SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000
SEC Exchange Act No. 000-23601
Pathfinder Bancorp, Inc.
(Exact name of issuer as specified in its charter)
Delaware
(State or jurisdiction of incorporation or organization)
16-1540137
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
------------------------------------- ------------
(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
--------------
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,617,245 shares
of the Company's common stock outstanding as of November 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 - 6
o Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8 - 13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 - 15
PART II OTHER INFORMATION 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>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
September 30, 2000 (unaudited) and December 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 3,266,478 $ 4,280,255
Federal funds sold 124,985 -
------------ ------------
Total cash and cash equivalents 3,391,463 4,280,255
Investment securities 64,963,003 66,397,491
Mortgage loans held-for-sale 507,863 697,405
Loans:
Real estate 128,983,388 119,167,708
Consumer and other 15,873,270 12,129,363
------------ ------------
Total loans 144,856,658 131,297,071
Less: Allowance for loan losses 1,245,252 1,149,677
Unearned discounts and
origination fees and costs, net 111,408 84,453
------------ ------------
Loans receivable, net 143,499,998 130,062,941
Premises and equipment, net 4,791,774 4,869,553
Accrued interest receivable 1,697,205 1,431,251
Other real estate 1,064,420 641,384
Intangible assets, net 2,736,548 2,973,365
Other assets 5,362,598 4,969,908
------------ ------------
Total assets $228,014,872 $216,323,553
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Interest bearing $150,920,807 $142,690,583
Noninterest bearing 10,871,689 9,745,513
------------ ------------
Total deposits 161,792,496 152,436,096
Borrowed funds 44,166,500 42,879,500
Other liabilities 1,843,624 933,345
------------ ------------
Total liabilities 207,802,620 196,248,941
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 6,920,223 6,912,580
Retained earnings 17,582,917 18,121,372
Unearned stock based compensation (496,370) (981,125)
Unearned ESOP shares (247,766) (287,609)
Accumulated other comprehensive loss (572,290) (895,894)
Treasury stock, at cost; 267,475 and
245,475 shares, respectively (3,262,934) (3,083,184)
------------- -------------
Total shareholders' equity 20,212,252 20,074,612
------------- -------------
Total liabilities and shareholders' equity $ 228,014,872 $ 216,323,553
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-1-
<PAGE>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended September 30, 2000 and September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
INTEREST INCOME:
<S> <C> <C>
Loans $ 2,959,114 $ 2,715,917
Interest and dividends on investments:
U.S. Treasury and agencies 189,369 147,735
State and political subdivisions 89,826 92,544
Corporate 389,248 400,101
Marketable equity securities 68,916 32,511
Mortgage-backed 355,752 400,021
Federal funds sold and interest-bearing
deposits 5,517 2,148
------------- -------------
Total interest income 4,057,742 3,790,977
INTEREST EXPENSE:
Interest on deposits 1,503,557 1,318,538
Interest on borrowed funds 705,557 497,975
------------- -------------
Total interest expense 2,209,114 1,816,513
------------- -------------
Net interest income 1,848,628 1,974,464
Provision for loan losses 49,697 151,151
------------- -------------
Net interest income after provision
for loan losses 1,798,931 1,823,313
------------- -------------
OTHER INCOME:
Service charges on deposit accounts 114,223 133,113
Loan servicing fees 32,697 24,002
Cash surrender value 41,322 52,161
Net securities losses (199) (53,541)
Other charges, commission and fees 100,175 84,053
------------- -------------
Total other income 288,218 239,788
------------- -------------
OTHER EXPENSES:
Salaries and employee benefits 717,386 861,315
Building occupancy 188,760 196,945
Data processing expenses 259,183 209,513
Professional and other services 135,835 159,804
Amortization of intangible asset 78,939 78,939
Other expenses 333,770 287,475
------------- -------------
Total other expenses 1,713,873 1,793,991
------------- -------------
Income before income taxes 373,276 269,110
Provision for income taxes 115,935 73,691
------------- -------------
Net income $ 257,341 $ $ 195,419
============= =============
Net income per share - basic $ .10 $ 0.08
============= =============
Net income per share - diluted $ .10 $ 0.07
