Pathfinder Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a quarterly report. Pathfinder Bancorp is a community bank holding company operating primarily in Oswego and Onondaga Counties, New York; its principal subsidiary, Pathfinder Bank, gathers deposits and makes commercial, real estate, and consumer loans.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets at year-end | $1.094 billion | $933.1 million |
| Loans receivable, net at year-end | $772.8 million | $613.0 million |
| Total deposits at year-end | $881.9 million | $727.1 million |
| Borrowings and subordinated loans at year-end | $108.3 million | $133.6 million |
| Shareholders’ equity at year-end | $90.4 million | $64.2 million |
| Net interest income | $28.2 million | $25.8 million |
| Provision for loan losses | $2.0 million | $1.5 million |
| Noninterest income | $4.9 million | $3.8 million |
| Noninterest expense | $25.7 million | $23.5 million |
| Net income attributable to Pathfinder Bancorp | $4.3 million | $4.0 million |
| Net income available to common shareholders | $3.6 million | $4.0 million |
| Basic/diluted EPS | $0.80 / $0.80 | $0.97 / $0.94 |
Net interest margin was 2.98%, down from 3.02%; net interest rate spread was 2.73%, down from 2.85%. Return on average assets was 0.43% versus 0.45%, and return on average equity was 5.34% versus 6.33%. The efficiency ratio improved slightly to 78.75% from 79.04%. Common dividends were $0.24 per share for each year.
Operating cash flow was $8.1 million, investing cash flow was negative $162.8 million, and financing cash flow was positive $148.5 million. Cash and cash equivalents fell $6.2 million to $20.2 million. At year-end the Bank reported $80.1 million of unused availability on credit lines, against approximately $173.2 million of total facilities.
Material changes versus 2018
- Assets grew 17.2%; loans receivable, including loans held for sale, increased 26.0% to $781.5 million. Commercial and commercial real estate loans rose 22.5% to $403.6 million; consumer and home-equity loans rose 149.4% to $129.3 million.
- Interest and dividend income rose 20.0%, but interest expense rose 49.6%, primarily reflecting larger and more expensive time-deposit balances. The average cost of interest-bearing liabilities increased to 1.67% from 1.24%.
- Deposits increased $154.8 million, including $95.1 million in brokered deposits and $59.7 million in customer deposits. Brokered deposits were $136.5 million, or 15.5% of deposits, versus $41.4 million, or 5.7%, a year earlier.
- Noninterest income increased 28.2%, helped by a $329,000 securities gain compared with a $182,000 loss in 2018. Noninterest expense grew 9.3%, led by personnel, occupancy, and data-processing costs.
- Net income attributable to the Company increased 6.1%, but common EPS declined as the 2019 preferred-stock placement introduced preferred dividends and participating securities. The Company raised $19.6 million net in a May 2019 private placement of common and Series B preferred stock, and issued a warrant to purchase 125,000 common shares.
Asset quality, capital, and liquidity
- Nonperforming loans increased to $5.2 million from $2.1 million; nonperforming loans were 0.67% of loans versus 0.35%. Nonperforming assets were 0.49% of total assets versus 0.36%. Management cited a newly nonaccrual commercial real estate relationship and said collateral was expected to limit significant losses.
- The allowance for loan losses increased to $8.7 million, but declined to 1.11% of year-end loans from 1.18%; coverage of nonperforming loans fell to 165.25% from 340.13%. Net charge-offs decreased to $603,000 from $1.3 million.
- Potential problem loans, excluding impaired loans, increased to $31.5 million from $14.6 million. Potential problem loans including impaired loans totaled $38.9 million. Past-due loans rose to $16.3 million, or 2.09% of loans, from $11.2 million, or 1.81%.
- The Bank remained “well-capitalized.” Its year-end total risk-based capital ratio was 12.28%, Tier 1 risk-based ratio 11.16%, and Tier 1 leverage ratio 8.20%; each exceeded applicable minimums, including the capital conservation buffer.
- Time deposits due within one year totaled $386.9 million, or 91.8% of certificates of deposit. Management cautioned that deposit retention could require higher-cost replacement funding. Borrowings and subordinated loans totaled $108.3 million, including $15.1 million of subordinated debt.
Outlook, risks, and unusual items
- Management’s strategy is to continue commercial and commercial real estate lending, deepen local customer relationships, emphasize lower-cost transactional deposits, expand in the Syracuse market, grow fee income, and control expense growth. It expected most planned fee-product enhancements to be implemented by the end of the first quarter of 2020 and anticipated opening a Syracuse Southwest branch by year-end 2020. The filing provides no numerical earnings or revenue guidance.
- COVID-19 was identified as a subsequent-event risk that could disrupt local economic and banking activity, weaken borrowers’ ability to repay, and adversely affect operations, financial condition, results, and cash flows. The filing does not quantify the potential impact.
- On January 28, 2020, the Company sold 267 residential mortgage loans classified as held for sale at year-end, with $35.7 million aggregate principal. The sale generated a $370,000 pretax gain and $289,000 of newly capitalized servicing rights, for $659,000 total pretax revenue. Proceeds were intended first to reduce borrowings and/or brokered CDs, then support commercial lending.
- The Company recorded a $136,000 valuation allowance against New York State deferred tax assets, contributing to an increase in the effective tax rate to 21.4% from 11.9%. Adoption of lease accounting added $2.5 million of right-of-use assets and $2.7 million of lease liabilities, with a $239,000 opening retained-earnings adjustment.
- Management identified allowance estimates, deferred taxes, pension obligations, securities impairment, goodwill, and fair values as significant judgment areas. The Bank also held substantial acquired loan pools originated outside its market, including unsecured consumer loans, generally serviced by the originators; management described due diligence and ongoing monitoring procedures.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective internal control over financial reporting and no material weaknesses; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the rise in criticized, past-due, and nonperforming loans continues, and whether the allowance remains adequate as the rapidly expanded loan book seasons.
- Performance and loss experience of purchased consumer and home-equity loan pools, including unsecured exposures and third-party servicing arrangements.
- Deposit stability and refinancing costs as large time deposits mature, and the Company’s increased reliance on brokered funding.
- Post-year-end mortgage-sale proceeds, realized gain, servicing-rights valuation, and use of proceeds; also assess COVID-19 effects not quantified in this filing.
- Common-shareholder earnings and dilution effects from preferred dividends, participating securities, the warrant, and potential preferred-stock conversion.