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, 2001
SEC Exchange Act No. 000-23601
Pathfinder Bancorp, Inc.
(Exact name of Company 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 2,601,495 shares
of the Company's common stock outstanding as of May 11, 2001.
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 - 11
Condition and Results of Operations
PART II OTHER INFORMATION 12
SIGNATURES
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
March 31, 2001 (unaudited) and December 31, 2000
March 31, December 31,
2001 2000
---------------- ---------------
ASSETS
Cash and due from banks $ 4,392,871 $ 3,969,370
Interest earning deposits 91,100 185,973
--------------- --------------
Total cash and cash equivalents 4,483,971 4,155,343
Investment securities 64,054,788 63,758,011
Mortgage loans held-for-sale 765,395 739,772
Loans:
Real estate residential 107,811,700 106,506,162
Real estate commercial 26,702,719 27,367,427
Consumer 2,904,422 3,009,209
Commercial 13,020,175 12,873,143
--------------- --------------
Total loans 150,439,016 149,755,941
Less: Allowance for loan losses 1,335,899 1,273,707
Unearned discounts and origination fees 128,010 120,203
--------------- --------------
Loans receivable, net 148,975,107 148,362,031
Premises and equipment, net 4,529,829 4,611,698
Accrued interest receivable 1,675,872 1,678,589
Other real estate 999,499 884,320
Intangible assets, net 2,578,670 2,657,609
Other assets 5,018,404 4,999,729
--------------- --------------
Total assets $ 233,081,535 $ 231,847,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 155,109,082 $ 151,563,551
Non-interest bearing 9,951,413 9,895,739
---------------- ---------------
Total deposits 165,060,495 161,459,290
Borrowed funds 44,208,500 47,229,500
Other liabilities 2,420,980 2,195,837
---------------- ---------------
Total liabilities 211,689,975 210,884,627
Shareholders' equity:
Common stock, par value $.10 per share;
authorized 9,000,000 shares; issued
2,884,720 shares; and 2,601,495 shares
outstanding for 2001 and 2000, respectively. 288,472 288,472
Additional paid in capital 6,562,758 6,562,085
Retained earnings 17,969,923 17,859,388
Accumulated other comprehensive income 334,767 30,919
Unearned ESOP shares (213,201) (227,230)
Treasury stock, at cost;
283,225 and 283,225 shares, respectively (3,551,159) (3,551,159)
---------------
Total shareholders' equity 21,391,560 20,962,475
---------------- ---------------
Total liabilities and shareholders' equity $ 233,081,535 $ 231,847,102
================ ===============
The accompanying notes are an integral part of the consolidated financial statements
-1-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME For
the three months ended March 31, 2001 and March 31, 2000
(unaudited)
March 31, March 31,
2001 2000
------------- -------------
INTEREST INCOME:
Loans $ 3,133,320 $ 2,720,063
Interest and dividends on investments:
U.S. Treasury and agencies 121,594 209,849
State and political subdivisions 86,591 91,912
Corporate obligations 409,109 358,541
Marketable equity securities 42,899 37,482
Mortgage-backed 362,572 403,044
Federal funds sold and interest-bearing deposits 1,375 830
------------ ------------
Total interest income 4,157,460 3,821,721
INTEREST EXPENSE:
Interest on deposits 1,617,788 1,330,660
Interest on borrowed funds 690,969 628,827
------------ ------------
Total interest expense 2,308,757 1,959,487
------------ ------------
Net interest income 1,848,703 1,862,234
Provision for loan losses 121,183 115,324
------------ ------------
Net interest income after provision for loan losses 1,727,520 1,746,910
------------ ------------
OTHER INCOME:
Service charges on deposit accounts 116,739 114,107
Loan servicing fees 36,124 28,113
Increase in value of Company owned life insurance 39,322 41,322
Net gain (loss) on securities and loans 69,306 (207,494)
Other charges, commission and fees 102,018 76,402
------------ ------------
Total other income 363,509 52,450
------------ ------------
OTHER EXPENSES:
Salaries and employee benefits 759,562 891,626
Building occupancy 230,589 204,282
Data processing expenses 187,550 189,959
Professional and other services 169,518 154,134
Deposit insurance premiums 7,910 8,155
Amortization of intangible asset 78,939 78,939
Other expenses 276,602 483,791
Unusual items -- 578,176
------------ ------------
Total other expenses ,710,670 2,589,062
------------ ------------
Income (loss) before income taxes 380,359 (789,702)
Provision (benefit) for income taxes 113,734 (156,293)
------------ ------------
Net income (loss) $ 266,625 $ (633,409)
============ ============
Net income (loss) per share - basic $ 0.10 $ (0.25)
============ ============-
Net income (loss) per share - diluted $ 0.10 $ (0.25)
============ ============
The accompanying notes are an integral part of the consolidated financial statements
-2-
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001
(unaudited)
Add't
Common Stock Paid in Retained
-------------------
Shares Amount Capital Earnings
--------------------------------------------------------------------------------
Balance, December 31, 2000 $ 2,884,720 $288,472 $6,562,085 $17,859,388
Comprehensive income:
Net Income 266,625
Other comprehensive income,
net of tax
Unealized gains on securities
Unrealized holding gains
arising during period
Reclassification adjustment
for gains
Included in net income
Other comprehensive income,
before tax
Income tax provision
Other comprehensive income,
net of tax
Comprehensive income:
ESOP shares earned 673
Dividends declared
(.06 per share) (156,090)
----- ---- -- ------
Balance, March 31, 2001 $2,884,720 $288,472 $6,562,758 $17,969,923
========== ======== ========== ===========
Accum.
