SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTER ENDED MARCH 31, 2000
SEC Exchange Act No. 000-23601
---------
Pathfinder Bancorp, Inc.
---------------------------------------
(Exact name of bank as specified in its charter)
New York
------------------------------------------------------
(State or jurisdiction of incorporation or organization)
16-1540137
-------------------------------------
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
------------------------------ ---------
(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (315) 343-0057
--------------
Not Applicable
----------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,617,245 shares
of the Bank's common stock outstanding as of May 12, 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
o Consolidated Statements of Shareholders' Equity 3
o Consolidated Statements of Cash Flows 4
o Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 6 - 13
Condition and Results of Operations
PART II OTHER INFORMATION 14
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
March 31, 2000 (unaudited) and December 31, 1999
March 31, December 31,
2000 1999
------------ -----------
ASSETS
<S> <C> <C>
Cash and due from banks $3,513,692 $4,280,255
Federal funds sold 71,180 -
----------- ----------------
Total cash and cash equivalents 3,584,872 4,280,255
Investment securities 63,103,783 66,397,491
Mortgage loans held-for-sale 692,289 697,405
Loans:
Real estate 118,781,046 119,167,708
Consumer and other 12,605,351 12,129,363
----------- -----------
Total loans 131,386,397 131,297,071
Less: Allowance for loan losses 1,209,601 1,149,677
Unearned discounts and origination fees 89,927 84,453
------------- -------------
Loans receivable, net 130,086,869 130,062,941
Premises and equipment, net 4,826,473 4,869,553
Accrued interest receivable 1,485,945 1,431,251
Other real estate 1,191,719 641,384
Intangible assets, net 2,894,426 2,973,365
Other assets 4,961,512 4,969,908
--------------- --------------
Total assets $212,827,888 $216,323,553
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $144,355,208 $142,690,583
Non-interest bearing 10,038,594 9,745,513
-------------- --------------
Total deposits 154,393,802 152,436,096
Borrowed funds 38,083,500 42,879,500
Other liabilities 1,087,005 933,345
--------------- ---------------
Total liabilities 193,564,307 196,248,941
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 6,917,226 6,912,580
Retained earnings 17,333,705 18,121,372
Unearned stock based compensation (595,599) (981,125)
Unearned ESOP shares (273,871) (287,609)
Accumulated other comprehensive loss (1,143,418) (895,894)
Treasury stock, at cost;
267,475 and 245,475 shares, respectively (3,262,934) (3,083,184)
----------- -----------
Total shareholders' equity 19,263,581 20,074,612
-------------- --------------
Total liabilities and shareholders' equity $212,827,888 $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 March 31, 2000 and March 31, 1999
(unaudited)
March 31, March 31,
2000 1999
-------- ----------
INTEREST INCOME:
<S> <C> <C>
Loans $2,731,831 $2,665,329
Interest and dividends on investments:
U.S. Treasury and agencies 209,849 7,586
State and political subdivisions 91,912 80,884
Corporate 358,541 350,698
Marketable equity securities 37,482 19,765
Mortgage-backed 403,044 325,669
Federal funds sold and interest-bearing deposits 830 35,728
------------- -----------
Total interest income 3,833,489 3,485,659
INTEREST EXPENSE:
Interest on deposits 1,330,660 1,382,379
Interest on borrowed funds 628,827 273,083
---------- ----------
Total interest expense 1,959,487 1,655,462
--------- ---------
Net interest income 1,874,002 1,830,197
Provision for loan losses 115,324 97,129
---------- -----------
Net interest income after provision for loan losses 1,758,678 1,733,068
--------- ---------
OTHER INCOME:
Service charges on deposit accounts 114,107 109,680
Mortgage servicing fees 39,528 16,235
Cash surrender value 41,322 50,092
Net securities (losses) gains (207,494) 31,571
Other charges, commission and fees 53,219 82,643
---------- -------
Total other income 40,682 290,221
---------- -------
OTHER EXPENSES:
Salaries and employee benefits 891,626 798,885
Building occupancy 204,282 178,470
Data processing expenses 189,959 160,116
Professional and other services 154,134 160,881
Amortization of intangible asset 78,939 78,939
Other expenses 491,946 238,977
Unusual items 578,176 -
---------- ---------------
Total other expenses 2,589,062 1,616,268
--------- ---------
(Loss) income before income taxes (789,702) 407,021
(Benefit) provision for income taxes (156,293) 119,961
---------- ---------
Net (loss) income $(633,409) $287,060
========== ========
Other comprehensive loss, net of taxes:
Unrealized net gains on securities:
Unrealized holding losses arising during period (208,406) (753,615)
Less: reclassification adjustment for (losses) gains included
in net income (207,494) 31,571
----------- -----------
(412,540) (743,775)
Income tax benefit 165,016 297,510
------------ ----------
Other comprensive loss, net of tax (247,524) (446,265)
----------- ---------
Comprehensive loss $(880,933) (159,205)
========== =========
Net (loss) income per share - basic and diluted $(0.25) $ 0.11
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-2-
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(unaudited)
<TABLE>
<CAPTION>
Accum.
