SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001
SEC Exchange Act No. 000-23601
Pathfinder Bancorp, Inc.
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(Exact name of Company as specified in its charter)
Federal
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(State or jurisdiction of incorporation or organization)
16-1540137
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(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
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(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,601,495 shares
of the Company's common stock outstanding as of August 10, 2001.
PATHFINDER BANCORP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
o Consolidated Balance Sheet 1
o Consolidated Statements of Income 2-3
o Consolidated Statements of Shareholders' Equity 4
o Consolidated Statements of Cash Flows 5
o Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7-11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market 12-13
Risk
PART II OTHER INFORMATION 14-15
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
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 2001 (unaudited) and December 31, 2000
June 30, December 31,
2001 2000
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ASSETS
Cash and due from banks $4,678,825 $3,969,370
Interest earning deposits 4,062,817 185,973
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Total cash and cash equivalents 8,741,642 4,155,343
Investment securities 59,587,880 63,758,011
Mortgage loans held-for-sale 1,737,371 739,772
Loans:
Real estate residential 107,192,669 106,506,162
Real estate commercial 27,029,079 27,367,427
Consumer 3,103,151 3,009,209
Commercial 13,549,831 12,873,143
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Total loans 150,874,730 149,755,941
Less: Allowance for loan losses 1,546,615 1,273,707
Unearned discounts and origination fees 64,940 120,203
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Loans receivable, net 149,263,175 148,362,031
Premises and equipment, net 4,530,364 4,611,698
Accrued interest receivable 1,575,374 1,678,589
Other real estate 1,043,157 884,320
Intangible assets, net 2,499,732 2,657,609
Other assets 6,442,969 5,507,422
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Total assets $235,421,664 $232,354,795
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $157,829,756 $151,563,551
Non-interest bearing 11,445,977 9,895,739
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Total deposits 169,275,733 161,459,290
Borrowed funds 42,075,500 47,229,500
Other liabilities 2,780,068 2,703,530
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Total liabilities 214,131,301 211,392,320
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 6,567,978 6,562,085 Retained
earnings18,17,859,388
Accumulated other comprehensive income 10,212 30,919
Unearned ESOP shares (199,177) (227,230)
Treasury stock, at cost; 283,225 shares (3,551,159) (3,551,159)
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Total shareholders' equity 21,290,363 20,962,475
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Total liabilities and shareholders' equity $235,421,664 $232,354,795
============ ============
The accompanying notes are an integral part of the consolidated financial statements
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2001 and June 30, 2000
(unaudited)
June 30, June 30,
2001 2000
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INTEREST INCOME:
Loans $3,092,902 $2,798,442
Interest and dividends on investments:
U.S. Treasury and agencies 116,746 195,896
State and political subdivisions 85,985 91,220
Corporate obligations 382,704 371,663
Marketable equity securities 40,217 37,100
Mortgage-backed 333,714 366,961
Federal funds sold and interest-bearing deposits 22,896 731
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Total interest income 4,075,164 3,862,013
INTEREST EXPENSE:
Interest on deposits 1,597,480 1,384,011
Interest on borrowed funds 583,702 607,956
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Total interest expense 2,181,182 1,991,967
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Net interest income 1,893,982 1,870,046
Provision for loan losses 419,028 28,085
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Net interest income after provision for loan losses 1,474,954 1,841,961
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OTHER INCOME:
Service charges on deposit accounts 139,127 107,239
Loan servicing fees 36,093 45,629
Increase in value of Company owned life insurance 41,851 41,322
Net gain (loss) on securities and loans 422,029 (1,756)
Other charges, commission and fees 108,763 84,832
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Total other income 747,863 277,266
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OTHER EXPENSES:
Salaries and employee benefits 727,648 754,296
Building occupancy 196,522 210,299
Data processing expenses 186,606 166,968
Professional and other services 186,006 159,991
Deposit insurance premiums 7,662 7,943
Amortization of intangible asset 78,939 78,939
Other expenses 343,143 310,076
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Total other expenses 1,726,526 1,688,512
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Income before income taxes 496,291 430,715
Provision for income taxes 140,286 129,950
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Net income $356,005 $300,765
======== ========
Net income per share - basic $ 0.14 $ 0.12
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Net income per share - diluted $ 0.14 $ 0.12
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The accompanying notes are an integral part of the consolidated financial statements
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 2001 and June 30, 2000
