Pathfinder Bancorp, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Pathfinder Bancorp is a bank holding company headquartered in Oswego, New York; its primary business is Pathfinder Bank. This unaudited filing covers the three months ended March 31, 2018, with operating results compared with Q1 2017 and balance-sheet amounts generally compared with December 31, 2017. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Interest and dividend income | $8.209 million | $6.870 million, Q1 2017 |
| Net interest income | $6.393 million | $5.497 million, Q1 2017 |
| Net interest income after loan-loss provision | $5.780 million | $5.108 million, Q1 2017 |
| Provision for loan losses | $613,000 | $389,000, Q1 2017 |
| Net income attributable to Pathfinder Bancorp | $1.004 million; diluted EPS $0.24 | $800,000; diluted EPS $0.19, Q1 2017 |
| Net interest margin | 3.02% | 2.97%, Q1 2017 |
| Return on average assets | 0.45% | 0.41%, Q1 2017 |
| Total assets | $891.1 million | $881.3 million, December 31, 2017 |
| Net loans | $600.6 million | $573.7 million, December 31, 2017 |
| Total deposits | $743.8 million | $723.6 million, December 31, 2017 |
| Borrowings | $63.9 million, plus $15.1 million subordinated loans | $73.9 million borrowings, plus $15.1 million subordinated loans, December 31, 2017 |
| Cash and cash equivalents | $18.3 million | $22.0 million, December 31, 2017 |
| Shareholders’ equity | $62.1 million, excluding $363,000 noncontrolling interest | $61.8 million, excluding noncontrolling interest, December 31, 2017 |
- Pathfinder Bancorp’s net income rose 25.5% year over year. Consolidated net income, including noncontrolling interest, was $1.034 million.
- Net cash from operating activities was $1.469 million, versus $520,000 in Q1 2017. Investing activities used $15.251 million; financing activities provided $10.070 million. Cash and cash equivalents declined $3.712 million during the quarter.
- At March 31, the Bank reported regulatory capital ratios of 13.47% total capital to risk-weighted assets, 12.22% Tier 1 risk-based capital, and 8.18% Tier 1 capital to adjusted assets. Management said the Bank exceeded current requirements and the fully phased-in 2019 capital buffer requirements.
- The allowance for loan losses was $7.451 million, or 1.23% of loans. Nonperforming loans were $6.454 million and nonperforming assets were $6.562 million; allowance coverage of nonperforming loans was 115.45%.
Material changes versus comparable periods
- Net interest income increased $896,000 year over year, supported by average interest-earning asset growth and a 17-basis-point increase in average asset yield to 3.88%. Net interest margin rose five basis points.
- Interest expense increased $443,000, with deposit interest expense up $580,000 as average interest-bearing deposit balances and rates rose. Deposit costs reflected competition and higher short-term rates.
- Noninterest expense increased $486,000, or 9.8%, to $5.459 million. Notable increases included salaries and benefits, professional services, FDIC assessments, occupancy and data processing; management cited added staffing to support growth and consulting for operational and strategic planning.
- Noninterest income declined $42,000 to $895,000, primarily because securities activity shifted from a $71,000 net gain in Q1 2017 to a $107,000 net loss in Q1 2018. Other noninterest income categories increased in aggregate.
- The effective tax rate fell to 15.8% from 24.1%, principally reflecting the Tax Act’s reduction of the federal corporate rate from 34% to 21%. Q1 2017 also included a $36,000 tax benefit tied to capital-loss carryforwards and prior-period hedging transactions.
- Loans grew $26.9 million from year-end, mainly in commercial and commercial real estate lending. Deposits increased $20.2 million, while borrowings fell $10.0 million. Brokered CDARS deposits rose to $74.6 million from $59.5 million.
- Other comprehensive loss was $751,000 in Q1 2018, largely reflecting a decline in the fair value of available-for-sale securities; accumulated other comprehensive loss increased to $5.012 million.
Outlook, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- Management said asset quality remained generally stable and comparable to peer averages, but nonperforming loans to total loans increased to 1.06% from 0.84% at year-end and 0.71% a year earlier. A $1.7 million commercial real estate loan was added to nonperforming assets; management expected refinancing and no losses beyond a reserve established in Q4 2017.
- Total loans past due were $14.1 million, including $6.5 million 90 or more days past due. Nonaccrual loans increased to $6.5 million from $4.9 million at year-end. Management reported $13.4 million in potential problem loans and considered the allowance adequate.
- The Company recorded a $613,000 loan-loss provision, up from $389,000, citing loan growth, portfolio mix and increased delinquency/nonaccrual levels. The allowance estimate depends on management judgments and could change as conditions evolve.
- Interest-rate movements can affect deposit costs, net interest income and securities values. Available-for-sale securities had $3.476 million of gross unrealized losses at quarter-end; management said it did not consider individual losses to be other-than-temporary impairment and did not intend, nor expect to be required, to sell the securities before recovery.
- Management identified credit quality, securities impairment, competition, interest rates and regional economic conditions, regulation, technology and cybersecurity among risks. The Company had $99.7 million of outstanding commitments to extend credit and standby letters of credit, and $2.2 million of standby letters of credit. It reported $97.9 million of unused capacity within existing credit lines, including the effect of outstanding commitments and encumbrances.
- The Company expects the credit-loss accounting standard scheduled for adoption in 2020 to increase its allowance, though the eventual effect depends on portfolio composition, asset quality and economic conditions at adoption. It also expected lease accounting adoption to increase reported assets and liabilities; minimum operating-lease payments were $1.1 million.
- A $57,000 recovery of an escrowed balance related to previously disposed foreclosed property was recognized in other charges and fees. Q1 2018 included no hedging activity; Q1 2017 included short-term Treasury transactions that produced gains and related interest expense.
- Management reported effective disclosure controls and no material adverse legal proceeding pending at March 31, 2018.
Important facts for investors to verify
- Progress and resolution of the $1.7 million commercial real estate nonperforming loan, and whether credit quality and allowance coverage stabilize.
- Loan growth and its concentration in commercial and commercial real estate lending, alongside trends in past-due, nonaccrual and potential problem loans.
- Deposit growth, deposit pricing and the higher use of brokered CDARS deposits as funding costs rise.
- Changes in securities fair values and accumulated other comprehensive loss, including any effect of interest-rate movements or security sales.
- Whether higher operating costs and loan-loss provisions are offset by continued net interest income growth, and the eventual impact of the expected credit-loss accounting standard.