Add't Unearned Other Unearned
Common Stock Paid in Retained Stock-Based Compr. ESOP Treasury
Shares Amount Capital Earnings Compensation Income Shares Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 2,884,720 $288,472 $6,912,580 $18,121,372 $(981,125) $(895,894) $(287,609) $(3,083,184) $20,074,612
Net Income (633,409) (633,409)
ESOP shares earned 4,646 13,738 18,384
Treasury stock purchased (179,750) (179,750)
Stock based compensation
earned 385,526 385,526
Change in unrealized net
appreciation on investment
securities (247,524) (247,524)
Dividends declared
(.06 per share) (154,258) (154,258)
Balance, March 31, 2000 2,884,720 $288,472 $6,917,226 $17,333,705 $(595,559) $(1,143,418) $(273,871) $(3,262,934) $19,263,581
========= ======== ========== =========== ========= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-3-
<PAGE>
<TABLE>
<CAPTION>
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
March 31, 2000 and March 31, 1999
(unaudited)
March 31, March 31,
2000 1999
----------- -------
OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $(633,409) $287,060
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 115,324 97,129
ESOP and other stock-based compensation earned 403,910 193,654
Loans held-for-sale 5,116 (1,941,685)
Realized loss/(gain) on available-for-sale investment securities 207,494 (31,571)
Depreciation 118,333 86,558
Amortization of intangibles 78,939 78,939
Net (accretion) amortization of premiums and discounts
on investment securities (3,079) 18,692
Increase in interest receivable (54,694) (92,510)
Net change in other assets and liabilities 323,575 131,282
------------- ------------
Net cash provided by operating activities 561,509 (1,172,452)
------------- ------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (3,098,123) (5,043,225)
Proceeds from maturities and principle reductions of
investment securities held-to-maturity -- 4,552,098
Proceeds from maturities and principle reductions of
investment securities available-for-sale 477,550 --
Proceeds from sale:
Real estate acquired through foreclosure -- 50,912
Available-for-sale investment securities 5,297,325 --
Net (increase) decrease in loans (689,587) 1,264,026
Purchase of premises and equipment (75,253) (170,423)
Decrease in surrender value of life insurance 4,678 214,411
------------ ------------
Net cash provided by investing activities 1,916,590 867,799
--------- ------------
FINANCING ACTIVITIES
Net increase (decrease) increase in demand deposits, NOW accounts savings
accounts, money market deposit accounts
and escrow deposits 409,123 (4,089,492)
Net increase (decrease) increase in time deposits 1,548,583 (89,573)
Net (payments) proceeds from borrowings, net (4,796,000) 3,333,000
Cash dividends (155,438) --
Treasury stock purchased (179,750) (206,000)
------------ ------------
Net cash used in financing activities (3,173,482) (1,052,065)
Decrease in cash and cash equivalents (695,383) (1,356,718)
Cash and cash equivalents at beginning of period 4,280,255 6,516,238
----------- -----------
Cash and cash equivalents at end of period $3,584,872 $5,159,520
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $1,926,467 $1,576,135
Income taxes paid -- --
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $550,335 $ --
Decrease (increase) in unrealized gains and losses on available
for sale investment securities 412,540 743,775
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $154,258 $160,275
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
-4-
<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 ended March 31, 2000 and 1999.