(unaudited)
June 30, June 30,
2001 2000
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INTEREST INCOME:
Loans $6,226,222 $5,530,273
Interest and dividends on investments:
U.S. Treasury and agencies 238,340 405,745
State and political subdivisions 172,576 183,132
Corporate obligations 791,813 730,204
Marketable equity securities 83,116 74,582
Mortgage-backed 696,286 770,005
Federal funds sold and interest-bearing deposits 24,271 1,561
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Total interest income 8,232,624 7,695,502
INTEREST EXPENSE:
Interest on deposits 3,215,268 2,714,671
Interest on borrowed funds 1,274,671 1,236,783
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Total interest expense 4,489,939 3,951,454
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Net interest income 3,742,685 3,744,048
Provision for loan losses 540,211 143,409
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Net interest income after provision for loan losses 3,202,474 3,600,639
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OTHER INCOME:
Service charges on deposit accounts 255,866 221,346
Loan servicing fees 72,217 61,974
Increase in value of Company owned life insurance 81,173 82,644
Net gain (loss) on securities and loans 491,335 (209,250)
Other charges, commission and fees 210,781 161,234
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Total other income 1,111,372 317,948
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OTHER EXPENSES:
Salaries and employee benefits 1,487,210 1,645,922
Building occupancy 427,111 414,581
Data processing expenses 374,156 356,927
Professional and other services 355,524 314,125
Deposit insurance premiums 15,572 16,097
Amortization of intangible asset 157,878 157,878
Unusual items - 578,176
Other expenses 619,745 793,868
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Total other expenses 3,437,196 4,277,574
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Income (loss) before income taxes 876,650 (358,987)
Provision (benefit) for income taxes 254,020 (26,343)
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Net income (loss) $622,630 $(332,644)
======== ==========
Net income (loss) per share - basic $ 0.24 $ (0.13)
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Net income (loss) per share - diluted $ 0.24 $ (0.13)
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The accompanying notes are an integral part of the consolidated financial statements
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001
(unaudited)
Accum.
Common Stock Add't Other Unearned
-------------------- Paid in Retained Comprehensive Compr. ESOP Treasury
Shares Amount Capital Earnings Income Income Shares Stock Total
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $2,884,720 $288,472 $6,562,085 $17,859,388 $ - $30,919 $(227,230) $(3,551,159) $20,962,475
Comprehensive income:
Net Income 622,630 622,630 622,630
Other comprehensive
income, net of tax
Unealized gains on
securities
Unrealized holding
gains arising during
period 456,824
Reclassification
adjustment for gains
Included in net income (491,335)
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Other comprehensive loss,
before tax (34,511)
Income tax provision 13,804
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Other comprehensive loss,
net of tax (20,707) (20,707) (20,707)
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Comprehensive income: 601,923
==========
ESOP shares earned 5,893 28,053 33,946
Dividends declared
(.12 per share) (307,981) (307,981)
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Balance, June 30, 2001 $ 2,884,720 $288,472 $6,567,978 $18,174,037 $ - $10,212 $(199,177) $(3,551,159) $21,290,363
=========== ======== ========== =========== ========= ======= ========= ============ ===========
The accompanying notes are an integral part of the consolidated financial statements
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOWS
June 30, 2001 and June 30, 2000
(unaudited)
June 30, June 30,
2001 2000
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OPERATING ACTIVITIES:
Net income (loss) $ 622,630 $ (332,644)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 540,211 143,409
ESOP and other stock-based compensation earned 33,946 466,815
Deferred income tax expense (benefit) 129,522 (74,890)
Proceeds from sale of loans 8,038,416 566,823
Originations of loans held-for-sale (9,010,664) (601,538)
Realized loss/(gain) on:
Sale of real estate acquired through foreclosure 30,733 343
Loans (25,351) 5,116
Available-for-sale investment securities (444,974) 204,387
Depreciation 237,604 236,210
Amortization of intangibles 157,878 157,878
Increase in surrender value of life insurance (81,173) (36,644)
Net accretion of premiums and discounts
on investment securities (8,524) (7,560)
Decrease (increase) in interest receivable 103,215 (51,306)
Net change in other assets and liabilities (888,411) 152,221
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Net cash (used in) provided by operating activities (564,942) 828,620
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INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (1,043,834) (5,353,725)
Proceeds from maturities and principle reductions of
investment securities available-for-sale 2,936,605 1,193,957
Proceeds from sale of:
Real estate acquired through foreclosure 103,551 83,738
Available-for-sale investment securities 2,696,347 5,300,432
Net increase in loans (1,734,476) (6,960,111)
Purchase of premises and equipment (156,270) (204,243)
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Net cash provided by (used in) investing activities 2,801,923 (5,939,952)
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FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts, savings accounts, money market
deposit accounts
