Pathfinder Bancorp, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Pathfinder Bancorp is the holding company for Pathfinder Bank, a community bank operating primarily in Central New York. This unaudited filing covers the three and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. The company continued expanding in the greater Syracuse market.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $7.2m | $6.4m | $20.5m | $19.3m |
| Provision for loan losses | $0.6m | $0.3m | $1.4m | $1.2m |
| Noninterest income | $1.3m | $0.9m | $3.6m | $2.9m |
| Noninterest expense | $6.3m | $5.9m | $19.5m | $17.5m |
| Net income attributable to Pathfinder Bancorp | $1.3m | $1.0m | $2.4m | $2.9m |
| Basic/diluted EPS | $0.22/$0.22 | $0.23/$0.23 | $0.47/$0.47 | $0.71/$0.69 |
Balance sheet and funding at September 30, 2019: Total assets were $1.056bn, up 13.2% from year-end 2018. Loans were $725.9m, up $105.6m; deposits were $859.6m, up $132.5m. Cash and cash equivalents totaled $39.8m. Investment securities totaled about $234.9m across available-for-sale, held-to-maturity, and marketable equity holdings. Short- and long-term borrowings totaled $79.3m, down from $118.5m at year-end; subordinated loans were $15.1m. Shareholders’ equity was $89.0m, excluding $0.2m noncontrolling interest.
Cash flow and liquidity: For the first nine months, operating cash flow was $6.6m, investing cash flow was negative $105.8m (primarily loan growth), and financing cash flow was positive $112.7m. Financing inflows included deposit growth and $19.6m of net proceeds from the May private placement. The Bank reported approximately $173.9m in total credit facilities, of which $79.3m was utilized, with $94.6m available after encumbrances. Management reported compliance with liquidity policy guidelines.
Margins and returns: Net interest margin was 3.00% in the quarterly average-balance table versus 3.01% a year earlier; the overview elsewhere describes it as 3.01% and down one basis point. Nine-month margin was 2.94%, down from 3.03%. Q3 return on average assets was 0.51%, up seven basis points year over year; nine-month return was 0.33%, down 11 basis points.
Material changes and management commentary
- Q3 net income attributable to the company rose $310,000 year over year, while nine-month income fell $518,000. Higher interest income and noninterest income supported results; increased deposit and borrowing costs, operating expenses, loan-loss provisions, and taxes offset those gains.
- Loan growth was broad-based: commercial loans increased $53.6m, consumer loans $45.5m, and residential loans $6.4m from year-end. Average earning assets and loan yields increased, but competition and higher time-deposit rates raised funding costs.
- Deposits rose 18.2%, including a $66.1m increase in brokered deposits. Management also cited retail and municipal deposit growth. Brokered deposits and time deposits are important funding sources to monitor.
- Noninterest income benefited from securities gains: $121,000 in Q3 2019 versus a $60,000 loss a year earlier, and $232,000 for nine months versus a $189,000 loss. Management said sales supported portfolio optimization and liquidity, with proceeds intended for reinvestment in potentially higher-yielding assets.
- Operating expenses increased 11.6% for nine months. Drivers included staffing and employee costs, expansion-related occupancy and data-processing costs, and $231,000 of foreclosed-property expenses related to a commercial property sold in February. The period also included about $170,000 in one-time severance payments.
- In May, the company raised approximately $17.0m gross through common and Series B preferred shares and a warrant; net proceeds reflected in cash flows were $19.6m. Preferred shares and the warrant participate in dividends, reducing income available to common shareholders and affecting EPS allocation.
Credit quality, capital, risks, and outlook
- Nonperforming loans were $5.3m, or 0.73% of loans, at September 30, up from $2.1m and 0.35% at December 31, 2018; the increase was concentrated in commercial and commercial real estate loans. Nonperforming assets were $5.5m, or 0.52% of assets. Past-due loans totaled $9.9m; $5.2m were at least 90 days past due.
- The allowance for loan losses was $8.3m, or 1.15% of loans, compared with $7.3m, or 1.18%, at year-end. Allowance coverage of nonperforming loans was 156.43%, down from 340.13% at year-end. Management considered the allowance adequate; estimates depend on economic conditions, collateral values, and other judgmental factors. Potential problem loans totaled $14.3m.
- The Bank met the regulatory definition of “well-capitalized” and exceeded required minimum ratios, including the capital conservation buffer. Its September 30 Tier 1 leverage ratio was 7.78%; total core capital to risk-weighted assets was 12.10%.
- Management identified credit quality, securities-market impairment, interest rates and regional economic conditions, competition, regulation, deposit costs, cybersecurity, and technology as risks. A new expected-credit-loss standard was scheduled for January 1, 2023; the company expected it to increase its allowance but had not quantified the impact.
- No formal earnings or financial guidance was provided. The company was evaluating—but had not decided on—the sale of certain conforming 30-year loans. On November 7, 2019, the Bank acquired a $25.1m participation in unsecured consumer loans; this is a subsequent event, not part of the September 30 balance sheet.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $132.0m. Standby letters of credit alone were $2.2m. The company reported no material adverse legal proceedings.
Investor verification priorities
- Reconcile the Q3 net interest margin disclosure: the average-balance table reports 3.00%, while the MD&A overview reports 3.01%.
- Track commercial-loan delinquencies, nonaccruals, impaired loans, potential problem loans, and allowance coverage after the increase in nonperforming loans.
- Assess the sustainability and cost of deposit growth, especially brokered and time deposits, and the resulting effect on net interest margin.
- Separate recurring earnings from securities-sale gains, expansion costs, severance, and the New York deferred-tax valuation allowance.
- Review preferred-stock and warrant dividend participation and potential dilution when evaluating common-shareholder earnings and capital returns.