Pathfinder Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Pathfinder Bancorp is a bank holding company whose primary business is Pathfinder Bank, serving primarily Oswego and Onondaga counties in New York. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest and dividend income | $8.830 | $7.533 | $25.555 | $21.487 |
| Net interest income | $6.396 | $6.003 | $19.256 | $17.081 |
| Provision for loan losses | $0.291 | $0.420 | $1.201 | $1.232 |
| Noninterest income | $0.940 | $0.981 | $2.859 | $2.968 |
| Noninterest expense | $5.912 | $5.253 | $17.498 | $15.237 |
| Net income attributable to Pathfinder | $0.985 | $0.907 | $2.934 | $2.627 |
| Diluted EPS | $0.23 | $0.22 | $0.69 | $0.63 |
| Net interest margin | 3.01% | 3.10% | 3.03% | 3.00% |
| Return on average assets | 0.44% | 0.44% | 0.44% | 0.44% |
- At September 30, 2018, total assets were $921.6 million, up 4.6% from year-end 2017. Loans were approximately $620.9 million, up 6.9%; deposits were $756.2 million, up 4.5%.
- Cash and cash equivalents were $36.0 million, compared with $22.0 million at December 31, 2017. Shareholders’ equity was $63.3 million, plus $0.2 million noncontrolling interest.
- Borrowings totaled $79.6 million ($2.0 million short-term and $77.6 million long-term); subordinated loans were $15.1 million. The Bank reported $95.7 million of unused availability on existing credit lines after $91.6 million of utilization and letter-of-credit encumbrances.
- Nine-month cash flows: $6.0 million provided by operations, $29.9 million used in investing, and $37.9 million provided by financing; ending cash and cash equivalents were $36.0 million.
- Allowance for loan losses was $7.8 million, or 1.26% of loans, versus $7.1 million and 1.23% at year-end 2017. Nonperforming loans were $4.7 million, 0.75% of loans; nonperforming assets were $4.9 million, 0.54% of assets.
- Pathfinder Bank met the regulatory definition of well-capitalized. Its reported Tier 1 capital-to-risk-weighted-assets ratio was 12.34% and Tier 1 capital-to-assets ratio was 8.37%.
Material changes versus comparable periods
- Q3 net income rose 8.6%; nine-month net income rose 11.7%. Higher interest income from loan and taxable-security growth and improved asset yields supported results.
- Funding costs rose: Q3 interest expense increased 59.1% to $2.4 million. Management cited a 42-basis-point increase in the average rate paid on interest-bearing liabilities, including higher rates on time deposits and money-market accounts. Q3 net interest margin declined nine basis points year over year.
- Noninterest expense increased 12.5% in Q3 and 14.8% for the nine months, led by salaries and benefits and professional services. Hiring supported growth and service in Onondaga County; the increase also included consulting costs and accelerated compensation expense related to an expected senior executive retirement.
- Noninterest income fell mainly because investment-security results shifted from gains to losses: a $60,000 Q3 loss versus a $108,000 gain, and a $189,000 nine-month loss versus a $314,000 gain. The 2017 comparison included $250,000 of gains from short-term hedging activity; there were no hedging activities in 2018.
- The effective tax rate fell to 13.6% for Q3 and 14.6% year to date, primarily reflecting the federal Tax Act rate reduction and New York tax changes. The 2018 rates also included tax benefits from stock-option redemptions and, year to date, low-income housing tax credits.
- Unrealized losses on available-for-sale securities increased; accumulated other comprehensive loss rose to $5.8 million from $4.2 million at year-end. Management said it did not consider the reported securities losses to be other-than-temporary credit impairment.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management said it increased short-term liquidity in anticipation of continued high loan-funding demand in Q4 and intended to reinvest proceeds from securities sales into potentially higher-yielding assets.
- Management described asset quality as stable and comparable to peers, with nonperforming-loan and charge-off ratios improving year over year. However, total delinquent loans rose to $13.9 million from $12.2 million at year-end 2017; the increase in early-stage delinquencies included one $3.2 million commercial real-estate loan and one $2.0 million commercial line of credit.
- Key risks identified include credit quality and allowance adequacy, interest-rate and market changes, local economic conditions, competition, regulation and compliance costs, cybersecurity and technology threats, and the ability to maintain funding and grow revenue-producing assets. Lending is concentrated largely in the local market, making borrowers’ repayment capacity sensitive to regional employment and economic conditions.
- The allowance for credit losses standard (ASU 2016-13) was expected to increase the allowance when adopted, but the amount was still under assessment. New lease accounting was expected to increase reported assets and liabilities; the Company had $1.0 million in minimum operating-lease payments and did not expect a material income-statement effect.
- On October 24, 2018, the Company agreed to acquire a mixed-use Oswego property for $1.8 million, with completion expected in Q4 2018. Management did not expect a material operating-results impact. No material adverse legal proceeding was reported.
Important facts for investors to verify
- Whether loan growth and planned reinvestment translate into sustained net interest income as deposit and borrowing costs rise.
- Trends in the two larger early-stage delinquencies, nonperforming loans, criticized loans, and the adequacy of the $7.8 million allowance.
- Drivers and durability of elevated operating expenses, including staffing, consulting, and the approximately $533,000 of accelerated compensation expected during 2018.
- How securities portfolio valuation losses and interest-rate movements affect equity, liquidity, and future earnings; verify management’s assessment that unrealized losses are not credit-related impairments.
- Deposit mix and reliance on brokered deposits, borrowing capacity after collateral and letter-of-credit commitments, and execution and costs of the planned $1.8 million property acquisition.
- The eventual quantified impact of expected credit-loss accounting adoption; the filing does not provide a clear estimate.