Pathfinder Bancorp, Inc. — Q1 2021 Form 10-Q
Business context and period: Pathfinder Bancorp is a bank holding company whose primary business is Pathfinder Bank, serving markets centered on Oswego and Onondaga counties in New York. This unaudited filing covers the three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020 unless noted. Amounts below are in millions unless otherwise stated.
Financial performance and position
- Earnings: Net income attributable to Pathfinder was $2.154 million, up 27.5% from $1.690 million in Q1 2020. Diluted and basic EPS were both $0.36, versus $0.29. Net income available to common shareholders was $1.609 million.
- Interest income and margin: Net interest income rose 10.0% to $8.560 million, as interest expense fell $0.882 million, more than offsetting a $0.101 million decline in interest and dividend income. Net interest margin narrowed to 2.85% from 3.03%; average earning-asset yield fell 67 basis points, while average interest-bearing-liability cost fell 52 basis points.
- Other income and expenses: Noninterest income increased 5.5% to $1.845 million, including $0.234 million of marketable equity gains and a $0.201 million gain on sale of premises and equipment. Noninterest expense rose 6.3% to $6.636 million. Pre-tax income was $2.741 million; income tax expense was $0.549 million and the effective tax rate was 20.6%.
- Cash flow: Operating activities provided $3.273 million, compared with $37.995 million in Q1 2020. Investing activities used $72.001 million, largely for securities purchases and loan growth; financing activities provided $77.232 million, primarily from deposit growth. Cash and cash equivalents ended at $51.968 million, up $8.504 million during the quarter.
- Balance sheet and funding: Total assets were $1.307 billion, up 6.5% from year-end. Net loans were $851.614 million, up 4.8%; total deposits were $1.069 billion, up 7.3%. Shareholders’ equity was $99.939 million, excluding $0.304 million noncontrolling interest. Period-end borrowings included $4.020 million short-term and $82.480 million long-term borrowings, plus $39.443 million in subordinated loans.
- Liquidity and capital: The company reported $146.7 million of credit available under existing facilities, of which $86.5 million was utilized and $60.2 million remained available. Pathfinder Bank exceeded regulatory minimums, reporting a 12.22% Tier 1 risk-based capital ratio and an 8.49% Tier 1 leverage ratio at March 31.
- Credit quality: The allowance for loan losses was $13.693 million, or 1.58% of loans, versus $12.777 million and 1.55% at year-end. Nonaccrual loans were $21.343 million, versus $21.333 million at year-end and $4.666 million a year earlier. Nonperforming loans were 2.47% of loans, compared with 2.58% at year-end and 0.62% a year earlier; allowance coverage of nonperforming loans was 64.16%.
Material changes versus comparable periods
- Year-over-year earnings improved primarily because deposit and borrowing costs declined, while average interest-earning assets grew. Loan yields were pressured by lower market rates and relatively low-yielding PPP loans.
- Assets and deposits expanded. Q1 loan growth included increases in commercial and consumer lending, including a $17.1 million purchase of secured consumer installment loans; PPP balances were $71.9 million at quarter-end.
- Credit indicators were substantially weaker than a year earlier: nonaccrual loans increased by $16.7 million, mainly from commercial loans. Compared with December 31, 2020, nonperforming loans declined modestly, but total past-due loans increased to $17.4 million from $15.3 million.
- Noninterest income included larger marketable-equity gains and a property-sale gain, but lower loan-sale gains than in Q1 2020, when the company sold $35.9 million of seasoned residential mortgages.
- Management attributed some higher professional-services and audit/exam costs to first-year internal-controls testing under FDICIA requirements for institutions with assets above $1 billion and pandemic-related expenses; it did not expect those categories’ Q1 levels to represent the remaining quarters of 2021.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing gives no numerical earnings or balance-sheet guidance and cautions that Q1 results are not necessarily indicative of full-year results. Management said the effects of the pandemic and low-rate environment on credit performance and net interest margin remained uncertain.
- COVID-19 accommodations: At March 31, 17 loans totaling $8.4 million remained in payment deferral, including $7.6 million of commercial loans. Six commercial loans totaling $6.2 million were also nonaccrual. Management cited pandemic developments, reopening, unemployment, collateral values, and borrower repayment capacity as key uncertainties.
- Control weakness: Management concluded disclosure controls and internal control over financial reporting were not effective at March 31 because two previously reported material weaknesses remained: related-party transaction controls and loan authorization, disbursement, and file-maintenance controls. Remediation efforts were underway.
- Subsequent debt redemption: On April 1, 2021, the company redeemed $10.0 million of subordinated debt bearing 6.25% interest. Management estimated the redemption would reduce annual interest expense by $625,000 prospectively.
- Tax and accounting: New York State tax legislation enacted after quarter-end may increase future tax expense; management did not expect the potential increase to be material. CECL adoption was scheduled for January 1, 2023; the company was still evaluating its impact, which it could not yet estimate.
- Other exposures: Outstanding commitments to extend credit and standby letters of credit totaled $180.1 million. Standby letters of credit alone were $2.4 million. The filing reported no legal proceedings expected to have a material adverse effect.
Most important facts for investors to verify
- Whether nonaccrual and past-due loan trends, particularly in commercial real estate and commercial lending, stabilize and whether the allowance remains adequate.
- How much earnings improvement is sustainable after separating lower funding costs from equity-security and property-sale gains, and how the redeemed subordinated debt affects subsequent interest expense.
- Whether loan growth and deposit inflows persist, and whether liquidity remains adequate if deposits or brokered funding decline.
- Progress in remediating the two material weaknesses and whether management can later demonstrate effective controls.
- Actual results of the remaining COVID-19 deferrals, PPP forgiveness collections, and the eventual CECL transition impact.