Pathfinder Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily with December 31, 2018. Pathfinder is a bank holding company whose principal business is Pathfinder Bank, serving markets in Central New York.
Financial performance and condition
- Income: Net interest and dividend income was $9.7 million, up 17.8% year over year. Noninterest income was $1.1 million, up 22.1%, including $79,000 of net securities gains versus a $107,000 loss a year earlier.
- Profit: Net income attributable to Pathfinder Bancorp was $514,000, down 48.8% from $1.0 million. Diluted EPS was $0.12 versus $0.24. Return on average assets was 0.22%, down 23 basis points.
- Interest performance: Net interest income was $6.5 million, up 2.4%; after the loan-loss provision, it was $6.4 million, up 10.8%. Net interest margin fell 10 basis points to 2.92%, as funding costs rose faster than asset yields. Average earning-asset yield increased to 4.31% from 3.88%; the average cost of interest-bearing liabilities rose to 1.61% from 0.99%.
- Expenses and taxes: Noninterest expense rose 22.9% to $6.7 million, notably salaries and benefits (+$696,000) and foreclosed-real-estate expense (+$211,000). The $251,000 tax provision included a one-time $136,000 valuation allowance against New York State deferred tax assets; the effective tax rate was 33.8% versus 15.8%.
- Assets and lending: Total assets were $975.1 million, up 4.5% from year-end. Net loans were $650.3 million, up 6.1%; the increase included a March purchase of approximately $24.6 million in automobile loans. Securities totaled approximately $234.2 million on the balance sheet, with available-for-sale holdings of $155.3 million and held-to-maturity holdings of $78.9 million.
- Credit quality: The allowance for loan losses was $7.3 million, or 1.11% of loans, compared with 1.18% at year-end. Nonperforming loans were $3.4 million, or 0.51% of loans, versus 0.35% at year-end and 1.06% a year earlier. Total past-due loans increased to $18.1 million, or 2.75% of loans, from $11.2 million and 1.81% at year-end. Management considered the allowance adequate. Potential problem loans were $14.8 million.
- Funding and debt: Deposits were $805.5 million, up $78.5 million from year-end, including growth in customer, municipal and brokered deposits. Brokered deposits rose to $50.5 million from $41.4 million. Short- and long-term borrowings totaled $77.4 million, down from $118.5 million; subordinated loans were $15.1 million.
- Liquidity and cash flow: Cash and cash equivalents were $24.8 million, down $1.5 million from year-end. Operating cash flow was negative $1.6 million, investing cash flow negative $37.3 million, and financing cash flow positive $37.3 million. The Company reported $197.2 million of total credit lines, of which $89.4 million was utilized or encumbered and $107.8 million remained available. Management reported compliance with its liquidity policy.
- Capital: Pathfinder Bank was reported as well capitalized and above regulatory minimums, including the capital conservation buffer. At March 31, the Bank’s total core capital to risk-weighted assets was 12.82%, Tier 1 risk-based capital was 11.70%, and Tier 1 capital to adjusted assets was 8.08%.
Material changes and notable items
- Compared with Q1 2018, net income declined despite higher interest income and lower loan-loss provision, principally because interest expense and noninterest expense each rose about $1.3 million and income taxes increased.
- Higher deposit costs—particularly on time deposits—and higher borrowing costs compressed net interest margin. Management attributed deposit pricing pressure to competition and higher short-term rates.
- Operating expense growth reflected additional staffing and costs associated with expansion into Oneida and Onondaga counties and two new banking locations. Foreclosed-property expense included costs for a commercial property sold in February 2019.
- Unrealized gains on available-for-sale securities improved other comprehensive income by $1.6 million after tax during the quarter. Management said it did not consider securities in unrealized-loss positions to be credit-impaired and did not intend, nor expect to be required, to sell them before recovery.
- The Company adopted lease accounting on January 1, 2019, recording a $2.5 million right-of-use asset and a $2.7 million lease liability, with a $239,000 opening retained-earnings adjustment.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management cautions that quarterly results are not necessarily indicative of full-year results. It cited credit quality and allowance estimates, securities-market impairment, local competition and economic conditions, interest-rate changes, regulation and capital requirements, deposit availability, and cyber and technology risks among factors that could affect results. The Bank’s lending is concentrated largely in Oswego and Onondaga counties; the filing notes that borrowers’ ability to repay depends in part on local economic conditions. The Company reported $145.6 million of outstanding commitments to extend credit and standby letters of credit, including $2.1 million of standby letters of credit. It reported no material adverse legal proceedings.
Subsequent event: On May 8, 2019, the Company completed a private placement of common and Series B convertible preferred shares and a warrant, raising $20.8 million gross and expecting approximately $19.6 million net. It said proceeds would support the balance sheet, Bank regulatory capital, organic growth and general corporate purposes. The preferred shares carry dividend rights matching common shares, have limited voting rights, and are convertible subject to ownership limits and approvals; the warrant covers 125,000 common shares at $14.25 per share and expires in 2026. Castle Creek received a board-representation right subject to ownership thresholds.
Most important facts for investors to verify
- Whether deposit growth, including brokered deposits, can sustainably fund loan growth without further pressure on funding costs and net interest margin.
- Whether the increase in past-due loans and nonperforming loans is temporary, and whether the allowance remains adequate as the portfolio expands.
- How operating expenses, staffing and new-location costs develop after the substantial year-over-year increase.
- The final accounting and regulatory-capital impact of the May private placement, including preferred-stock conversion, warrant dilution, issuance costs and use of proceeds.
- The effect of the New York State deferred-tax valuation allowance and the expected implementation impact of the new credit-loss accounting standard, which management expected to increase the allowance.