Pathfinder Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2020. Pathfinder is a bank holding company whose primary business is Pathfinder Bank, serving principally Oswego and Onondaga counties in New York. Unless otherwise noted, financial amounts below are in millions.
Financial performance and position
- Q2 earnings: Net income attributable to Pathfinder was $1.84 million, versus $0.61 million a year earlier; diluted EPS was $0.31 versus $0.11. Return on average assets was 0.63%.
- First-half earnings: Net income attributable to Pathfinder was $3.53 million, versus $1.12 million; diluted EPS was $0.60 versus $0.23. Return on average assets was 0.62%.
- Net interest: Q2 net interest income was $7.64 million, up 13.9%; after loan-loss provision it was $6.49 million, up 6.5%. Q2 net interest margin was 2.75%, down 15 basis points year over year. For the first half, net interest income was $15.42 million, up 16.3%, and margin was 2.88%, down 3 basis points.
- Credit provision: Provision for loan losses was $1.15 million in Q2 and $2.21 million in the first half, compared with $0.61 million and $0.75 million, respectively, in 2019. The allowance was $10.55 million, or 1.31% of loans, at June 30.
- Noninterest items: Q2 noninterest income was $1.53 million, up 25.6%, while noninterest expense was $5.76 million, down 11.9%. First-half noninterest income was $3.28 million, up 41.8%, and expense was $12.00 million, down 9.4%.
- Balance sheet: Total assets were $1.17 billion, up 6.7% from December 31, 2019. Net loans were $795.5 million; deposits were $970.6 million, up 10.1%; and total equity was $92.6 million, including $0.3 million of noncontrolling interest.
- Liquidity and funding: Cash and cash equivalents were $45.1 million, up from $20.2 million at year-end. The Bank reported $137.7 million of total credit availability and $62.3 million undrawn. Borrowings were $75.4 million, down from $93.1 million.
- Cash flow: First-half operating cash flow was $40.3 million, investing cash outflow was $85.9 million, and financing cash flow was $70.5 million. Cash increased $25.0 million to $45.1 million.
- Capital: The Bank reported it met all regulatory minimums, including capital conservation buffer requirements, and was well-capitalized. Its Tier 1 capital-to-assets ratio was 8.17%; total core capital to risk-weighted assets was 12.64%.
Material changes versus comparable periods
- Q2 earnings growth reflected higher net interest income, lower funding costs and expenses, and higher securities-sale gains. These gains were partly offset by a larger credit-loss provision and a $0.72 million loss on marketable equity securities.
- First-half net interest income benefited from loan and earning-asset growth and lower interest expense. Lower asset yields and increased provision expense tempered the improvement.
- Loans grew, notably from $73.8 million of Paycheck Protection Program (PPP) lending. Net loans also reflected the January sale of $35.9 million of residential mortgages, which generated a reported gain of approximately $0.66 million.
- Asset quality weakened: nonaccrual loans rose to $8.4 million from $5.2 million at year-end; nonperforming loans were 1.04% of loans versus 0.67% at year-end. Past-due loans were 3.19% of loans, compared with 2.09% at year-end.
Outlook, risks and unusual items
- Management provided no quantified earnings or financial guidance. It said COVID-19’s effects on future revenue, earnings, credit losses, capital and liquidity remained unknown.
- The Bank granted payment deferrals, primarily for 90 days, on 556 loans totaling approximately $145.6 million through June 30. Management expected elevated deferral requests to continue; subsequent collectability depends on economic conditions and borrower recovery. Qualifying COVID-related modifications were not treated as troubled debt restructurings under applicable relief.
- The Bank originated 680 PPP loans totaling approximately $73.8 million through June 30. PPP loans carry a 1% interest rate and are 100% SBA-guaranteed, subject to program terms and potential forgiveness.
- COVID-19, near-zero interest rates, unemployment, borrower and collateral deterioration, and loan concentrations could increase credit losses and pressure net interest margin. Other identified risks include reduced customer activity, cyber and vendor risks from remote operations, higher deposit insurance costs, and possible dividend reductions if earnings materially decline.
- Unusual securities activity affected results: Q2 included $1.02 million of net investment-security gains and a $0.72 million marketable-equity loss. A restructured investment became publicly traded and was marked to market, producing a reported $1.2 million Q2 loss; its June 30 fair value was $0.92 million. Management said it believed the investment was fundamentally sound and could be held indefinitely.
- The Board declared a quarterly dividend of $0.06 per common and preferred share, payable August 14, 2020. Management said the allowance was adequate at quarter-end but emphasized that estimates could change significantly as pandemic-related information develops.
Important facts for investors to verify
- Whether loan deferrals expire without renewed relief and whether delinquency, nonaccrual and criticized-loan balances continue to rise.
- Whether the $10.55 million loan-loss allowance adequately reflects pandemic-related risk, especially in commercial real estate and commercial lending.
- How much reported earnings depended on securities and loan-sale gains, equity-security valuation changes, PPP-related fee income, and capitalized loan-origination costs.
- Whether deposit growth and available borrowing capacity remain sufficient to support liquidity needs, and how funding costs evolve.
- Whether lower interest rates further compress net interest margin and affect the sustainability of earnings and dividends.
- Management’s assessment of the listed investment’s valuation and the potential volatility from future market-price changes.