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-2-
<PAGE>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 2000 and September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- ------------
INTEREST INCOME:
<S> <C> <C>
Loans $ 8,489,387 $ 8,071,110
Interest and dividends on investments:
U.S. Treasury and agencies 595,114 200,222
State and political subdivisions 272,958 263,088
Corporate 1,119,452 1,141,047
Marketable equity securities 143,498 76,430
Mortgage-backed 1,125,757 1,047,584
Federal funds sold and interest-bearing
deposits 7,078 58,425
------------- ------------
Total interest income 11,753,244 10,857,906
INTEREST EXPENSE:
Interest on deposits 4,218,228 4,035,382
Interest on borrowed funds 1,942,340 1,096,784
------------- ------------
Total interest expense 6,160,568 5,132,166
------------- ------------
Net interest income 5,592,676 5,725,740
Provision for loan losses 193,106 311,612
------------- ------------
Net interest income after provision
for loan losses 5,399,570 5,414,128
------------- ------------
OTHER INCOME:
Service charges on deposit accounts 335,569 363,660
Loan servicing fees 94,671 67,310
Cash surrender value 123,966 166,483
Net securities (losses) gains (209,449) 19,834
Other charges, commission and fees 261,409 250,396
------------- ------------
Total other income 606,166 867,683
------------- ------------
OTHER EXPENSES:
Salaries and employee benefits 2,363,308 2,473,134
Building occupancy 603,341 553,979
Data processing expenses 616,110 580,326
Professional and other services 449,960 569,157
Amortization of intangible asset 236,817 236,817
Other expenses 1,143,735 808,712
Unusual items 578,176 -
------------- ------------
Total other expenses 5,991,447 5,222,125
------------- ------------
Income before income taxes 14,289 1,059,686
Provision for income taxes 89,592 290,996
------------- ------------
Net (loss) income $ (75,303) $ 768,690
============= ============
Net (loss) income per share - basic $ (0.03) $ 0.28
============= ============
Net (loss) income per share - diluted $ (0.03) $ 0.27
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-3-
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Accum.
Common Stock Add't Unearned Unearned Other
-------------------- Paid in Retained Stock-Based ESOP Comp. Treasury
Shares 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 (75,303) (75,302)
Other comprehensive loss,
net of tax:
Unrealized depreciation
in available-for-sale
securities, net of
reclassification amount (Note 1) 323,604 323,604
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss (75,303) 323,604 248,302
ESOP shares earned 7,643 39,843 47,486
Treasury stock purchased (179,750) (179,750)
Stock based compensation
earned 484,755 484,755
Dividends declared
(.18 per share) (463,152) (463,153)
------------ --------- ------------ ---------- ---------- --------- ---------- ----------- -----------
Balance,
September 30, 2000 2,884,720 $ 288,472 $ 6,920,223 $17,582,917 $(496,370) $(247,766) $(572,290) $(3,262,934) $20,212,252
============ ========= ============ =========== ========== ========== ========== ============ ===========
Note 1 - Disclosure of
reclassification amount
Unrealized net gains on securities:
Unrealized holding gains arising
during the period $ 743,474
Less: reclassification adjustment
for losses
Included in net income 204,134
---------
539,340
Income tax provision (215,736)
---------
$(323,604)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-4-
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2000 and September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $ (75,303) $ 768,690
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 193,106 311,612
ESOP and other stock-based compensation
earned 532,241 661,055
Realized loss/(gain) on:
Sale of real estate acquired through
foreclosure 1,053 --
Sale of loans 5,315 (77,262)
Available-for-sale investment securities 204,134 57,428
Depreciation 356,383 311,520
Amortization of intangibles 236,817 236,817
Net accretion of premiums and discounts on
investment securities (12,533) 36,270
Increase in interest receivable (265,954) (205,332)
Net change in other assets and liabilities 379,422 205,079
----------- ------------
Net cash provided by operating activities 1,554,681 2,196,766
----------- ------------
INVESTING ACTIVITIES:
Purchase of investment securities available
for sale (5,442,232) (25,252,470)
Proceeds from maturities and principle
reductions of investment securities
available for sale 1,923,771 8,168,758
Proceeds from sale of:
Real estate acquired through foreclosure 213,544 50,912
Loans 898,610 4,082,918
Available-for-sale investment securities 5,300,685 --
