Pathfinder Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Comparisons below are against the corresponding 2020 periods unless otherwise indicated. Amounts are in millions of dollars unless noted.
Business context and financial condition
Pathfinder is a bank holding company whose primary business is Pathfinder Bank, operating mainly in Oswego and Onondaga counties, New York. At June 30, 2021, assets were $1.260 billion, up 2.6% from year-end 2020. Net loans were $820.3 million; deposits were $1.032 billion; and total shareholders’ equity, including noncontrolling interest, was $103.5 million.
- Loans increased $7.6 million from year-end, while investment securities increased $20.8 million to $322.1 million.
- Deposits increased $35.8 million from year-end. Noninterest-bearing deposits rose $21.6 million to $183.7 million.
- Cash and cash equivalents were $41.2 million, compared with $43.5 million at year-end.
- Borrowings totaled $83.7 million, versus $82.1 million at year-end. Subordinated loans declined to $29.5 million after the company redeemed $10.0 million on April 1; management said this would reduce annual interest expense by $625,000 prospectively.
Results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest and dividend income | $12.1 | $10.5 | $23.0 | $21.6 |
| Net interest income | $10.2 | $7.6 | $18.8 | $15.4 |
| Provision for loan losses | $0.9 | $1.1 | $2.0 | $2.2 |
| Noninterest income | $1.4 | $1.5 | $3.3 | $3.3 |
| Noninterest expense | $6.8 | $5.8 | $13.5 | $12.0 |
| Net income attributable to Pathfinder | $3.0 | $1.8 | $5.2 | $3.5 |
| EPS, voting common, basic and diluted | $0.50 | $0.31 | $0.87 | $0.60 |
| Net interest margin | 3.42% | 2.75% | 3.13% | 2.88% |
| Return on average assets | 0.95% | 0.63% | 0.81% | 0.62% |
Q2 net income rose 65.4%; six-month net income rose 45.4%. Management attributed stronger net interest income primarily to lower funding costs and growth in average earning assets. Q2 interest expense fell 35.6%, while interest and dividend income rose 14.8%. Six-month interest expense declined 31.0%; average earning-asset yield fell 19 basis points, partly offsetting the benefit from lower funding costs.
Noninterest income was broadly flat for the first half. Lower securities-sale gains and lower loan-sale gains were offset by improved marketable-equity results and growth in selected recurring fees. Noninterest expense increased 18.9% in Q2 and 12.3% for the first half, reflecting higher compensation, occupancy, data-processing, professional-services, FDIC, and audit costs. Management linked some cost increases to business growth, branch refurbishments, the return of incentive accruals, and increased internal-control testing.
Operating cash flow was $8.6 million for the first half, investing cash flow was negative $37.7 million, and financing cash flow was positive $26.9 million. Cash and cash equivalents declined $2.3 million to $41.2 million. The company reported $147.4 million of available credit facilities, of which $83.7 million was utilized and $63.7 million remained available; management said it was in compliance with liquidity-policy guidelines. The Bank exceeded regulatory capital requirements, including applicable buffer requirements; its Tier 1 capital-to-assets ratio was 8.83%.
Material changes and unusual items
- Shareholders approved conversion of all 1,380,283 Series B convertible preferred shares into Series A non-voting common shares, effective June 28, 2021. The company reported $0.07 quarterly dividends per voting and non-voting share.
- The allowance for loan losses increased to $14.6 million from $12.8 million at year-end; allowance to total loans was 1.75%, versus 1.55%.
- Nonperforming loans were $16.0 million, or 1.92% of loans, down from $21.3 million, or 2.58%, at year-end. Management attributed the decline mainly to a $7.4 million commercial real estate loan returning to accruing status after six months of timely payments.
- Past-due loans rose to $19.8 million, or 2.36% of loans, from $15.3 million, or 1.85%, at year-end. The increase included $3.4 million related to one commercial borrower. Potential problem loans rose to $32.4 million from $23.2 million.
- PPP loans outstanding were $53.6 million at quarter-end. The Bank had originated 1,177 PPP loans totaling $111.7 million since the program began; $58.1 million had been forgiven. Q2 included $735,000 of deferred PPP fee income recognition.
- The filing reported no active pandemic-related loan deferrals at June 30, 2021. It also reported no material adverse legal proceeding.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management cautioned that a prolonged low-rate environment could reduce net interest margin as earning-asset yields decline. It also noted uncertainty around the economic effects of COVID-19, including the Delta variant, and the possible impact on borrower performance, collateral values, credit losses, liquidity, and earnings. Management considered the allowance adequate but said credit-sensitive portfolios would continue to be monitored.
New York tax legislation may increase future tax expense; management did not expect the potential increases to be material. The company was still assessing CECL, scheduled for adoption January 1, 2023, and said the impact could not yet be estimated. Off-balance-sheet commitments to extend credit and standby letters of credit totaled $196.4 million; standby letters alone were $2.6 million.
Management concluded disclosure controls and procedures were not effective at June 30, 2021 because previously disclosed material weaknesses remained in related-party transaction controls and loan authorization, disbursement, and file maintenance. Remediation efforts were underway, but management had not yet established that the weaknesses were resolved.
Most important facts for investors to verify
- Whether the elevated past-due and potential-problem-loan balances lead to further nonaccruals, charge-offs, or provision expense.
- Whether the returned-to-accrual $7.4 million commercial real estate loan continues to perform, and the status of other large or classified credits.
- How loan growth, PPP forgiveness and fee recognition, and deposit mix affect recurring net interest income and margin.
- Whether expense growth moderates and whether the company completes and tests remediation of the disclosed material weaknesses.
- The eventual effects of CECL adoption and New York tax changes, and the sensitivity of liquidity and earnings to interest rates and renewed pandemic disruption.