Other Unearned
Comprehensive Compr. ESOP Treasury
Income Income Shares Stock Total
---------------------------------------------------------------------
Balance, December 31, 2000 $ -- $ 30,919 $(227,230) $(3,551,159) $20,962,475
Comprehensive income:
Net Income 266,625 266,625
Other comprehensive income,
net of tax
Unealized gains on securities
Unrealized holding gains
arising during period 437,107
Reclassification adjustment
for gains
Included in net income 69,306
---------
Other comprehensive income,
before tax 506,413
Income tax provision 202,565
---------
Other comprehensive income,
net of tax 303,848 303,848 303,848
---------
Comprehensive income: 570,473
=========
ESOP shares earned 14,029 14,702
Dividends declared
(.06 per share) (156,090)
-------- --------- ---------- --------- ----------
Balance, March 31, 2001 $ -- $334,767 $(213,201) $(3,551,159) $21,391,560
========= ======== ========= =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
-3-
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
March 31, 2001and March 31, 2000
(unaudited)
March 31, March 31,
2001 2000
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 266,625 $ (633,409)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 121,183 115,324
ESOP and other stock-based compensation earned 14,702 403,910
Deferred income tax benefit 62,633 92,205
Proceeds from sale of loans 893,387 --
Originations of loans held-for-sale (849,704) --
Realized loss/(gain) on:
Sale of real estate acquired through foreclosure 15,060 --
Loans (69,306) --
Available-for-sale investment securities -- 207,494
Depreciation 120,401 118,333
Amortization of intangibles 78,939 78,939
(Increase) decrease in surrender value of life insurance (39,322) 4,678
Net amortization of premiums and discounts
on investment securities (4,480) (3,079)
Decrease (increase) in interest receivable 2,717 (54,694)
Net change in other assets and liabilities (20,785) 231,370
------------- -----------
Net cash provided by operating activities 592,050 561,071
------------ -----------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (834,081) (3,098,123)
Proceeds from maturities and principle reductions of
investment securities available-for-sale 1,048,198 477,550
Proceeds from sale of:
Real estate acquired through foreclosure 64,178 --
Available-for-sale investment securities -- 5,297,325
Net increase in loans (928,676) (684,471)
Purchase of premises and equipment (38,532) (75,253)
------------- ------------
Net cash (used in) provided by investing activities (688,913) 1,917,028
------------- -----------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts savings accounts, money
market deposit accounts
and escrow deposits 424,150 409,123
Net increase in time deposits 3,177,055 1,548,583
Proceeds from borrowings, net (3,021,000) (4,796,000)
Cash dividends (154,714) (155,438)
Treasury stock purchased -- (179,750)
------------ ------------
Net cash provided by (used in) financing activities 425,491 (3,173,482)
Increase (decrease) in cash and cash equivalents 328,628 (695,383)
Cash and cash equivalents at beginning of period 4,155,343 4,280,255
------------ -----------
Cash and cash equivalents at end of period $ 4,483,971 $ 3,584,872
------------ ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 2,377,213 $ 1,926,467
Income taxes paid -- --
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $ 194,417 $ 550,335
Decrease in unrealized gains and losses on available
for sale investment securities 506,413 412,540
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $ 156,090 $ 154,258
The accompanying notes are an integral part of the consolidated financial statements
-4-
Pathfinder Bancorp, Inc.
Notes to Financial Statements
(1) Basis of Presentation
The accompanying unaudited financial statements were prepared in accordance
with the instructions for Form 10-Q and Regulation S-X and, therefore, do
not include information for footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. The following material under
the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is written with the presumption that the users
of the interim financial statements have read, or have access to, the
Company's latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2000 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, 2001 and 2000.
Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2001.
(2) Earnings per Share
Basic earnings per share have been computed based upon net income (loss)
for the three months ended March 31, 2001 and 2000, using 2,562,825 and
2,575,073 weighted average common shares outstanding. For the three months
ended March 31, 2001, the calculation of diluted earnings per share
excludes the effect of incremental common stock equivalents aggregating
84,000 shares since they would have been anti-dilutive. 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-
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, 2001, 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, 2001, 1,578,239 shares,
or 60.7%, of the Company's common stock was held by Pathfinder Bancorp,
MHC, the Company's mutual holding company parent and 1,023,256 shares, or
39.3%, 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.
