 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. For Against
Bruce E. Manwaring 2,069,760 214,022
L. William Nelson 2,069,760 214,022
George P. Joyce 2,069,760 214,022
Set forth below are the names of the other directors of the Bank and their
terms of office.
Name Term Expires
---- ---- -------
Steven Thomas 2001
Corte Spencer 2001
Janette Resnick 2001
Chris Gagas 2002
Chris Burritt 2002
Raymond Jung 2002
2. 2. The ratification of the appointment of Pricewaterhouse Coopers as
auditors for the fiscal year ending December 31, 2000.
For Against Abstain
--- ------- -------
Number of Votes 2,078,754 1,714 203,314
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<PAGE>
Other Information
On June 20, 2000 the Board of Directors declared a $.06 cash dividend to
shareholders of record as of June 30, 2000, payable on July 15, 2000.
Exhibits and Reports on Form 8-K
None
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<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.
PATHFINDER BANCORP, INC.
/s/ Thomas W. Schneider
------------------------------------
Date: August 10, 2000 Thomas W. Schneider
President, Chief Executive Officer
/s/ James A. Dowd
------------------------------------
Date: August 10, 2000 James A. Dowd
Vice President, Treasurer