Operating results for the three months ended March 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 based upon net (loss) income
for the three months ended March 31, 2000 and 1999, using 2,575,073 and
2,676,936 weighted average common shares outstanding. Diluted earnings per
share for the three month period in 1999 was computed using 2,683,366
weighted average common shares outstanding. Due to the loss incurred by the
Company during the first three months of 2000, the impact of the
outstanding options is anti-dilutive and, therefore, their impact has not
been included in the diluted earnings per share disclosure for the three
months ended March 31, 2000.
-5-
<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 March 31, 2000,
Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Pathfinder
Bank, which in turn owns Pathfinder REIT, Inc. and Whispering Oaks Development
Corp.. At March 31, 2000, 1,552,500 shares, or 59.3%, of the Company's common
stock was held by Pathfinder Bancorp, MHC, the Company's mutual holding company
parent and 1,064,745 shares, or 40.7%, was held by the public.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage loans, investment securities and other loans, and its cost of funds
consisting of interest paid on deposits and borrowed funds. The Company's net
income also is affected by its provision for loan losses, as well as by the
amount of non interest income, including income from fees and service charges,
net gains and losses on sales of securities, and non interest expense such as
employee compensation and benefits, occupancy and equipment costs, data
processing and income taxes. Earnings of the Company also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Company. In particular,
the general level of market rates tends to be highly cyclical.
Management Succession
- ---------------------
On January 14, 2000 Chris C. Gagas retired as President and Chief Executive
Officer of Pathfinder Bancorp, MHC, Pathfinder Bancorp, Inc. and Pathfinder
Bank. Mr. Gagas continues as Chairman of the Board of the Company and its mutual
holding company parent. Thomas W. Schneider succeeded Mr. Gagas as President and
Chief Executive Officer of the Mutual Holding Company, the Company and the Bank.
Mr. Schneider has been employed by the Company and the Bank since 1988 and most
recently served as Executive Vice President and Chief Financial Officer.
-6-
<PAGE>
Bank Name Change
- ----------------
On November 16, 1999, Oswego City Savings Bank changed its name to Pathfinder
Bank.
Trust Department
- ----------------
During the fourth quarter of 1999, the Company began providing trust and
custodial services. The Company incurred approximately $6,000 in expenses during
the first quarter of 2000 associated with trust operations. At March 31, 2000,
the Company has $687,000 in assets under trust and custodial services
management.
Year 2000
- ---------
Prior to year-end 1999, the Company had completed the assessment of its year
2000 risk, had implemented all necessary system enhancements, and tested all
systems and equipment to ensure customer service, and minimize its business
risks associated with the century date rollover. A business resumption
contingency plan along with a liquidity contingency plan were in place to
provide for problems should they have occurred. The Company experienced no
significant year 2000 related deposit declines or cash withdrawals during
December of 1999. The month of January 2000 reflected a successful transition to
the year 2000 of all the Company's operating systems and equipment. All year end
processing was completed as scheduled and daily processing since year- end has
been performed without any year 2000 related incidents. During the month of
January, the Company reinvested its contingency cash balances. Costs of the
Company's efforts to prepare its data processing systems for the impact of the
Year 2000 were approximately $180,000 in non-capitalized costs. The majority of
expenditures for software and hardware upgrades were capitalized, consisting
primarily of maintenance costs of operating parallel systems. The total amount
capitalized was $575,000 and is being depreciated over an average of
approximately four and one-third years. The depreciation will result in
additional annual expenses of approximately $133,000 over this period.
To date there has been no indication that the quality of the Company's
commercial loan portfolio was negatively impacted by the year 2000. The Company
believes that its year 2000 related business risks have been significantly
reduced with the successful operation of its systems during the early part of
the year 2000.
The following discussion reviews the financial condition at March 31, 2000 and
the results of operations of the Company for the three months ended March 31,
2000.
Financial Condition
Assets
- ------
Total assets decreased approximately $3.5 million, or 1.6%, to $212.8 million at
March 31, 2000 from $216.3 million at December 31, 1999. The decrease in total
assets was primarily due to the reduction in the Company's investment portfolio.