Net increase in loans (14,982,179) (8,754,625)
Purchase of premises and equipment (278,604) (368,030)
(Increase) decrease in surrender value of
life insurance (77,966) 127,476
Other investing activities -- (25,569)
----------- ------------
Net cash used in investing activities (12,444,371) (21,970,630)
----------- ------------
FINANCING ACTIVITIES
Netincrease (decrease) in demand deposits,
NOW accounts, savings accounts, money
market deposit accounts and escrow accounts
and escrow deposits 852,416 5,227,471)
Net increase (decrease) increase in time
deposits 8,503,984 (1,520,470)
Net proceeds from borrowings 1,287,000 24,573,500
Proceeds from stock option exercised -- 47,727
Cash dividends (462,752) (455,583)
Treasury stock purchased (179,750) (987,353)
----------- ------------
Net cash provided by financing activities 10,000,898 16,430,350
Decrease in cash and cash equivalents (888,792) (3,343,514)
Cash and cash equivalents at beginning of
period 4,280,255 6,516,238
----------- ------------
Cash and cash equivalents at end of period $ 3,391,463 $ 3,172,724
=========== ============
</TABLE>
-5-
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2000 and September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
CASH PAID DURING THE PERIOD FOR:
<S> <C> <C>
Interest $ 6,100,781 $ 4,976,031
Income taxes paid 73,000 475,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $ 637,633 $ 92,592
(Increase) decrease in unrealized gains
and losses on available for sale
investment securities (539,340) 2,710,913
Loans securitized and held as investments -- 2,049,818
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $ 151,860 $ 159,663
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-6-
<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 nine months ended September 30, 2000 and 1999.
Operating results for the three months and nine months ended September 30,
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 nine months ended September 30, using 2,557,189
and 2,537,425 weighted average common shares outstanding for 2000 and
2,618,314 and 2,643,531 for 1999. Diluted earnings per share for the three
month period ending September 30, 2000 and the three and nine month periods
ending September 30, 1999 have been computed using 2,558,596, 2,649,453 and
2,704,652 weighted average common shares outstanding, respectively. Due to
the loss incurred by the company during the first nine 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 nine months ended September 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.
-7-
<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 September 30,
2000, Pathfinder Bancorp, Inc.'s only business was the 100% ownership of
Pathfinder Bank. At September 30, 2000, 1,570,298 shares, or 60.0%, of the
Company's common stock was held by Pathfinder Bancorp, MHC, the Company's mutual
holding company parent and 1,046,947 shares, or 40.0%, 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 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. Noninterest 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. Noninterest
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 Trust Department generated approximately $3,000 in
revenue, while incurring approximately $80,000 in expenses during the first nine
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 nine months ended
September 30, 2000.
<PAGE>
Financial Condition
Assets
Total assets increased approximately $11.7 million, or 5.4%, to $228.0 million
at September 30, 2000 from $216.3 million at December 31, 1999. The increase in
total assets was primarily the result of a $13.4 million increase in net loans
receivable, partially offset by a $1.4 million decrease in investment
securities. The increase in net loans receivable is due to a $5.1 million
increase in residential real estate loans, a $3.9 increase in commercial real
estate loans, and a $2.9 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.
Liabilities
Total liabilities increased by $11.6 million, to $207.8 million at September 30,
2000 from $196.2 million at December 31, 2000. The increase is primarily
attributable to a $9.4 million, or 6.1%, increase in total deposits, combined
with an increase in borrowed funds of $1.3 million, or 3.0%. The increase in
deposits was primarily comprised of an $8.1 million increase in time deposits, a
$1.1 million increase in noninterest bearing deposits and a $200,000 increase in
other interest bearing deposits. The increase in deposit balances can be
attributed to the Company's competitive pricing of time deposit products, as
well as additional deposit relationships garnered through expanding commercial
and residential lending relationships.
