Pathfinder Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Pathfinder is a bank holding company whose primary business is its wholly owned subsidiary, Pathfinder Bank. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Third-quarter earnings: Net income attributable to Pathfinder was $3.4 million, up 128% from $1.5 million a year earlier. Basic and diluted EPS were $0.56, versus $0.25.
- Nine-month earnings: Net income attributable to Pathfinder was $8.5 million, up 70% from $5.0 million; EPS was $1.43 versus $0.85.
- Interest income and margins: Q3 net interest income was $9.8 million, up 17.8%; net interest margin rose to 3.31% from 3.01%. For nine months, net interest income was $28.6 million, up 20.4%, and margin was 3.19% versus 2.93%.
- Credit provision and asset quality: Provision for loan losses was $0.1 million in Q3 and $2.1 million for nine months, compared with $1.7 million and $3.9 million, respectively, in 2020. Allowance for loan losses was $14.1 million, or 1.78% of loans. Nonperforming loans were $8.8 million (1.11% of loans), down from $21.3 million (2.58%) at year-end 2020. Potential problem loans increased to $37.4 million from $23.2 million.
- Operating costs and taxes: Noninterest expense rose 9.5% to $6.8 million in Q3 and 11.4% to $20.3 million for nine months. Effective tax rates were 23.2% for Q3 and 22.2% year to date; the filing cites higher pretax income and New York tax legislation as factors.
- Balance sheet at September 30: Total assets were $1.262 billion, up 2.8% from December 31, 2020. Deposits were $1.046 billion, up 5.1%; noninterest-bearing deposits were $206.2 million. Cash and cash equivalents totaled $75.2 million. Loans receivable, net, were $774.1 million; investment securities totaled about $337.9 million.
- Debt and equity: Short-term borrowings were zero, versus $4.0 million at year-end; long-term borrowings were $67.1 million, down from $78.0 million, and subordinated loans were $29.5 million, down from $39.4 million. Pathfinder shareholders’ equity was $106.3 million, plus $0.3 million of noncontrolling interest. The Bank reported regulatory capital ratios above minimum requirements, including a 14.17% Tier 1 risk-based ratio and a 9.21% Tier 1 leverage ratio.
- Cash flow and liquidity: Nine-month operating cash flow was $15.7 million; investing activities used $8.4 million and financing activities provided $24.5 million. Cash increased $31.8 million to $75.2 million. Management reported compliance with liquidity policy; approximately $78.8 million remained available on credit lines at quarter-end.
Changes versus comparable periods
- Profitability improved as higher interest income, lower funding costs, and a smaller loan-loss provision more than offset higher operating expenses and taxes. Q3 return on average assets rose to 1.07% from 0.50%; the nine-month measure rose to 0.90% from 0.58%.
- Loan balances declined from year-end, principally as PPP loans were forgiven; commercial loans fell while residential mortgages increased. The Bank had $27.3 million of PPP loans outstanding at September 30, down from $60.6 million at December 31, 2020.
- Deposits and securities grew, while borrowings declined. Management said elevated noninterest-bearing and consumer deposit balances may be transitory and could return toward historical levels.
- On June 28, 2021, the Company converted all 1,380,283 Series B preferred shares into an equal number of newly created Series A non-voting common shares.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management said a prolonged low-rate environment could reduce future net interest margin as asset yields decline. COVID-19, the Delta variant, economic conditions, deposit outflows, credit quality, collateral values, interest rates, competition, regulation, and cybersecurity are identified risks.
- In September, the Company redesignated a $40 million interest-rate cap as a freestanding derivative after the associated funding strategy changed. This resulted in a $157,000 increase in Q3 interest expense; future fair-value changes will flow through earnings until maturity in February 2023.
- Management reported that disclosure controls were not effective at September 30, 2021 because previously disclosed material weaknesses remained in related-party transaction controls and loan authorization, disbursement, and file maintenance. Remediation was underway.
- The Bank had no active COVID-related loan deferrals at quarter-end. It reported $190.2 million of commitments to extend credit and standby letters of credit, including $2.6 million of standby letters of credit. No material adverse legal proceeding was reported.
- Subsequent to quarter-end, the Bank entered a commercial loan participation agreement of up to $15 million and acquired $22.3 million of secured consumer installment loans, primarily collateralized outside its market area.
Important facts for investors to verify
- Whether the rise in potential problem loans and past-due loans signals renewed credit deterioration, and whether the $14.1 million allowance remains adequate.
- Whether elevated deposits persist and how their potential runoff would affect liquidity, funding costs, and loan growth.
- How margin and earnings respond to interest-rate changes, including the cap’s fair-value effects and the repricing of assets and liabilities.
- Progress and testing results for remediation of the two material weaknesses in internal control.
- The performance, credit concentration, and collateral quality of the new loan participations and purchased loan pools.