During the first quarter of 2000, approximately $3.6 million of investment
securities were liquidated in connection with a balance sheet reorganization in
an effort to reduce the Company's reliance on overnight borrowings. Cash and
cash equivalents decreased $695,000, or 16.2% to $3.6 million from $4.3 million
at December 31, 1999, reflecting the more normal liquidity requirements of the
Bank following the year 2000. These asset decreases were offset by a $550,000,
or 85.8%, increase in other real estate. Loans receivable remained relatively
consistent increasing $78,000, or 0.1% to $132.0 million at March 31, 2000 from
$131.9
-7-
<PAGE>
million at December 31, 1999. The decline in asset base also reflects the lack
of significant growth and economic development in the Company's market area.
Liabilities
- -----------
Total liabilities decreased by $2.7 million, to $193.6 million at March 31, 2000
from $196.3 million at December 31, 1999. The decrease is primarily attributable
to a $4.8 million, or 11.2%, decrease in borrowed funds, partially offset by an
increase in deposits of $2.0 million, or 1.3%. The decrease in borrowed funds is
a direct result of paydowns facilitated by the proceeds received from the sale
of securities during the first quarter of 2000. Intermediate term lower yielding
investment securities were liquidated in order to reduce the Company's reliance
on short term borrowings in a rising interest rate environment.
Shareholders' Equity
- --------------------
Shareholders' equity decreased $811,000, or 4.0%, to $19.3 million at March 31,
2000 from $20.1 million at December 31, 1999. The decrease in shareholders'
equity is primarily the result of a $788,000 reduction in retained earnings, a
$248,000 reduction in accumulated and other comprehensive income, 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 three months of 2000, combined with dividends declared during the period.
These decreases were partially offset by a $386,000 reduction in unearned stock
based compensation.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, amortization and prepayment
of loans and maturities of investment securities and other short-term
investments, earnings and funds provided from operations and borrowings. While
scheduled principal repayments on loans are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Company manages the
pricing of deposits to maintain a desired deposit balance. In addition, the
Company invests excess funds in short-term interest-bearing instruments and
other assets, which provide liquidity to meet lending requirements. For
additional information about cash flows from the Company's operating, financing,
and investing activities, see Statements of Cash Flows included in the Financial
Statements. The Company adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans and
loan commitments. The Company also adjusts liquidity as appropriate to meet its
assets and liability management objectives.
Results of Operations
- ---------------------
The Company recorded a net loss of approximately $633,000 for the three months
ended March 31, 2000, as compared to net income of $287,000 for the same period
during 1999. 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. 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 of $114,000 associated with
the change in name of the Bank and other one time expenses, and other real
estate owned write-downs of approximately $96,000. Additionally, the Company
incurred losses of approximately $195,000 on the sale of investment securities.
-8-
<PAGE>
As a result of the decrease in net income between the comparative periods,
annualized return on average assets and return on average shareholders' equity
were (1.15%) and (12.70%), respectively, for the three months ended March 31,
2000 compared to .57% and 5.14% for the first quarter of 1999. (Loss)/earnings
per share - basic was ($.25) for the first quarter of 2000 compared to $.11 for
the same period in 1999.
Interest Income
- ---------------
Interest income, on a tax-equivalent basis, totaled $3.9 million for the quarter
ended March 31, 2000, as compared to $3.5 million for the quarter ended March
31, 1999, an increase of $347,000, or 9.9%. The increase resulted primarily from
an increase in the average balance of interest-earning assets to $202.4 million
for the three months ended March 31, 2000 from $182.9 million in the prior year
period, partially offset by a decrease in the yield on average interest-earning
assets to 7.64% from 7.70%. The increase in the average balance of interest
earning assets was comprised of a $3.3 million increase in the average balance
of loans receivable and a $16.2 million increase in the average balance of
investment securities. The increase in the average balance of interest earning
assets is primarily the result of the continued implementation of a wholesale
growth strategy by the Company whereby the Company uses borrowings to fund the
purchase of investments and the origination of loans, as well as offsetting
deposit reductions. The yield reduction is principally the result of mortgage
loan originations occuring at rates below the weighted average yield of the
existing loan portfolio which lowered the total portfolio yield.