Liquidity and Capital Resources
Shareholders' equity increased $138,000, or .7%, to $20.2 million at September
30, 2000 from $20.1 million at December 31, 1999. The increase in shareholders'
equity is primarily the result of a $324,000 reduction in accumulated other
comprehensive loss, and a $525,000 reduction in unearned ESOP and other stock
based compensation. Retained earnings decreased $539,000 as the result of the
net loss of $333,000 incurred by the Company during the first six months of 2000
combined with dividends declared during this period. Treasury stock increased
approximately $180,000 relating to the acquisition of 22,000 shares as part of
the Company's share repurchase program.
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.
<PAGE>
Results of Operations
The Company recorded net income of $257,000 and $195,000 for the three months
ended September 30, 2000 and 1999, respectively. The increase in net income of
$62,000, or 31.8%, for the three months ended September 30, 2000, resulted
primarily from an increase in other income of $48,000, or 20.0%, and a reduction
of $80,000, or 4.5%, in operating expenses, partially offset by a decrease of
$24,000 in net interest income after provision for loan losses. For the nine
months ended September 30, 2000, the Company recorded a net loss of
approximately $75,000 as compared to net income of $769,000 for the same period
in the prior year. The net loss recorded for the first nine months of 2000 was a
direct result of the net loss recorded by the Company during the first quarter
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 .46% and 5.17%, respectively for the three months ended September 30, 2000
as compared to .36% and 3.75% for the third quarter of 1999. For the nine months
ended September 30, 2000, the same performance measurements were (.05%) and
(.51%), as compared to .49% and 4.76% for the same period in the prior year.
Interest Income
Interest income, on a tax-equivalent basis, totaled $4.1 million for the quarter
ended September 30, 2000, as compared to $3.8 million for the quarter ended
September 30, 1999, an increase of $269,000, or 7.0%. The increase resulted
primarily from an increase in the average balance of interest-earning assets to
$207.6 million for the three months ended September 30, 2000 from $200.4 million
in the prior year period, combined with an increase in the yield on average
interest-earning assets to 7.91% from 7.66%. The increase in the average balance
of interest earning assets was comprised of a $9.4 million increase in the
average balance of loans receivable, partially offset by a $2.2 million decrease
in investment securities. The yield increase is principally the result of
commercial loan originations at rates exceeding the existing weighted average
portfolio yield.
Interest income, on a tax equivalent basis, totaled $11.9 million for the nine
months ended September 30, 2000, as compared to $11.0 million for the same
period in 1999, an increase of $871,000, or 7.9%. The increase resulted
primarily from an increase in the average balance of interest-earning assets of
$12.3 million, or 6.5%, combined with an increase in the tax-equivalent yield on
interest-earning assets to 7.76% from 7.66%.
Interest income on loans receivable increased $243,000, or 8.9%, to $3.0 million
for the three months ended September 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 $9.4 million, or 7.1%, to
$141.3 million at September 30, 2000, from $131.9 million at September 30, 1999,
and an increase in average yield on loans receivable to 8.38% from 8.26%. For
the nine months ended September 30, 2000 and 1999, interest income on loans
receivable increased $418,000, or 5.2%. Average loans receivable increased $5.8
million while the yield on average loans receivable increased to 8.30% from
8.26%. The increase in the average balance of loans receivable is comprised of
originations of one-to-four family adjustable rate mortgage loans. The
<PAGE>
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 amortized over 30 years. The Company also
experienced an increase in the origination of commercial real estate and
business loans. The increase in the yield on average loans receivable was
attributable to commercial loan originations occurring at rates exceeding the
weighted average yield of the existing loan portfolio.
Interest income on the mortgage-backed securities portfolio decreased by
$44,000, or 11.0%, to $356,000 for the three months ended September 30, 2000,
from $400,000 for the three months ended September 30, 1999. The decrease in
interest income on mortgage-backed securities resulted generally from a
reduction in the average balance on mortgage-backed securities of $2.7 million,
partially offset by an increase in the average yield on mortgage-backed
securities to 6.71% from 6.68%. For the nine months ended September 30, 2000 and
1999, interest income on mortgage-backed securities was $1,126,000 and
$1,048,000, respectively, an increase of $78,000, or 7.4%. The decrease in the
average balance of mortgage backed securities reflects the scheduled
amortization and prepayments of principle on the underlying mortgage loans. The
principle reductions have been utilized to fund existing loan demand, rather
than being reinvested into the mortgage-backed security portfolio.