and escrow deposits 5,147,475 1,974,611
Net increase in time deposits 2,668,968 2,135,671
Net (repayments)/proceeds from borrowings (5,154,000) 1,431,000
Cash dividends (313,125) (309,696)
Treasury stock purchased -- (179,750)
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Net cash provided by financing activities 2,349,318 5,051,836
Increase (decrease) in cash and cash equivalents 4,586,299 (59,496)
Cash and cash equivalents at beginning of period 4,155,343 4,280,255
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Cash and cash equivalents at end of period $8,741,642 $4,220,759
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CASH PAID DURING THE PERIOD FOR:
Interest $4,580,201 $3,924,890
Income taxes paid 359,618 48,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $293,121 $550,335
Decrease in unrealized gains and losses on available
for sale investment securities 34,511 417,737
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $156,090 $157,035
The accompanying notes are an integral part of the consolidated financial
statements 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, 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 and six months ended June 30, 2001 and 2000.
Operating results for the three months and six months ended June 30, 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 has been computed by dividing net income (loss)
for the three months and six months ended June 30, using 2,565,347 and
2,564,165 weighted average common shares outstanding for 2001 and 2,553,341
and 2,556,924 for 2000. Diluted earnings per share for the three months and
six months ended June 30, 2001 and the three month period ending June 30,
2000, has been computed using 2,588,239, 2,574,863 and 2,554,894 weighted
average common shares outstanding, respectively. Due to the loss incurred
by the Company during the first six months of 2000, the impact of
outstanding options is anti-dilutive and, therefore, their impact has not
been included in the diluted earnings per share disclosure for the six
months ended June 30, 2000.
(3) Reclassifications
Certain prior period information has been reclassified to conform to the
current period's presentation. These reclassifications had no affect on net
income as previously reported.
(4) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets" effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill will no longer be amortized, but will be subject to
annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives. The Company
will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the statement is expected to increase
pre-tax income by approximately $316,000 on the Company's annual financial
statements. The Company will perform the first of the required impairment
tests of goodwill as of January 1, 2002 and has not determined what the
effect of these tests will be on the earnings and financial position of the
Company.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
This Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market areas and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
General
Throughout the Management's Discussion and Analysis the term, "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc., Pathfinder Bank,
Pathfinder REIT Inc., and Whispering Oaks Development Corp. At June 30, 2001,
Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Pathfinder
Bank. At June 30, 2001, 1,583,239 shares, or 60.9%, of the Company's outstanding
common stock was held by Pathfinder Bancorp, MHC, the Company's mutual holding
company parent and 1,018,256 shares, or 39.1%, was held by the public.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its loans, investment
securities, federal funds sold and interest-bearing deposits, and its cost of
funds consisting of interest expense on deposits and borrowed funds. The
Company's net income also is affected by its provision for loan losses, non
interest income and non interest expense. Non-interest income is comprised of
service charges on deposit accounts, loan fees, cash surrender value, other
charges, commissions and fees and net securities gain and losses. Non-interest
expense includes salaries and employee benefits, building occupancy, data
processing expenses, professional and other services, amortization of intangible
assets and income taxes. Earnings of the Company are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities. These
events are beyond the control of the Company.
In June 2001, the Company and its mutual holding company parent converted its
charter from a Delaware corporation to a Federal corporation chartered by the
Office of Thrift Supervision. Pathfinder Bank will retain its New York savings
bank charter.
The following discussion presents material changes to the Company's financial
condition and the results of operations for the three and six months ended June
30, 2001 and June 30, 2000.
Financial Condition
Assets
Total assets increased approximately $3.1 million, or 1.3%, to $235.4 million at
June 30, 2001 from $232.3 million at December 31, 2000. The increase in total
assets is primarily attributable to a $3.9 million increase in interest earning
deposits, a $901,000 increase in net loans receivable, a $998,000 increase in
mortgage loans held-for sale and a $936,000 increase in other assets. These
increases were partially offset by a $4.2 million decrease in investment
securities. The increase in loans and interest earning deposits was principally
funded by an increase of $7.8 million in deposits. The increase in net loans
receivable is due to a $348,000 net increase in residential and commercial real
estate loans, a $94,000 increase in consumer loans, and a $677,000 increase in
commercial loans. The increase in other assets is primarily attributable to an
increase in deferred taxes and prepaid expenses.
