Pathfinder Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company is a bank holding company whose primary business is Pathfinder Bank, serving mainly Oswego and Onondaga counties, New York. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
- Q2 earnings: Net income attributable to Pathfinder Bancorp was $3.27 million, up 8.7% from $3.01 million. Earnings per voting share were $0.54 versus $0.50. Six-month attributable net income was $6.22 million, up 20.5%, and EPS was $1.03 versus $0.87.
- Revenue and margins: Q2 net interest income was $9.98 million, down 2.3%; after provision for loan losses it was $9.92 million, up 6.8%. Net interest margin declined to 3.14% from 3.42%. For the first half, net interest income was $19.44 million, up 3.6%, and margin was 3.10% versus 3.13%.
- Credit costs: Q2 provision for loan losses was $59,000 versus $929,000; first-half provision was $161,000 versus $1.96 million. The allowance was $13.08 million, or 1.51% of loans, at June 30.
- Noninterest items: Q2 noninterest income fell 9.6% to $1.30 million; noninterest expense rose 4.4% to $7.15 million. First-half noninterest income fell 11.6% to $2.90 million, while expense rose 6.8% to $14.40 million. Salary and benefit costs were the main expense increase.
- Balance sheet: Total assets were $1.363 billion, up 6.1% from year-end 2021. Gross loans were $866.3 million, up about $33.6 million; deposits were $1.138 billion, up 7.8%. Cash and cash equivalents were $38.3 million. Shareholders’ equity excluding noncontrolling interest declined 2.3% to $107.7 million.
- Debt and capital: Short- and long-term borrowings totaled $75.7 million; subordinated debt was $29.6 million. Pathfinder Bank was reported as well-capitalized, with a 9.49% Tier 1 leverage ratio, 13.52% Tier 1 risk-based ratio, and 14.77% total core capital to risk-weighted assets.
- Cash flow and liquidity: First-half operating cash flow was $7.0 million, investing cash outflow $86.2 million, and financing cash inflow $80.3 million. Financing inflows included $81.5 million of brokered deposits. The company reported $63.5 million of unused capacity on existing credit lines at June 30 and compliance with its liquidity policy.
Material changes versus comparable periods
- Q2 earnings improved mainly because the provision for loan losses fell by $870,000 and interest expense declined; lower interest and dividend income, lower noninterest income, and higher operating expenses partly offset those benefits.
- First-half earnings increased primarily because provision expense fell by $1.80 million and interest expense by $989,000. Average yields on earning assets declined, limiting net interest income growth.
- Rapid first-half 2022 interest-rate increases reduced the fair value of available-for-sale securities. Their fair value was $11.4 million below amortized cost at June 30, compared with $579,000 above cost at December 31, 2021. After-tax accumulated other comprehensive loss increased $8.1 million; management said it did not consider the securities impaired.
- Nonperforming loans were $11.7 million at June 30, up from $8.3 million at year-end, primarily due to one $2.6 million commercial relationship. The company said that loan returned to accrual status in July. Nonperforming loans were lower than the $16.0 million reported at June 30, 2021.
Outlook, commentary, risks, and contingencies
- The filing provides no quantified earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management cited improving economic and asset-quality factors in explaining lower provisions, while stating that credit-sensitive portfolios remain under close review. It also cited inflation and competition as reasons for salary increases and continued to focus on recurring noninterest income.
- Risks identified include credit deterioration and allowance adequacy; market-rate and securities valuation changes; inflation and regional economic conditions; competition; regulatory costs and changes; cybersecurity and technology threats; and continuing or renewed COVID-19 disruptions.
- CECL was scheduled for adoption January 1, 2023. Management was evaluating its impact and said the amount of any allowance change could not yet be estimated.
- Outstanding commitments to extend credit and standby letters of credit totaled $244.9 million. Standby letters alone were $2.9 million. The company reported no legal proceeding expected to have a material adverse effect and no material repurchase claims from FNMA in the periods presented.
Important facts for investors to verify
- Whether loan delinquencies, nonaccrual loans, and the allowance evolve favorably, particularly after the $2.6 million commercial loan returned to accrual in July.
- How rising rates affect net interest margin, deposit pricing and retention, and the fair value or liquidity of securities; review the substantial unrealized securities losses and related hedges.
- Whether deposit growth—especially brokered deposits—remains sustainable and how funding costs compare with asset yields.
- The effect of salary and other expense growth on future profitability, and whether recurring fee income offsets lower service charges and securities-related gains.
- The eventual CECL adoption adjustment and any resulting effect on retained earnings, credit reserves, and capital.
- The filing reports nonperforming loans at 1.35% of loans in its discussion, while a later table gives 1.40%; verify the intended ratio and denominator.