Interest income on investment securities, on a tax equivalent basis, increased
$77,000, or 10.8%, for the three months ended September 30, 2000 to $788,000
from $711,000 for the same period in 1999. The increase resulted primarily from
an increase in the average tax equivalent yield of investment securities to
7.01% from 6.40%, combined with an increase in the average balance of investment
securities of $537,000, or 1.2%, to $45.0 million for the three months ended
September 30, 2000. The increase in the average tax equivalent yield of
investment securities is a result of a restructuring of the securities portfolio
during the first quarter of 2000, where lower yielding securities were sold at a
loss. In addition to the portfolio restructuring, a general rise in the interest
rate environment has contributed to the increase in the average tax equivalent
yield of investment securities.
For the nine months ended September 30, 2000, tax equivalent interest income on
investment securities increased $442,000, or 24.7%, to $2.2 million compared to
$1.8 million for the same period in 1999. The increase resulted primarily from
an increase in the average balance of investment securities of $6.5 million,
combined with an increase in the tax equivalent yield on investment securities
to 6.66% from 6.25%.
Interest income on interest-earning deposits increased $4,000, to $6,000 from
$2,000 for the three months ended September 30, 2000 and 1999, respectively. The
increase is primarily the result of a $285,000 increase in the average balance
of interest earning deposits. For the nine months ended September 30, 2000,
interest income on interest-earning deposits decreased $51,000. This decrease is
principally the result of a $1.4 million reduction in the average balance of
interest-earning deposits, partially offset by an increase in the average yield
on interest earning deposits to 5.45% from 5.02%.
Interest Expense
Interest expense for the quarter ended September 30, 2000 increased by
approximately $393,000, or 21.6%, to $2.2 million from $1.8 million when
compared to the same quarter for 1999. The increase in interest expense for the
period was principally the result of increases in the average balance of
deposits and borrowed funds, as well as increases in the costs of deposits and
borrowings. The average balance of borrowed funds increased $8.3 million, or
22.9%, to $44.6 million for the three months ended September 30, 2000 from $36.3
for the three months ended September 30, 1999. The average cost of borrowed
<PAGE>
funds increased to 6.33% from 5.49% when comparing the same periods. The average
balance of interest bearing deposits increased $1.8 million, or 1.4%, when
comparing the third quarter of 2000 to the same period during 1999. The average
cost of interest bearing deposits increased to 4.08% for the quarter ended
September 30, 2000 from 3.64% for the same period during 1999. 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 third quarters of 2000
and 1999.
For the nine months ended September 30, 2000, interest expense increased
$1,028,000, or 20.0%, when compared to the first nine 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 $15.3 million, combined with
an increase in the average cost of interest bearing liabilities to 4.36% from
3.95%.
Net Interest Income
Net interest income decreased $124,000, or 6.1%, to $1.9 million, on a tax
equivalent basis, for the three months ended September 30, 2000 when compared to
the same period in the prior year. The decrease in net interest income for the
quarter ended September 30, 2000, was primarily the result of the cost of
interest-bearing liabilities increasing faster than the yield on interest
earning assets. The cost of interest bearing liabilities rises as relatively
short term interest bearings deposits and borrowings reprice more rapidly during
periods of rising short term interest rates. This trend is evidenced by the
compression of the Bank's net interest rate spread to 3.31% for the three months
ended September 30, 2000 from 3.65% for the three months ended September 30,
1999.
For the nine months ended September 30, 2000, net interest income declined
$158,000 when compared to the same period in 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 September 30, 2000 of $50,000, as compared to
a provision of $151,000 for the three months ended September 30, 1999. For the
nine months ended September 30, 2000 and 1999, the provision for loan losses was
$193,000 and $312,000, respectively. The decrease in provision for loan losses
reflects improved ratios of allowance for loan losses as a percentage of total
loans and non-performing loans. The Company's ratios of allowance for loan
losses to total loans receivable and to non-performing loans at September 30,
2000 were .86% and 66.86%, respectively, as compared to .85% and 54.33% at
September 30, 1999.