Liabilities
Total liabilities increased by $2.7 million, to $214.1 million at June 30, 2001
from $211.4 million at December 31, 2000. The increase is primarily attributable
to a $7.8 million, or 4.8%, increase in total deposits, partially offset by a
decrease in borrowed funds of $5.1 million, or 10.9%. The increase in deposits
was comprised of a $3.7 increase million in savings, NOW and money management
deposit accounts, a $2.5 million increase in time deposits and a $1.6 million
increase in checking deposit accounts. The increased deposit levels allowed the
company to reduce its utilization of wholesale funding during the first six
months of the year. The increase in deposit balances can be attributed to the
Company's competitive pricing of time deposit products, active efforts to obtain
additional deposit relationships garnered through expanding commercial lending
relationships, as well as funds moving out of equity markets into fixed income
products.
Liquidity and Capital Resources
Shareholders' equity increased $328,000, or 1.6%, to $21.3 million at June 30,
2001 from $21.0 million at December 31, 2000. The increase in shareholder's
equity is primarily the result of net income of $623,000, partially offset by
dividends declared of $308,000.
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.
Results of Operations
The Company recorded net income of $356,000 and $301,000 for the three months
ended June 30, 2001 and 2000, respectively. The increase in net income of
$55,000, or 18.4%, for the three months ended June 30, 2001, resulted primarily
from an increase in other income of $471,000 and a $24,000 increase in net
interest income, offset by increases in provision for loan losses of $391,000
and operating expenses of $38,000. For the six months ended June 30, 2001, the
Company recorded net income of $623,000 as compared to a net loss of $333,000
for the same period in the prior year. The net loss recorded for the prior year
was the result of expenses associated with 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 the prior year.
The tax benefit of the unusual items charges, non-recurring charges and
securities losses totals approximately $241,000.
Annualized return on average assets and return on average shareholders equity
were .61% and 7.09%, respectively for the three months ended June 30, 2001 as
compared to .55% and 6.26% for the second quarter of 2000. For the six months
ended June 30, 2001, the same performance measurements were .55 % and 6.27%, as
compared to (.30%) and (3.38%) 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 June 30, 2001, as compared to $3.9 million for the quarter ended June 30,
2000, an increase of $205,000, or 5.3%. The increase resulted primarily from an
increase in the average balance of interest-earning assets to $215.9 million
from $201.4 million in the prior period, partially offset by a decrease in the
yield on average interest-earning assets to 7.59% from 7.73%. The increase in
the average balance of interest earning assets was comprised of a $16.2 million
increase in the average balance of loans receivable, and a $2.4 million increase
in the average balance of interest bearing deposits, partially offset by a $4.1
million decrease in investment securities. The yield reduction is principally
the result of mortgage loan originations occurring at rates below the weighted
average coupon of the existing loan portfolio which lowered the total portfolio
yield.
Interest income on loans receivable increased $294,000, or 10.5%, to $3.1
million for the three months ended June 30, 2001, 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 $16.2 million, or 11.9%,
to $151.7 million at June 30, 2001, partially offset by a reduction in the
average yield on loans receivable to 8.14% from 8.29%. The increase in the
average balance of loans receivable is 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 decreased by
$33,000, or 9.1%, to $334,000 for the three months ended June 30, 2001, from
$367,000 for the same period in 2000. The decrease in interest income on
mortgage-backed securities resulted generally from a decrease in the average
balance on mortgage-backed securities of $626,000, combined with the decrease in
the average yield on mortgage-backed securities to 6.29% from 6.73%.
Interest income on investment securities, on a tax equivalent basis, decreased
$76,000, or 10.4% , to $652,000 for the three months ended June 30, 2001, from
$728,000 for the same period in 2000. The decrease resulted primarily from a
decrease in the average balance of investment securities of $3.5 million, or
7.9%, to $40.5 million for the three months ended June 30, 2001, while the tax
equivalent yield of investment securities decreased to 6.45% from 6.62% for the
quarters ended June 30, 2001 and 2000, respectively. The decrease in average
balance resulted from the proceeds from calls and maturities of investment
securities primarily being utilized to fund the Company's loan growth.