The following discussion reviews the financial condition at March 31, 2001
and the results of operations of the Company for the three months ended
March 31, 2001.
Financial Condition
Assets
Total assets increased approximately $1.2 million, or .5%, to $233.1
million at March 31, 2001 from $231.9 million at December 31, 2000. The
increase in total assets was primarily due to an increase in total loans
receivable of $613,000, or .4%, to $149.0 million at March 31, 2001 from
$148.4 million at December 31, 2000. Cash and cash equivalents increased
$329,000, or 7.9%, to $4.5 million at March 31, from $4.2 million at
-6-
December 31, 2000. Investment securities increased $297,000 or .5%, to
$64.1 million at March 31, 2001 from $63.8 at December 31, 2000.
Liabilities
Total liabilities increased by $805,000, to $211.7 million at March 31,
2001 from $210.9 million at December 31, 2000. The increase is primarily
attributable to a $3.6 million, or 2.2%, increase in deposits, offset by a
decrease in borrowed funds of $3.0 million, or 6.4%.
Shareholders' Equity
Shareholders' equity increased $429,000, or 2.1%, to $21.4 million at March
31, 2001 from $21.0 million at December 31, 2000. The increase in
shareholders' equity is primarily the result of a $304,000 increase in
accumulated other comprehensive income and a $111,000 increase in retained
earnings. The increase in retained earnings is a result of net income of
$267,000 offset by dividends declared of $156,000, during the first three
months of 2001.
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 net income of approximately $267,000 for the three
months ended March 31, 2001, as compared to a net loss of $633,000 for the
same period during 2000. The increase in the Company's first quarter
earnings is primarily the result of a loss recorded during the first
quarter of 2000 in connection with the reorganization of the Company's work
force and balance sheet. The prior year first quarter earnings were
adversely impacted by certain unusual items, totaling approximately
$578,000, and other non-recurring charges totaling approximately $270,000.
Additionally, the Company incurred losses of approximately $195,000 on the
sale of investment securities. The tax benefit of the unusual items
charges, non-recurring charges and securities losses totaled approximately
$241,000 for the quarter ended March 31, 2000.
As a result of the increase in net income between the comparative periods,
annualized return on average assets and return on average shareholders'
equity were .46% and 5.00%, respectively, for the three months ended March
31, 2001 compared to (1.10)% and (12.11)% for the first quarter of 2000.
Earnings/(loss) per share - basic was $.10 for the first quarter of 2001
compared to $(.25) for the same period in 2000.
Interest Income
-7-
Interest income, on a tax-equivalent basis, totaled $4.2 million for the
quarter ended March 31, 2001, as compared to $3.9 million for the quarter
ended March 31, 2000, an increase of $335,000, or 8.7%. The increase
resulted primarily from an increase in the average balance of
interest-earning assets to $214.2 million for the three months ended March
31, 2001 from $202.4 million in the prior year period, combined with an
increase in the yield on average interest-earning assets to 7.85% from
7.65%. The increase in the average balance of interest earning assets was
comprised of an $18.7 million increase in the average balance of loans
receivable, offset by a $6.8 million decrease in the average balance of
investment securities. The increase in the average balance of interest
earning assets is primarily the result of strong demand for residential and
commercial real estate loans, and commercial business loans. The yield
increase is principally the result of the higher yields on commercial loan
originations and general interest rate trends during 2000.
Interest income on loans receivable increased $413,000, or 15.2% to $3.1
million for the three months ended March 31, 2001 as compared to the same
period in the prior year. The increase in interest income on loans resulted
from an increase in the average balance of loans receivable of $18.7
million, or 14.1% to $151.1 million at March 31, 2001, from $132.4 million
at March 31, 2000, combined with an increase in the average yield on loans
receivable to 8.30% from 8.25%. The increase in the average balance of
loans receivable is primarily comprised of originations of one-to-four
family residential mortgages and originations of commercial real estate and
business loans. The increase in the yield on average loans receivable was
attributable to the increase in the average balance of commercial real
estate and business loans which are typically originated at yields greater
than the residential mortgage portfolio.
Interest income on the mortgage-backed securities portfolio decreased by
$40,000, or 10.0%, to $363,000 for the three months ended March 31, 2001,
from $403,000 for the three months ended March 31, 2000. The decrease in
interest income on mortgage-backed securities resulted generally from the
decrease in the average balance on mortgage-backed securities of $2.1
million, or 8.8%, combined with a decrease in the average yield on
mortgage-backed securities to 6.68% from 6.77%.
