Pathfinder Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Pathfinder is a bank holding company operating primarily through Pathfinder Bank in Central New York.
Financial performance and position
- Q2 earnings: Net income attributable to Pathfinder was $607,000, down 35.8% from $945,000 a year earlier. Net income available to common shareholders was $492,000, or $0.11 per basic and diluted share, versus $945,000 and $0.23/$0.22 per share. Return on average assets was 0.25%, down 18 basis points.
- First-half earnings: Net income attributable to Pathfinder was $1.121 million, down 42.5% from $1.949 million. Common earnings were $1.003 million, or $0.23 per basic and diluted share, versus $1.949 million and $0.47/$0.46. Return on average assets was 0.23%, down 21 basis points.
- Net interest and margins: Q2 net interest income rose 3.7% to $6.706 million, but after provision for loan losses fell 1.2% to $6.096 million. Q2 net interest margin declined to 2.90% from 3.07%. First-half net interest income rose 3.1% to $13.253 million; after provision it increased 4.6% to $12.499 million. First-half margin declined to 2.91% from 3.05%.
- Other income and expenses: Q2 noninterest income increased 19.0% to $1.219 million, partly reflecting securities gains. Noninterest expense rose 6.7% to $6.539 million. First-half noninterest income rose 20.5% to $2.312 million, while expenses increased 14.4% to $13.250 million. First-half pretax income was $1.561 million versus $2.283 million.
- Balance sheet at June 30: Assets were $1.013 billion, up 8.6% from year-end 2018. Loans, net, were $685.0 million, up $72.0 million; deposits were $808.6 million, up $81.6 million. Cash and cash equivalents were $50.3 million, versus $26.3 million at year-end. Investment securities totaled about $213.4 million, down from about $232.0 million.
- Funding and capital: Short- and long-term borrowings totaled $89.4 million, down from $118.5 million at year-end; subordinated loans were $15.1 million. Shareholders’ equity, excluding noncontrolling interest, increased to $87.6 million from $64.2 million, substantially reflecting the May private placement. The Bank was described as well-capitalized; its June 30 Tier 1 leverage ratio was 7.90%, Tier 1 risk-based capital ratio 11.17%, and total capital ratio 12.30%.
- Cash flow: First-half operating cash flow was $3.1 million; investing cash outflow was $51.3 million, driven mainly by $73.4 million of net loan growth; financing cash inflow was $72.3 million. Ending cash and cash equivalents were $50.3 million.
Material changes and management commentary
- On May 8, the Company raised $20.8 million gross, or $19.6 million net, through a private placement: common shares, Series B convertible perpetual preferred shares, and a warrant. Management said proceeds would strengthen the balance sheet and Bank regulatory capital, support organic growth, and fund general corporate purposes. Preferred shares and the warrant participate in common dividends; the warrant covers 125,000 shares at $14.25 and expires in 2026. The transaction also introduced potential dilution and ownership/conversion limits.
- Loan growth was concentrated in commercial and consumer lending. Average interest-earning assets and yields increased, but higher funding costs—especially time-deposit costs—compressed margins. Management cited competition for deposits and expansion, including new locations in Onondaga and Oneida counties.
- Q2 provision for loan losses rose to $610,000 from $297,000, including a $176,000 specific reserve for a commercial relationship. First-half provision declined to $754,000 from $910,000. The allowance was $7.825 million, or 1.13% of loans, compared with $7.306 million, or 1.18%, at year-end.
- First-half expenses included approximately $197,000 of one-time severance payments and elevated costs related to a foreclosed commercial property that was sold in February. The Company also recorded a $136,000 first-quarter tax charge for a New York deferred-tax-asset valuation allowance; the first-half effective tax rate was 27.8%.
- Available-for-sale securities had $896,000 of gross unrealized losses at June 30, compared with $4.172 million at year-end. Management reported no securities considered other-than-temporarily impaired and said it did not intend, nor was it more likely than not required, to sell the identified loss-position securities before recovery.
Credit, liquidity, outlook, and risks
- Nonperforming loans were $3.755 million, or 0.54% of loans, versus $2.148 million, or 0.35%, at year-end. Total loans past due were $17.0 million, up from $11.2 million; the filing attributes increases in older delinquencies primarily to several commercial real estate and commercial and industrial loans. Management characterized overall asset-quality metrics as stable, while noting nonperforming assets had risen to $4.346 million from $3.321 million at year-end.
- Potential problem loans totaled $14.4 million, slightly below year-end. One residential real estate loan was modified as a troubled debt restructuring during the first half; no recently restructured loans had subsequently defaulted in the period.
- Liquidity included $50.3 million in cash and approximately $87.1 million of available credit capacity; $89.4 million of facilities were utilized or encumbered. Deposits included increased brokered funding. Management reported compliance with its liquidity policy and said cash was positioned partly for anticipated loan fundings in the second half of 2019.
- No specific earnings or financial guidance was provided. Management expects to reinvest securities-sale proceeds in potentially higher-yielding assets and said loan growth opportunities remain. These are forward-looking expectations, not guarantees.
- Key risks identified include credit quality and allowance adequacy, interest-rate and economic changes, securities-market impairment, deposit competition and funding costs, regulatory requirements, cybersecurity and technology risks, and reliance on economic conditions in the Bank’s Central New York markets. The Company expects the forthcoming credit-loss standard to increase allowances; the effective date for smaller reporting companies was under proposed extension to 2023 at the time of filing, subject to final action.
- The Company reported $140.4 million in off-balance-sheet commitments to extend credit and standby letters of credit, including $2.2 million of standby letters. It reported no material adverse legal proceeding and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth can be sustained without further deterioration in delinquencies, nonperforming loans, or credit-loss provisions.
- How rising time-deposit and other funding costs affect net interest margin, earnings, and reliance on brokered deposits.
- The final terms, regulatory capital treatment, dividend obligations, conversion limits, and dilution implications of the Series B preferred shares and warrant.
- Whether management’s planned reinvestment of securities-sale proceeds and second-half loan funding needs support returns and liquidity.
- The eventual impact and adoption timing of the expected credit-loss accounting standard, including the increase in allowance management anticipates.