Interest income on interest-earning deposits increased $22,000, to $23,000, for
the three months ended June 30, 2001 as compared to the same period in the prior
year. The increase was primarily the result of an increase of $2.4 million in
the average balance of interest-earning deposits, partially offset by a decrease
in the average yield on interest-earning deposits to 3.72% from 3.74%.
Interest income, on a tax equivalent basis, totaled $8.3 million for the six
months ended June 30, 2001, as compared to $7.8 million for the same period in
2000, an increase of $564,000, or 7.3%. The increase resulted primarily from an
increase in the average balance of interest-earning assets of $13.7 million, or
6.8%, combined with an increase in the tax-equivalent yield on interest-earning
assets to 7.74% from 7.71%.
For the six months ended June 30, 2001, interest income on loans receivable
increased $696,000, or 12.6% as compared to the same period in the prior year.
Average loans receivable increased $17.4 million while the yield on average
loans receivable decreased to 8.22% from 8.24%.
For the six months ended June 30, 2001 and 2000, interest income on
mortgage-backed securities was $696,000 and $770,000, respectively, a decrease
of $74,000, or 9.6%. The decrease in the average balance of mortgage backed
securities reflects the increase in prepayments experienced during the first six
months of 2001 in response to the declining interest rate environment. The
proceeds were utilized to fund the Company's loan growth.
For the six months ended June 30, 2001, tax equivalent interest income on
investment securities decreased $75,000, or 5.14%, to $1.4 million compared to
$1.5 million for the same period in 2000. The decrease resulted primarily from a
decrease in the average balance of investment securities of $3.6 million, offset
by an increase in the tax equivalent yield on investment securities to 6.77%
from 6.56%.
Interest income on interest-earning deposits decreased $23,000 to $24,000 for
the six months ended June 30, 2001 as compared to the same period in the prior
year. This increase is principally due to an increase in the average balance of
interest-earning deposits of $1.2 million when compared to the same period in
the prior year.
Interest Expense
Interest expense for the quarter ended June 30, 2001 increased by approximately
$189,000, or 9.5%, to $2.2 million from $2.0 million 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 of interest bearing
deposits of $11.3 million, or 7.8%, to $156.2 million for the three months ended
June 30, 2001 from $144.9 for the three months ended June 30, 2000, and an
increase in the average balance of borrowed funds of $1.5 million, or 3.7%, to
$42.7 for the three months ended June 30, 2001 from $41.2 for the three months
ended June 30, 200. The average cost of interest bearing deposits increased to
4.09% from 3.82%, for the three months ended June 30, 2001 and 2000,
respectively, offset by a decrease in the average cost of borrowed funds to
5.47%, from 5.90%.
For the six months ended June 30, 2001, interest expense increased $538,000, or
13.6%, when compared to the first six months of 2000. The increase in interest
expense for the period was the result of an increase in the average balance of
interest bearing liabilities of $9.4 million, combined with an increase in the
average cost of interest bearing liabilities to 4.51% from 4.17%.
Net Interest Income
Net interest income, on a tax equivalent basis, remained constant for the three
months and six months ended June 30, 2001 at $1.9 million and $3.7 million,
respectively, when compared to the same periods in the prior year.
Net interest margin for the quarter ended June 30, 2001 decreased from 3.78% to
3.55% when compared to the same period in the prior year. For the six months
ended June 30, 2001, net interest margin decreased from 3.78% to 3.57%, when
compared to the same period in the prior year. This is due to the decrease in
the average yield on loans receivable and investment securities, combined with
an increase in the average cost of interest-bearing liabilities.
Provision for Loan Losses
The Company maintains an allowance for loan losses based upon a quarterly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio. Loan
loss provisions are based upon management's estimate of the fair value of the
collateral and the Company's actual loss experience, as well as standards
applied by the FDIC. The Company established a provision for possible loan
losses for the three months ended June 30, 2001 of $419,000, as compared to a
provision of $28,000 for the three months ended June 30, 2000. For the six
months ended June 30, 2001 and 2000, the provision for loan losses was $540,000
and $143,000, respectively. The increase in provision for loan losses is
principally the result of increased loan charge offs, implementation of a more
comprehensive loan review process and management's desire to increase coverage
ratios due to the slowing economy. The Company had non-performing loans of $1.9
million at June 30, 2001. The Company's ratios of allowance for loan losses to
total loans receivable and to non-performing loans at June 30, 2000 were 1.01%
and 81.58%, respectively, as compared to .85% and 50.29% at June 30, 2000.