Interest income on loans receivable increased $67,000, or 2.5% to $2.7 million
for the three months ended March 31, 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 $3.3 million, or 2.6% to $132.4
million at March 31, 2000, from $129.1 million at March 31, 1999, partially
offset by a reduction in the average yield on loans receivable to 8.25% from
8.26%. The increase in the average balance of loans receivable is primarily
comprised 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
$77,000, or 23.8%, to $403,000 for the three months ended March 31, 2000, from
$326,000 for the three months ended March 31, 1999. The increase in interest
income on mortgage-backed securities resulted generally from an increase in the
average balance on mortgage-backed securities of $4.4 million, combined with an
increase in the average yield on mortgage-backed securities to 6.77% from 6.72%.
Interest income on investment securities, on a tax equivalent basis, increased
$238,000 or 48.2%, for the three months ended March 31, 2000 to $732,000 from
$494,000 for the same period in 1999. The increase resulted primarily from an
increase in the average balance of investment securities of $14.5 million, or
45.8%, to $46.1 million for the three months ended March 31, 2000, combined with
an increase in the tax equivalent yield of investment securities to 6.36% for
the quarter ended March 31, 2000 from 6.25% for the first quarter of 1999. The
increase in average balance resulted from the purchase of investment securities
in connection with the Company's wholesale growth strategy.
-9-
<PAGE>
Interest income on interest-earning deposits decreased $35,000, to $1,000 from
$36,000 for the three months ended March 31, 2000 and 1999, respectively. The
decrease was primarily the result of a decrease of $2.7 million in the average
balance of interest-earning deposits, partially offset by an increase in the
average yield on interest-earning deposits to 5.56% from 5.12%. The increase in
the average yield on interest-earning deposits was principally due to the
increase in the federal funds rate caused by the general rise in interest rates.
Interest Expense
- ----------------
Interest expense for the quarter ended March 31, 2000 increased by approximately
$304,000, or 18.4%, 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 $23.1 million, or 115.5% to $43.1 million for the three months ended March
31, 2000 from $20.0 for the three months ended March 31, 1999, combined with an
increase in the average cost of borrowed funds to 5.84% from 5.47%. These
increases were partially offset by a decrease in the average balance of interest
bearing deposits of $3.1 million, or 2.1% to $143.7 million from $146.8 million
for the periods ending March 31, 2000 and 1999 respectively, and a decrease in
the average cost of interest bearing deposits to 3.70% from 3.77% for the same
periods. 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 was caused by increases in short
term interest rates when comparing the first quarter of 2000 and 1999.
Net Interest Income
- -------------------
Net interest income totaled $1.9 million, on a tax equivalent basis, for the
three months ended March 31, 2000 and 1999. The relative consistency in net
interest income for the quarter ended March 31, 2000, was the result of an
increase of $19.5 million, or 10.7%, in the average balance of interest earning
assets, offset by a decrease in the average yield on interest earning assets to
7.64% from 7.70%, an increase in the average balance of interest bearing
liabilities of $20.0 million, or 12.0%, and an increase in the average cost of
interest bearing liabilities to 4.20% from 3.97%.
Provision for Loan Losses
- -------------------------
The Company maintains an allowance for loan losses based upon a quarterly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio. Loan
loss provisions are based upon management's estimate of the fair value of the
collateral and the Company's actual loss experience, as well as standards
applied by the FDIC. The Company established a provision for possible loan
losses for the three months ended March 31, 2000 of $115,000, as compared to a
provision of $97,000 for the three months ended March 31, 1999. The increase in
provision for loan losses reflects higher net charge-offs for the period as well
as the increased risks associated with the Bank's expanded commercial lending.
The Company's ratios of allowance for loan losses to total loans receivable and
to non-performing loans at March 31, 2000 were .92% and 81.32%, respectively.
Non-interest Income
- -------------------
Non-interest income consists of servicing income, fee income, gain (loss) on
sales of loans and investment securities and other operating income.
Non-interest income decreased approximately $250,000, to $41,000 for the three
months ended March 31, 2000 as compared to $290,000 for the prior year quarter.
