Pathfinder Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Pathfinder Bancorp is a bank holding company whose primary business is Pathfinder Bank. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
- Q2 earnings: Net income attributable to Pathfinder Bancorp was $0.920 million, up 10.6% from $0.832 million a year earlier. Diluted EPS was $0.22 versus $0.20. For the first half, attributable net income was $1.720 million versus $1.493 million; diluted EPS was $0.41 versus $0.35.
- Interest income and margin: Q2 interest and dividend income rose 20.8% to $7.084 million, while net interest income rose 11.8% to $5.581 million. Net interest margin fell 23 basis points to 2.93%. For the first half, net interest income increased 12.7% to $11.078 million and margin declined 21 basis points to 2.95%.
- Credit costs: Provision for loan losses was $0.423 million in Q2 and $0.812 million for the first half, compared with $0.150 million and $0.360 million, respectively, in 2016. The allowance was $6.258 million, or 1.14% of gross loans, versus 1.27% at year-end 2016.
- Noninterest items and taxes: Q2 noninterest income increased 3.6% to $1.063 million; first-half noninterest income was essentially unchanged at $2.026 million. Noninterest expense increased 5.1% in Q2 to $5.024 million and 5.7% in the first half to $10.023 million. Q2 effective tax rate was 21.3%, reduced by a $60,000 tax benefit tied to capital-loss carryforward reserves; first-half rate was 22.6%, including a $96,000 benefit.
- Assets, loans and funding: Total assets were $811.2 million, up 8.3% from December 31, 2016. Net loans grew 11.7% to $542.6 million; deposits rose 5.4% to $643.8 million. Cash and cash equivalents were $15.3 million, down from $22.4 million at year-end.
- Debt and equity: Borrowings totaled $84.7 million, including $41.5 million short-term and $43.2 million long-term, compared with $58.9 million in total borrowings at year-end. Subordinated loans were $15.0 million. Shareholders’ equity was $61.1 million, excluding $0.5 million of noncontrolling interest.
- Cash flow and liquidity: First-half operating cash flow was $3.383 million; investing cash outflow was $68.758 million and financing cash inflow was $58.280 million. The company reported $182.6 million of credit lines, of which $110.8 million was utilized or encumbered, leaving $71.8 million available. Management reported compliance with liquidity policy guidelines.
- Capital: Pathfinder Bank reported a 12.70% Tier 1 risk-based capital ratio and an 8.52% Tier 1 leverage ratio at June 30, 2017. The filing states the Bank exceeded current and projected minimums, including the fully phased-in 2019 capital conservation buffer.
Material changes versus comparable periods
- Earnings increased, driven mainly by higher interest income from growth in loans and taxable securities. Higher funding costs and credit-loss provisions offset part of that benefit.
- Average interest-bearing liabilities and their average cost rose; management attributed margin pressure primarily to higher deposit and borrowing rates. Average loan yields also declined as new loans were booked at rates below the existing portfolio average.
- Loan growth included $23.3 million outstanding at quarter-end from acquired 90% participations in auto-secured loans originated and serviced by an outside financial institution.
- Asset quality measures generally improved from year-end: delinquent loans were 1.47% of loans versus 1.98%; nonperforming loans were 0.80% versus 0.98%; nonperforming assets were $5.071 million versus $5.408 million. Potential problem loans increased to $9.6 million from $6.9 million.
- Deposits grew by $32.9 million, while brokered deposits declined $14.7 million. Long-term FHLB borrowings increased $26.2 million as the company sought longer-duration funding.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Management attributed increased staffing costs to supporting loan growth and expansion in Onondaga County; higher building costs reflected modernization-related depreciation and maintenance, including timing-related and nonrecurring charges.
- During the first half, the company conducted four short-term transactions involving approximately $40 million Treasury securities and 30-day loans. These were intended as hedges against rising short-term rates and generated $250,000 of gains through June 30. After related borrowing costs and fees, management said the transactions increased after-tax net income by approximately $80,000 for the first half. The position was closed at quarter-end; deferred fees remained.
- Key disclosed risks include credit quality and allowance estimates, interest-rate and economic changes, competition, securities impairment, regulatory requirements and the company’s ability to generate revenue-producing assets. The bank’s borrowers are concentrated largely in Oswego and Onondaga counties, making repayment capacity sensitive to local economic conditions.
- Standby letters of credit totaled $2.2 million; total outstanding commitments to extend credit and standby letters of credit were $111.6 million. The filing reports no material adverse legal proceeding and says disclosure controls were effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, including the acquired auto-loan participations, can be sustained without weakening underwriting or asset quality.
- Whether deposit and borrowing costs continue to rise faster than asset yields, putting further pressure on net interest margin.
- Whether the $9.6 million of potential problem loans, delinquency trends and the allowance remain manageable as the portfolio expands.
- How much reported earnings depended on the temporary Treasury hedging transactions and associated tax-reserve reversal, and whether those benefits recur.
- Whether available liquidity and funding capacity remain adequate as loans grow and securities and loan collateral are pledged or encumbered.