Non-interest Income
Non-interest income consists of servicing income on deposit accounts, loan fee
income, cash surrender value from Company owned life insurance, gain (loss) on
sales of loans and investment securities and other operating income.
Non-interest income increased approximately $471,000, to $748,000 for the three
months ended June 30, 2001 as compared to $277,000 for the prior year quarter.
The increase in non-interest income is primarily attributable to an increase in
net securities gains and losses of $424,000. Exclusive of net securities gains
and losses, non-interest income increased $47,000, or 17.0%, compared to the
same period in the prior year. This was primarily due to an increase in service
charges on deposit accounts and other fee income.
For the six months ended June 30, 2001, non-interest income increased $793,000,
or 249.5%, compared to the same period in 2000. Non-interest income, exclusive
of securities gains and losses, increased $93,000, or 17.6%, for the six months
ended June 30, 2001 as compared to the same period in the prior year. Net
securities gains (losses) increased $701,000, to a net gain of $491,000 for the
period ending June 30, 2001, as compared to a loss of $209,000 in the prior
year.
Non-interest Expense
Non-interest expense increased $38,000, or 2.3%, to $1.7 million for the three
months ended June 30, 2001, as compared to the same period in 2000. The increase
in non-interest expense is primarily the result of a $26,000, or 16.3%, increase
in professional and other services, a $20,000, or 11.8%, increase in data
processing costs and a $33,000, or 10.7%, increase in other expenses. These
increases were partially offset by a $14,000 decrease in building occupancy
expenses and a $27,000 decrease in salaries and employee benefits. The increase
in professional and other services is primarily a result of legal fees incurred
in connection with the conversion of the Company's charter from the State of
Delaware to that of a Federal Corporation. The increase in data processing
expenses is a result of increased licensing and maintenance charges associated
with the Company's core processing systems and development of internet banking
services.
For the six months ended June 30, 2001, non-interest expense decreased $840,000,
or 19.6%, to $3.4 million as compared to $4.3 million for the same period in
2000. 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
decreased $51,000, or 1.5%, to $3.4 million for the six months ended June 30,
2001 when compared to the same period in the prior year.
Income Taxes
Income taxes increased approximately $10,000, or 8.0%, for the quarter ended
June 30, 2001 as compared to the same period in the prior year. The increase is
primarily a result of an increase in pretax income for the second quarter of
2001.
For the six months ended June 30, 2001 and 2000, income tax expense (benefit)
was an expense of $254,000 and benefit of $26,000, respectively. The increase is
the result of the prior year to date pre-tax loss, as compared to the current
period's net income.
Other Matters
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized, but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of the
statement is expected to increase pre-tax income by approximately $316,000 on
the Company's annual financial statements. The Company will perform the first of
the required impairment tests of goodwill as of January 1, 2002 and has not
determined what the effect of these tests will be on the earnings and financial
position of the Company.
Item 3 - Quantitative and Qualitative Disclosure about Market Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of the Company's assets and liabilities are sensitive to changes in
interest rates. The Company's mortgage loan portfolio, consisting primarily of
loans on residential real property located in Oswego County, is subject to risks
associated with the local economy. The Company's interest rate risk management
program focuses primarily on evaluating and managing the composition of the
Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
The extent to which such assets and liabilities are "interest rate sensitive"
can be measured by an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and that amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to positively affect net interest income. Conversely,
during a period of falling interest rates, a negative gap would tend to
positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Company does not generally maintain in its portfolio fixed interest rate
loans with terms exceeding 20 years. In addition, ARM loans are originated with
terms that provide that the interest rate on such loans cannot adjust below the
initial rate. Generally, the Company tends to fund longer-term loans and
mortgage-backed securities with shorter-term time deposits, repurchase
agreements, and advances. The impact of this asset/liability mix creates an
inherent risk to earnings in a rising interest rate environment. In a rising
interest rate environment, the Company's cost of shorter-term deposits may rise
faster than its earnings on longer-term loans and investments. Additionally, the
prepayment of principal on real estate loans and mortgage-backed securities
tends to decrease as rates rise, providing less available funds to invest in the
higher rate environment. Conversely, as interest rates decrease, the prepayment
of principal on real-estate loans and mortgage-backed securities tends to
increase, causing the Company to invest funds in a lower rate environment. The
potential impact on earnings from this mismatch is mitigated to a large extent
by the size and stability of the Company's savings accounts. Savings accounts
have traditionally provided a source of relatively low cost funding that have
demonstrated historically a low sensitivity to interest rate changes. The
Company generally matches a percentage of these, which are deemed core, against
longer-term loans and investments. In addition, the Company has sought to extend
the terms of its time deposits. In this regard, the Company has, on occasion,
offered certificates of deposits with three and four year terms which allow
depositors to make a one-time election, at any time during the term of the
certificate of deposit, to adjust the rate of the certificate of deposit to the
then prevailing rate for a certificate of deposit with the same term. The
Company has further sought to reduce the term of a portion of its rate sensitive
assets by originating one year ARM loans, five year/one year ARM loans (mortgage
loans which are fixed rate for the first five years and adjustable annually
thereafter), and by maintaining a relatively short term investment securities
(original maturities of three to five years) portfolio with staggered
maturities.