Non-interest
-10-
<PAGE>
income, exclusive of securities gains and losses, decreased $11,000, or 4.1%,
for the quarter ended March 31, 2000 as compared to the same period in the prior
year. The decrease in non-interest income, exclusive of securities gains and
losses, is attributable to a reduction 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 deposit service charges and mortgage
servicing fees. Net securities gains (losses) decreased $239,000, from $32,000
to a net loss of $208,000 for the period ending March 31, 2000. These securities
losses were incurred in conjunction with the reorganization of the Company's
earning assets in an effort to improve future profitability.
Non-interest Expense
- --------------------
Non-interest expense increased $973,000, or 60.2%, to $2.6 million for the three
months ended March 31, 2000, as compared to 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 $185,000,
or 11.4% to $1.8 million for the three months ended March 31, 2000 from $1.6
million when compared to the same period in the prior year. This increase was
comprised of a $96,000 increase in salaries and employee benefits, a $26,000
increase in building occupancy, and a $30,000 increase in data processing
expenses.
Income Taxes
- ------------
Income taxes decreased $276,000 to a tax benefit of $156,000 for the quarter
ended March 31, 2000 as compared to the same period in the prior year. This
decrease was directly attributable to a decrease in the Company's pre-tax
income.
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.
-11-
<PAGE>
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- Liability Management Committee which is responsible for reviewing the
Company's assets and liability policies, setting prices and terms on
rate-sensitive products, and monitoring and measuring the impact of interest
rate changes on the Company's earnings. The Committee meets monthly on a formal
basis and reports to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements. The Company does not
have a targeted gap range, rather the Board of Directors has set parameters of
percentage change by which net interest margin and the market value of portfolio
equity are affected by changing interest rates. The Board and management deem
these measures to be a more significant and realistic means of measuring
interest rate risk.
Gap Analysis. At March 31, 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 $21.7 million, representing a cumulative
one-year gap ratio of a negative 10.11%.
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
-12-
<PAGE>
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 -19.22% -22.53%
200 -12.57% -14.92%
150 -9.38% -11.21%
100 -6.24% -7.54%
50 -3.05% -3.71%
Base Case - -
( 50) 2.98% 3.40%
(100) 5.32% 5.88%
(150) 7.20% 6.85%
(200) 8.71% 7.07%
(300) 6.51% 3.39%
-13-
<PAGE>
Part II - Other Information
- ---------------------------
Legal Proceedings
- -----------------
From time to time, the Bank is involved as a plaintiff or defendant in
various legal actions incident to its business. None of these actions
individually or in the aggregate is believed to be material to the
financial condition of the Bank
Changes in Securities
- ---------------------
Not applicable
Defaults upon Senior Securities
- -------------------------------
Not applicable
Other Information
- -----------------
On March 21, 2000 the Board of Directors declared a $.06 cash dividend to
shareholders of record as of March 31, 2000, payable on April 17, 2000.
Exhibits and Reports on Form 8-K
- --------------------------------
None
-14-
<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: May 11, 2000 Thomas W. Schneider
--------------- President, Chief Executive Officer
/s/ James A. Dowd
------------------------------------
Date: May 11, 2000 James A. Dowd
--------------- Vice President, Treasurer
-15-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,514
<INT-BEARING-DEPOSITS> 71
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,991
<INVESTMENTS-CARRYING> 113
<INVESTMENTS-MARKET> 113
<LOANS> 131,386
<ALLOWANCE> 1,210
<TOTAL-ASSETS> 212,828
<DEPOSITS> 154,394
<SHORT-TERM> 22,861
<LIABILITIES-OTHER> 1,087
<LONG-TERM> 15,223
289
0
<COMMON> 0
<OTHER-SE> 18,975
<TOTAL-LIABILITIES-AND-EQUITY> 212,828
<INTEREST-LOAN> 2,732
<INTEREST-INVEST> 1,102
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,834
<INTEREST-DEPOSIT> 1,331
<INTEREST-EXPENSE> 1,960
<INTEREST-INCOME-NET> 1,874
<LOAN-LOSSES> 115
<SECURITIES-GAINS> (208)
<EXPENSE-OTHER> 2,589
<INCOME-PRETAX> (790)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (633)
<EPS-BASIC> (.25)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.64
<LOANS-NON> 1,488
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,150
<CHARGE-OFFS> 60
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,210
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
