Pathfinder Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless stated otherwise. Pathfinder Bancorp is the holding company for Pathfinder Bank, a New York community bank. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $11.043 | $9.669 in Q1 2019 |
| Net interest income | $7.779 | $6.547 in Q1 2019 |
| Provision for loan losses | $1.067 | $0.144 in Q1 2019 |
| Noninterest income | $1.748 | $1.093 in Q1 2019 |
| Noninterest expense | $6.245 | $6.711 in Q1 2019 |
| Net income attributable to Pathfinder | $1.690 | $0.514 in Q1 2019 |
| Net income available to common shareholders; EPS | $1.323; $0.29 basic and diluted | $0.514; $0.12 basic and diluted in Q1 2019 |
| Net interest margin | 3.03% | 2.92% in Q1 2019 |
| Total assets | $1,107.6 | $1,093.8 at December 31, 2019 |
| Loans, net of allowance | $740.9 | $772.8 at December 31, 2019 |
| Total deposits | $899.9 | $881.9 at December 31, 2019 |
| Total equity, including noncontrolling interest | $88.3 | $90.7 at December 31, 2019 |
Cash and cash equivalents were $57.6 million, up $37.4 million from year-end. Operating cash flow was $38.0 million, substantially reflecting proceeds from the January sale of residential mortgage loans. Investing activities used $16.8 million and financing activities provided $16.2 million. The Bank reported $91.4 million of credit lines used and $59.4 million available from approximately $150.8 million of facilities.
At March 31, the Bank’s regulatory capital ratios included total capital to risk-weighted assets of 13.48%, Tier 1 risk-based capital of 12.23%, and Tier 1 capital to adjusted assets of 8.59%. The Bank reported that it exceeded well-capitalized and capital-buffer requirements. Interest-bearing and other borrowings included $8.1 million short-term, $83.3 million long-term, and $15.1 million subordinated debt.
Material changes and drivers
- Net income attributable to Pathfinder rose $1.2 million year over year. Higher net interest income, noninterest income, and lower expenses more than offset the increased loan-loss provision and interest and tax expense.
- Noninterest income increased 59.9%, primarily due to a $0.672 million gain on loan and foreclosed-real-estate sales, chiefly from selling $35.9 million of seasoned residential mortgages in January. The sale reduced period-end loans; commercial loans grew $11.0 million during the quarter.
- The loan-loss provision rose to $1.067 million from $0.144 million. The allowance increased to $9.6 million, or 1.28% of loans, from $8.7 million, or 1.11%, at year-end. Management cited loan growth, higher delinquency and nonaccrual levels, and COVID-19-related economic uncertainty.
- Noninterest expense declined 6.9%, mainly from lower salaries and benefits and lower foreclosed-property costs. Management also suspended most incentive accruals in response to pandemic uncertainty.
- Deposits increased $17.9 million from year-end. Management reported a $42.4 million increase in brokered deposits during the quarter as it built cash reserves amid uncertainty.
- Shareholders’ equity declined $2.4 million, principally due to a $3.9 million after-tax other comprehensive loss. The loss reflected marked depreciation in available-for-sale securities amid COVID-related market disruption and a $1.344 million loss on cash-flow hedges. Management said it did not consider individual securities’ unrealized losses to represent other-than-temporary impairment.
Outlook, risks, and other notable items
- Management provided no quantified earnings or revenue guidance. It said the pandemic’s effects on future revenue, earnings, credit losses, capital, and liquidity were unknown and could persist into the second quarter and beyond.
- By May 15, 2020, the Bank had granted mainly 90-day payment deferrals on 540 loans totaling approximately $142.9 million. It had also received SBA approval for 619 Paycheck Protection Program loans totaling approximately $73.5 million. These are post-quarter developments.
- Management identified risks including borrower distress, rising delinquencies and foreclosures, lower collateral values, further provision expense, pressure on net interest margin from near-zero policy rates, possible dividend reductions if earnings weaken, remote-work cybersecurity exposure, vendor disruption, and higher FDIC premiums.
- COVID-19 disrupted market pricing for securities at quarter-end. Management noted that available quotations for some securities might not reflect values obtainable in normally functioning markets.
- The quarterly common dividend was $0.06 per share; the Board also declared $0.06 per preferred share and per warrant notional share. The filing states the dividend was payable May 8, 2020.
- The Company elected CARES Act relief allowing eligible COVID-related loan modifications to avoid troubled-debt-restructuring treatment. It expected significant further modifications. It was assessing the expected-credit-loss standard (CECL), with adoption scheduled for January 1, 2023.
- There were no material legal proceedings reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent-quarter performance and credit quality of the $142.9 million of deferred loans, including changes in delinquency, nonaccrual, and potential problem loans.
- Whether PPP lending, loan modifications, and economic conditions materially change loan growth, fee income, credit costs, or funding needs.
- Whether securities valuations recover or produce impairment, and how hedge marks and accumulated other comprehensive losses affect equity.
- Net interest margin and funding costs after Federal Reserve rate cuts, including the sustainability of brokered-deposit funding and available borrowing capacity.
- The sustainability of Q1 earnings, which benefited from a one-time mortgage-loan sale gain and lower incentive accruals, and the continuation of the $0.06 quarterly dividend.