Interest income on investment securities, on a tax equivalent basis,
decreased $26,000, or 3.6%, for the three months ended March 31, 2001 to
$706,000 from $732,000 for the same period in 2000. The decrease resulted
primarily from the decrease in the average balance of investment securities
of $4.7 million, or 10.2%, to $41.4 million for the three months ended
March 31, 2001, offset by an increase in the tax equivalent yield of
investment securities to 6.82% for the quarter ended March 31, 2001 from
6.36% for the first quarter of 2000. The decrease in the average balance of
investment securities is a result of the Company's liquidity being utilized
to fund loan portfolio growth. As investments are sold, redeemed or mature,
the funds are not reinvested into the securities portfolio.
Interest income on interest-earning deposits remained constant for the
three months ended March 31, 2001 and 2000, respectively. The average yield
on interest-earning deposits increased to 7.33% from 5.56%.
Interest Expense
Interest expense for the quarter ended March 31, 2001 increased by
approximately $349,000, or 17.8%, to $2.3 million from $2.0 million when
compared to the same quarter for 2000. The increase in interest expense for
the period was principally the result of an increase in the average balance
and average cost of time deposits and borrowings. Time deposits increased
$9.5 million, or 13.8%, to $78.6 million for the three months ended March
31, 2001, from $69.1 million for the three months ended March 31, 2000,
combined with an increase in the average cost of time deposits to 6.06%
from 5.32%. The average balance of borrowed funds increased $2.4
-8-
million, or 5.7%, to $45.5 million from $43.0 million for the periods
ending March 31, 2001 and 2000 respectively, combined with an increase in
the average cost of borrowed funds to 6.08% from 5.84%. The increase in the
average cost of interest bearing liabilities is principally the result of
the shorter term liabilities repricing in the relatively higher interest
rate environment in fiscal year 2000.
Net Interest Income
Net interest income totaled $1.9 million, on a tax equivalent basis, for
the three months ended March 31, 2001 and 2000. The relative consistency in
net interest income for the quarter endeds March 31, 2001 and 2000, was the
result of an increase of $11.9 million, or 5.9%, in the average balance of
interest earning assets, combined with a increase in the average yield on
interest earning assets to 7.85% from 7.65%, offset by an increase in the
average balance of interest bearing liabilities of $11.5 million, or 6.2%,
and an increase in the average cost of interest bearing liabilities to
4.66% from 4.20%.
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, 2001 of
$121,000, as compared to a provision of $115,000 for the three months ended
March 31, 2000. The increase in provision for loan losses reflects higher
net charge-offs for the period as well as the increased risks associated
with the Company'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, 2001 were .89% and 66.93%, 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 increased approximately $311,000, to $364,000 for the
three months ended March 31, 2001 as compared to $53,000 for the prior year
quarter. Non-interest income, exclusive of securities gains and losses,
increased $34,000, or 13.2%, for the quarter ended March 31, 2001 as
compared to the same period in the prior year. The increase in non-interest
income is attributable to a $26,000 increase in other charges, commissions
and fees and an $8,000 increase in loan servicing fees. Net gains (losses)
on securities and loans increased $277,000, from a loss of $208,000 in the
first quarter of 2000, to net gains of $69,000 for the 3 month period
ending March 31, 2001. The prior year 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 decreased $878,000, or 33.9%, to $1.7 million for the
three months ended March 31, 2001, as compared to the same period in 2000.
The primary components of this decrease were the recording of certain
unusual items and non-recurring charges of $849,000 by the Company during
the first quarter of 2000. These non-interest expense levels resulted in an
operating expense to total asset ratio of 2.94% and an efficiency ratio of
77.33%.
Income Taxes
-9-
Income taxes increased $270,000 for the quarter ended March 31, 2001 as
compared to the same period in the prior year. This increase was directly
attributable to a $1.2 million increase 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.
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
-10-
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, 2001, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning
assets maturing or repricing in the same period by $25.5 million,
representing a cumulative one-year gap ratio of a negative 10.92%.
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, 2001 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 -15.65% -21.18%
200 -10.01% -13.85%
100 -4.88% -6.75%
Base Case - -
(100) 3.21% 2.97%
(200) 6.09% 4.40%
(300) 6.96% 2.94%
-11-
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
Not applicable
Other Information
On March 20, 2001 the Board of Directors declared a $.06 cash dividend to
shareholders of record as of March 31, 2001, payable on April 16, 2001.
Exhibits and Reports on Form 8-K
None
-12-
SIGNATUARES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PATHFINDER BANCORP, INC.
/s/ Thomas W. Schneider
May 11, 2001 ------------------------------------
Date: --------------- Thomas W. Schneider
President, Chief Executive Officer
/s/ James A. Dowd
May 11, 2001 ------------------------------------
Date: --------------- James A. Dowd
Vice President, Chief Financial Officer
-13-