Pathfinder Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unless stated otherwise, figures are consolidated and in millions of dollars. Pathfinder is a bank holding company operating primarily through Pathfinder Bank in central New York.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net income available to common shareholders | $0.820 | $0.852 | $2.297 | $2.011 |
| Diluted earnings per share | $0.20 | $0.20 | $0.55 | $0.48 |
| Net interest income | $5.299 | $4.797 | $15.132 | $13.979 |
| Provision for loan losses | $0.322 | $0.220 | $0.682 | $1.004 |
| Noninterest income | $0.963 | $1.192 | $2.990 | $3.009 |
| Noninterest expense | $4.802 | $4.558 | $14.283 | $13.014 |
| Net interest margin | 3.28% | 3.39% | 3.21% | 3.33% |
| Return on average assets | 0.49% | 0.59% | 0.46% | 0.47% |
At September 30, 2016, total assets were $717.1 million, up 15.1% from December 31, 2015. Loans were $473.4 million, up 10.0%; deposits were $555.1 million, up 13.2%; and cash and cash equivalents were $23.7 million, compared with $15.2 million at year-end 2015. Available-for-sale and held-to-maturity securities totaled $182.5 million.
Total liabilities were $657.9 million. Short- and long-term borrowings totaled $82.1 million, up from $41.3 million at year-end; subordinated loans were $15.0 million. Pathfinder Bancorp shareholders’ equity was $58.8 million, down from $70.8 million, mainly reflecting redemption of $13.0 million of preferred stock and a $1.8 million common-stock repurchase.
For the first nine months, operating activities provided $4.1 million of cash; investing activities used $85.4 million, principally for securities purchases and loan growth; and financing activities provided $89.7 million. Cash increased $8.4 million. The Bank reported regulatory capital ratios above the fully phased-in 2019 capital-buffer requirements, including a 9.69% Tier 1 leverage ratio and a 13.85% Tier 1 risk-based ratio.
Changes versus comparable periods
- Q3 common net income declined 3.8% year over year. Higher net interest income was more than offset by increased expenses, a higher loan-loss provision, and lower noninterest income. The margin fell 11 basis points, while higher average earning-asset balances lifted net interest income.
- Nine-month common net income rose 14.2%, and diluted EPS increased from $0.48 to $0.55. Growth in net interest income and a lower provision for loan losses more than offset higher operating expenses.
- Credit indicators improved from December 31, 2015: nonperforming loans fell to $3.9 million from $5.3 million, or 0.82% of loans from 1.24%; total delinquency fell to 1.78% from 2.06%. The allowance was $6.1 million, or 1.29% of gross loans, versus $5.7 million, or 1.33%.
- Deposits grew mainly through business and municipal customers, while brokered deposits declined. Borrowings rose as the Company funded short-term securities purchases and prepared collateral capacity for seasonal municipal deposits.
Management commentary, outlook, and risks
- Management said the May 2016 combination of Pathfinder Bank and Pathfinder Commercial Bank into one New York-chartered commercial bank was expected to have little operational impact, with some annual cost savings anticipated. No quantified earnings guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Q3 expenses rose 5.4%, including higher staffing costs to support loan growth and expansion in Onondaga County. Nine-month expense growth also reflected data-processing, advertising, audit, and other costs. The Company recorded a $97,000 year-over-year increase in nonrecurring residential-loan repurchase expense during the nine-month period.
- Q3 noninterest income was lower partly because Q3 2015 included a one-time $135,000 bank-owned-life-insurance death benefit and higher securities-sale gains. Securities gains and sales activity can vary by quarter.
- The Company redeemed its $13.0 million SBLF preferred stock in February 2016. The new $10.0 million subordinated loan carries an effective annual interest rate of 6.44%; management said it increased annual interest expense by about $644,000 but avoided a 9% preferred dividend rate and reduced annual preferred dividends by about $1.2 million.
- Key stated risks include local economic and borrower-credit conditions, allowance-estimation uncertainty, interest-rate changes and securities valuation, competition, regulation and compliance costs, deposit fluctuations, and the availability and cost of funding. Loan growth and deposits are concentrated in the Company’s central New York markets.
- At quarter-end, $57.5 million of credit lines remained available after $108.1 million of approximately $165.6 million in facilities was utilized or encumbered. The Company reported compliance with internal liquidity guidelines. It had $1.9 million of standby letters of credit; no material adverse legal proceedings were reported.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained without further pressure on funding costs and net interest margin.
- Trends in delinquencies, nonperforming assets, potential problem loans ($7.8 million at September 30), and the adequacy of the $6.1 million loan-loss allowance.
- The cost and funding implications of increased borrowings and the seasonal municipal-deposit strategy, including the availability of remaining credit lines.
- Whether the bank combination produces the expected operating savings, and whether elevated staffing, technology, and other expenses continue.
- Effects of the preferred-stock redemption and subordinated debt on future earnings, capital, and common-shareholder returns; also confirm the impact of the 143,400-share repurchase.