Business context and reporting period
Pathfinder Bancorp, Inc. is a bank holding company whose primary business is Pathfinder Bank, operating mainly in Oswego and Onondaga counties, New York. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Nine months 2017 | Comparison |
|---|---|---|---|
| Interest and dividend income | $7.53 million | $21.49 million | Up 20.5% in both periods |
| Net interest income | $6.00 million | $17.08 million | Up 13.3% and 12.9%, respectively |
| Provision for loan losses | $420,000 | $1.23 million | Up from $322,000 and $682,000 |
| Net income attributable to Pathfinder common shareholders | $907,000 | $2.63 million | Up 10.6% and 13.6%, respectively |
| Basic / diluted EPS | $0.22 / $0.22 | $0.65 / $0.63 | Prior-year Q3: $0.20 / $0.20; nine months: $0.56 / $0.55 |
| Net interest margin | 3.10% | 3.00% | Down 18 and 21 basis points, respectively |
| Return on average assets | 0.44% | 0.44% | Down 5 and 2 basis points, respectively |
Total assets at September 30 were $874.6 million, up 16.8% from year-end 2016. Net loans were $559.9 million, up 15.2%; deposits were $716.4 million, up 17.3%; and total borrowed funds were $74.8 million, versus $58.9 million at year-end. Shareholders’ equity attributable to Pathfinder was $61.9 million. Cash and cash equivalents were $61.2 million, up from $22.4 million.
For the first nine months, operating cash flow was $4.4 million; investing activities used $86.4 million, largely reflecting loan growth and securities purchases; financing activities provided $120.8 million. The common dividend was $0.055 per share for Q3, declared September 29 and payable November 3, 2017.
Material changes and credit quality
Growth in average loans and taxable investment securities drove higher interest income, while deposit and borrowing costs rose faster and compressed margin. Average rates paid on interest-bearing liabilities increased 21 basis points in Q3 and 22 basis points year to date. Noninterest expense rose 10.0% in Q3 and 7.2% year to date, primarily from staffing, occupancy, advertising, and other costs. The provision for loan losses increased with loan growth and portfolio mix.
Nonperforming loans were $4.8 million, or 0.86% of loans, compared with 0.98% at year-end 2016; nonperforming assets were $5.5 million, or 0.63% of assets, versus 0.72%. However, total past-due loans rose to $13.3 million from $9.8 million, mainly due to a $2.0 million commercial real estate loan 30–59 days past due. Loans classified doubtful increased to $3.2 million from $1.3 million. The allowance was $6.6 million, 1.17% of loans, versus 1.27% at year-end. Management considered the allowance adequate. One $2.0 million commercial real estate loan was modified as a troubled debt restructuring during the quarter.
Outlook, risks, contingencies, and unusual items
The filing provides no specific earnings or growth guidance. Management said operating results for the interim periods are not necessarily indicative of full-year results. It cited loan growth and expansion in the greater Syracuse market, alongside pressure from deposit competition and rising short-term rates. Key disclosed risks include credit quality and allowance adequacy, interest-rate and economic changes, securities impairment, competition, and regulatory costs.
Cash at quarter-end included $35.8 million of deposits placed by ten large depositors (seven associated with one customer) shortly before September 30. Management described these balances as transitory and expected them to remain for an indefinite but relatively short period. The company also reported $104.0 million of outstanding commitments to extend credit and standby letters of credit. Available credit lines totaled about $183.4 million; $100.9 million was utilized, including letter-of-credit encumbrances, leaving $82.5 million available.
In the first half, the company completed four short-term Treasury-related transactions intended to hedge rising short-term rates, recognizing $250,000 in gains and a $96,000 tax benefit from reversal of previously established reserves. The transactions increased after-tax net income by $80,000 after related borrowing costs and fees; the hedge position was closed June 30 and not reopened in Q3. The nine-month effective tax rate was 25.5%, versus 28.3% before the reserve reversal. Management reported the Bank remained “well-capitalized” and exceeded regulatory minimums, including fully phased-in 2019 buffer levels. No material adverse legal proceeding was reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether deposit and loan growth can continue without further pressure on net interest margin, funding costs, and operating expenses.
- The composition and subsequent payment performance of the $13.3 million in past-due loans, including the $2.0 million commercial real estate loan, and the increase in doubtful classifications.
- Whether the $35.8 million of near-quarter-end large deposits remained or were withdrawn, and the effect on liquidity and funding.
- The quality and returns of the acquired automobile loan pools, which had $21.4 million outstanding at September 30 and are serviced by the originating institution.
- How the $104.0 million of credit and letter-of-credit commitments, available borrowing capacity, and pledged collateral affect liquidity under stress.
- The sustainability of earnings excluding the one-time $250,000 hedging gain and $96,000 tax benefit, and the future effect of rising rates on asset yields and funding costs.