Pathfinder Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Pathfinder Bancorp is a bank holding company whose primary business is Pathfinder Bank, serving principally Oswego and Onondaga counties in New York. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Amounts below are in millions unless noted.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Interest and dividend income | $10.982 | $10.942 |
| Net interest income | $9.467 | $8.560 |
| Provision for loan losses | $0.102 | $1.028 |
| Noninterest income | $1.603 | $1.845 |
| Noninterest expense | $7.252 | $6.636 |
| Net income attributable to Pathfinder | $2.950 | $2.154 |
| Basic and diluted EPS | $0.49 | $0.36 |
| Net interest margin | 3.06% | 2.85% |
- Return on average assets was 0.90%, up 22 basis points year over year. The effective tax rate was 21.0%, versus 20.6%.
- Operating cash flow was $4.1; investing cash outflow was $47.8; financing cash inflow was $43.8. Cash and cash equivalents ended the quarter at $37.2.
- At March 31, total assets were $1,328.4, loans net of allowance were $842.6, and deposits were $1,114.1. Total liabilities were $1,219.0; Pathfinder shareholders’ equity was $109.1, excluding $0.4 of noncontrolling interest.
- Interest-bearing deposits were $909.3; short-term borrowings were $2.5, long-term borrowings $60.0, and subordinated loans $29.6. Available credit lines totaled approximately $146.9, of which $62.5 was used and $84.4 remained available.
- The allowance for loan losses was $13.0, or 1.52% of loans. Nonperforming loans were $7.9 (0.93% of loans); the allowance was 163.8% of nonperforming loans. Potential problem loans were $42.4.
Material changes and management commentary
- Net income rose $0.8, or 37.0%, year over year. Higher net interest income and a $0.9 reduction in loan-loss provision were principal contributors; lower noninterest income and higher expenses partly offset the gains.
- Net interest income increased $0.9, or 10.6%, as average interest-earning assets grew 3.1% and the average cost of interest-bearing liabilities fell 36 basis points. Average asset yield declined 10 basis points. Management attributed the lower provision primarily to improved qualitative credit factors and economic conditions.
- Loans grew $23.1 and investment securities grew $14.5 from year-end. Deposits increased $58.7; borrowings declined $14.6, with deposit inflows used in part to repay maturing borrowings.
- Noninterest income fell $0.2 year over year, partly because Q1 2021 included a $0.2 gain on land sale and higher marketable-equity gains. Noninterest expense rose $0.6, chiefly from salaries and benefits, including higher salaries and incentive costs.
- Available-for-sale securities incurred $5.8 of gross unrealized holding losses during the quarter; after tax, the decline in other comprehensive income was $3.8. Accumulated other comprehensive loss increased to $5.1, primarily reflecting rising market interest rates. Management said it did not consider individual unrealized security losses to be other-than-temporary impairment. Held-to-maturity securities had a $3.2 fair-value shortfall versus amortized cost at quarter-end.
Outlook, risks, and contingencies
- Management projected full-year 2022 net interest margin of 3.13%–3.18%, based on balance-sheet repricing and market assumptions as of March 31; it cautioned that market conditions can change and the projection is not assured.
- Management said deposit growth may be transitory, reflecting pandemic stimulus, PPP activity, municipal funds, and lower consumer spending; timing of any normalization is uncertain. The filing reported $13.3 of PPP loans remaining at quarter-end, with 152 loans outstanding.
- Key disclosed risks include credit quality and allowance adequacy, interest rates and inflation, regional and national economic conditions, securities-market impairment, competition, regulation, cybersecurity, technology, and COVID-19 effects, including potential impacts from variants.
- The company had $237.2 of commitments to extend credit and standby letters of credit, including $2.7 of standby letters of credit. It reported no material adverse legal proceeding. The Bank met regulatory “well-capitalized” requirements and exceeded required capital ratios, including the conservation buffer.
- CECL was scheduled for adoption January 1, 2023. Management was evaluating models and processes, but had not estimated the adoption impact; it noted the transition could increase credit-loss allowances. The Board declared a $0.09-per-share dividend, paid May 6, 2022.
Most important facts for investors to verify
- Whether deposit balances remain stable and how funding costs respond to changing interest rates, given management’s description of some deposit growth as potentially temporary.
- Credit trends behind the $42.4 of potential problem loans, past-due balances, nonaccrual loans, and the adequacy of the $13.0 allowance.
- The effect of rate changes on securities values and equity, including the unrealized losses in available-for-sale securities and the fair-value discount on held-to-maturity securities.
- Actual net interest margin versus management’s 3.13%–3.18% full-year projection, and the assumptions underlying that outlook.
- The eventual CECL allowance and retained-earnings impact, which management had not yet quantified.