Noninterest Income
Noninterest 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. Noninterest
income increased approximately $48,000, to $288,000 for the three months ended
September 30, 2000 as compared to $240,000 for the prior year quarter. The
increase in noninterest income is attributable to a $16,000 increase in
<PAGE>
commission and fees, a $9,000 increase in loan servicing fees, combined with a
reduction in net securities gains and losses of $53,000. This increase was
partially offset by a reduction in the income generated from the cash value of
bank owned life insurance policies and decreases of service charges associated
with deposit accounts.
For the nine months ended September 30, 2000, noninterest income decreased
$262,000, or 30.1%, compared to the same period in 1999. Noninterest income,
exclusive of securities gains and losses, decreased $32,000, or 3.8%, for the
nine months ended September 30, 2000 as compared to the same period in the prior
year. Net securities gains (losses) decreased $229,000, to a net loss of
$209,000 for the period ending September 30, 2000, as compared to a gain of
$20,000 in the prior year. These securities losses were incurred in the first
quarter of 2000, in conjunction with a reorganization of the Company's
securities portfolio in an effort to improve future profitability.
Noninterest Expense
Noninterest expense decreased $80,000, or 4.5%, to $1.7 million for the three
months ended September 30, 2000, as compared to the same period in 1999. The
decrease in noninterest expense is primarily the result of a $144,000, or 16.7%,
decrease in salaries and employee benefits, a $24,000, or 15.0%, decrease in
professional and other services and a $8,000, or 4.2%, decrease in building
occupancy expense. These decreases were partially offset by increases in data
processing expenses and other operating expenses of approximately $50,000 and
$46,000, respectively. 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 professional and other services is the result of
non-recurring computer consulting expenses incurred in the third quarter of
1999, combined with reductions in legal service expense. Data processing
expenses increased as a result of rising hardware maintenance and operating
system licensing charges on the Bank's mainframe computer. The majority of the
increase in other expenses relates to the expenditure for supplies necessitated
by the Bank's name change.
For the nine months ended September 30, 2000, noninterest expense increased
$769,000, or 14.7%, to $6.0 million as compared to $5.2 million for the same
period in 1999. Noninterest 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, noninterest
expenses decreased $20,000, or .4%, to $5.2 million for the nine months ended
September 30, 2000 from $5.2 million when compared to the same period in the
prior year.
Income Taxes
Income taxes increased approximately $42,000, or 57.0%, for the quarter ended
September 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 third
quarter of 2000.
<PAGE>
For the nine months ended September 30, 2000 and 1999, income tax expense was
$90,000 and $291,000, respectively.
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.
<PAGE>
The Company manages its interest rate sensitivity by monitoring (through
simulation and net present value techniques) the impact on its GAP position, net
interest income, and the market value of portfolio equity to changes in interest
rates on its current and forecast mix of assets and liabilities. The Company has
an Asset-Liability Management Committee which is responsible for reviewing the
Company's assets and liability policies, setting prices and terms on
rate-sensitive products, and monitoring and measuring the impact of interest
rate changes on the Company's earnings. The Committee meets monthly on a formal
basis and reports to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements. The Company does not
have a targeted gap range; rather the Board of Directors has set parameters of
percentage change by which net interest margin and the market value of portfolio
equity are affected by changing interest rates. The Board and management deem
these measures to be a more significant and realistic means of measuring
interest rate risk.
Gap Analysis. At September 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 $26.4 million, representing a
cumulative one-year gap ratio of a negative 11.56%.
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 Rate
Increase(Decrease)
Basis Points Net Interest Income Net Portfolio Value
(Rate Shock) Percentage Change Percentage Change
300 -17.08% -21.79%
200 -11.14% -14.75%
100 - 5.49% - 7.50%
Base Case
-100 4.28% 5.99%
-200 6.76% 7.86%
-300 3.75% 4.65%
<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 Matter to a Vote of Security Holders
Not applicable
Other Information
On September 19, 2000 the Board of Directors declared a $.06 cash dividend to
shareholders of record as of September 30, 2000, payable on October 16, 2000.
Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURES
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: November 9, 2000 Thomas W. Schneider
President, Chief Executive Officer
/s/ James A. Dowd
____________________________________
Date: November 9, 2000 James A. Dowd
Vice President, Treasurer
