Pathfinder Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Pathfinder Bancorp is a bank holding company whose primary business is Pathfinder Bank, serving markets in central New York. This unaudited filing covers the quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Key financial results and position
- Q3 earnings: Net income attributable to Pathfinder was $1.47 million, up 13.8% from $1.30 million a year earlier. Basic and diluted EPS were $0.25, versus $0.22. Net interest income after provision for loan losses was $6.63 million.
- Nine-month earnings: Net income attributable to Pathfinder was $5.01 million, versus $2.42 million in 2019; EPS was $0.85, versus $0.47. Net interest income after provision was $19.84 million.
- Interest income and margin: Q3 interest and dividend income was $10.49 million, down 2.3%; net interest income before provision rose 15.4% to $8.31 million as interest expense fell. Net interest margin was 3.01% versus 3.00% in Q3 2019. For the first nine months, margin was 2.93% versus 2.94%.
- Credit provision: Provision for loan losses was $1.68 million in Q3, compared with $0.60 million; for nine months it was $3.90 million, compared with $1.35 million. The allowance was $12.10 million, or 1.48% of loans, at September 30.
- Noninterest income and expense: Q3 noninterest income increased 15.9% to $1.49 million; expense declined 0.8% to $6.23 million. Nine-month noninterest income rose 32.6% to $4.77 million, while expense declined 6.7% to $18.23 million. Nine-month income included substantial securities and loan-sale gains, offset in part by losses on marketable equity securities.
- Balance sheet: Total assets were $1.20 billion, up 9.9% from December 31, 2019. Net loans were $808.2 million; deposits were $998.2 million; shareholders’ equity was $94.5 million, excluding noncontrolling interest.
- Funding and liquidity: Cash and cash equivalents were $39.0 million, compared with $20.2 million at year-end 2019. Deposits increased 13.2% to $998.2 million, including growth in brokered deposits. Short- and long-term borrowings totaled $80.2 million, down from $93.1 million at year-end; subordinated loans were $15.2 million. The Bank reported $60.3 million of unused credit availability under existing facilities.
- Cash flow, first nine months: Operating activities provided $45.1 million; investing activities used $128.8 million; financing activities provided $102.6 million. Cash and cash equivalents increased $18.8 million to $39.0 million.
- Capital: Pathfinder Bank reported a 12.40% total core capital-to-risk-weighted-assets ratio and an 8.35% Tier 1 capital-to-assets ratio, and exceeded applicable well-capitalized and capital-buffer requirements.
Material changes versus comparable periods
- Q3 net interest income improved as lower deposit and borrowing costs more than offset lower yields on earning assets. Average interest-earning assets increased, while the average yield declined to 3.80% from 4.47%.
- Loan growth included $75.3 million of Paycheck Protection Program (PPP) loans. Commercial real estate loans also increased; residential and consumer loan balances declined from year-end levels.
- Credit indicators weakened: nonaccrual loans rose to $13.2 million from $5.3 million at September 30, 2019, and nonperforming loans increased to 1.61% of loans from 0.73% a year earlier. The allowance-to-nonperforming-loans ratio was 91.44%, versus 156.43% a year earlier.
- Nine-month noninterest income benefited from a $659,000 gain on the January sale of $35.9 million of seasoned residential mortgages and higher securities-sale gains. Marketable equity securities produced a net loss of $798,000 for the nine months, including a second-quarter loss following an investment’s restructuring and public listing.
Outlook, risks and unusual items
- Management provided no quantified earnings or margin guidance. It said the pandemic’s effects on future revenue, earnings, credit losses, capital and liquidity remain uncertain; results for the interim periods are not necessarily indicative of full-year results.
- COVID-19 remains a material risk. At September 30, 2020, $25.9 million of loans, or 3.2% of loans, remained in payment deferral, including four commercial loans totaling $8.7 million granted deferrals beyond 180 days. The Bank had received approval for 697 PPP loans totaling about $75.3 million and had submitted 70 loans totaling about $9.2 million for forgiveness.
- Management cited pandemic-related economic uncertainty, rising delinquencies and nonaccrual loans as drivers of increased provision expense. Potential problem loans totaled $33.8 million. Management cautioned that loan classifications and loss estimates may be revised as economic conditions develop.
- Other risks include possible further deterioration in borrower and collateral quality, persistently low rates pressuring asset yields and margins, deposit outflows or higher funding costs, securities valuation changes, and operational, cyber and third-party service risks.
- After quarter-end, the Company completed a $25 million issuance of 5.50% fixed-to-floating subordinated notes, maturing in 2030. The rate resets in 2025 to three-month SOFR plus 532 basis points; the notes are intended to qualify as Tier 2 capital if applicable.
- The Board declared a quarterly dividend of $0.06 per common and preferred share. The filing reported no material adverse legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial nonaccruals, past-due loans and potential problem loans continue to rise, and whether the allowance remains adequate as pandemic-related deferrals end.
- How much of the reported earnings improvement is recurring versus attributable to securities transactions, mortgage sales and market-value changes in equity investments.
- Deposit composition and retention, particularly brokered deposits and PPP-related balances, as well as available borrowing capacity and liquidity needs.
- The effect of prolonged low interest rates on net interest margin and the cost or capital treatment of the post-quarter $25 million subordinated note issuance.
- Progress on PPP forgiveness applications and any further borrower deferrals or credit deterioration.