The Company manages its interest rate sensitivity by monitoring (through
simulation and net present value techniques) the impact on its GAP position, net
interest income, and the market value of portfolio equity to changes in interest
rates on its current and forecast mix of assets and liabilities. The Company has
an Asset-Liability Management Committee which is responsible for reviewing the
Company's assets and liability policies, setting prices and terms on
rate-sensitive products, and monitoring and measuring the impact of interest
rate changes on the Company's earnings. The Committee meets monthly on a formal
basis and reports to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements. The Company does not
have a targeted gap range; rather the Board of Directors has set parameters of
percentage change by which net interest margin and the market value of portfolio
equity are affected by changing interest rates. The Board and management deem
these measures to be a more significant and realistic means of measuring
interest rate risk.
Gap Analysis. At June 30, 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 $27.1 million, representing a cumulative
one-year gap ratio of a negative 11.51%.
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 100 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 June 30, 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 -12.31% -21.77%
200 - 7.81% -14.40%
100 - 3.59% - 6.58%
Base Case
-100 1.91% 3.54%
-200 3.24% 3.85%
-300 2.70% 1.48%
Part II - Other Information
Legal Proceedings
From time to time, the Company is involved as a plaintiff or defendant in
various legal actions incident to its business. None of these actions
individually or in the aggregate is believed to be material to the financial
condition of the Company.
Changes in Securities
Not applicable
Defaults upon Senior Securities
Not applicable
Submission of Matters to a Vote of Security Holders
The Company's Meeting of Shareholders was held on April 25, 2001. The following
are the items voted on and the results of the shareholder voting.
1. The election of Steven W. Thomas, Corte J. Spencer and Janette Resnick to
serve as directors of the Company, each for a term of three years or until
his successor has been elected and qualified.
For Against Withheld
--------- ------- --------
Steven W. Thomas 1,928,318 0 160,214
Corte J. Spencer 1,929,085 0 159,447
Janette Resnick 1,929,218 0 159,314
Set forth below are the names of the other directors of the Bank and their
terms of office.
Name Term Expires
---- ---- -------
Chris G. Gagas 2002
Chris R. Burritt 2002
Raymond W. Jung 2002
Bruce E. Manwaring 2003
L. William Nelson 2003
George P. Joyce 2003
2. The ratification of the appointment of Pricewaterhouse Coopers, LLP as
auditors for the fiscal year ending December 31, 2001.
For Against Abstain
--------- --------- -------
Number of Votes 1,922,939 159,314 79
3. The approval of the Plan of Charter Conversion from a Delaware Corporation
to a Federal Corporation.
For Against Abstain
--------- --------- -------
Number of Votes 1,915,592 166,090 650
Other Information
On June 19, 2001, the Board of Directors declared a $.06 cash dividend to
shareholders of record as of June 30, 2001, payable on July 15, 2001.
Exhibits and Reports on Form 8-K
None
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 BANK
---------------
Date:08/10/2001 /s/ Thomas W. Schneider
------------------- ----------------------------------------
Thomas W. Schneider
President, Chief Executive Officer
Date:08/10/2001 /s/ James A. Dowd
------------------- ----------------------------------------
James A. Dowd
Vice President, Chief Financial Officer