Pathfinder Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Pathfinder Bancorp is the holding company for Pathfinder Bank, headquartered in Oswego, New York. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $16.6 | $11.7 in Q2 2022 |
| Interest expense | $6.9 | $1.7 in Q2 2022 |
| Net interest income | $9.7 | $10.0 in Q2 2022 |
| Provision for credit losses | $1.1 in Q2; $1.8 for first half | $0.1 in Q2; $0.2 for first half 2022 |
| Net income attributable to Pathfinder | $2.0 in Q2; $4.6 for first half | $3.3 in Q2; $6.2 for first half 2022 |
| EPS, voting and Series A non-voting | $0.32 in Q2; $0.75 for first half | $0.54 in Q2; $1.03 for first half 2022 |
| Total assets | $1,392.3 | $1,399.9 at December 31, 2022 |
| Total loans / allowance for credit losses | $891.1 / $18.8 | $897.7 / $15.3 at December 31, 2022 |
| Deposits | $1,101.1 | $1,125.4 at December 31, 2022 |
| Cash and cash equivalents | $36.8 | $35.3 at December 31, 2022 |
| Total shareholders’ equity | $113.8, plus $0.7 noncontrolling interest | $111.0, plus $0.6 noncontrolling interest, at December 31, 2022 |
For the first half, net interest income increased to $19.7 million from $19.4 million, but higher credit-loss provisions contributed to lower income. Net cash from operating activities was $1.9 million; reported investing cash flow was $11.2 million and financing cash flow was negative $11.6 million. Cash increased $1.5 million during the half.
Q2 net interest margin is inconsistent within the filing: the average-balance table reports 2.96% versus 3.14% a year earlier, while MD&A elsewhere gives 2.99% for Q2. For the first half, the reported margin was 2.99% versus 3.10%.
Material changes and key developments
- Q2 net income attributable to the company fell 39.4% year over year. First-half net income fell 26.4%.
- Q2 interest income rose $4.9 million year over year, but interest expense rose $5.2 million, primarily due to higher deposit and borrowing costs. Average interest-bearing liability cost increased as rates rose and deposit competition intensified.
- Nonperforming loans rose to $20.3 million, or 2.28% of loans, from $9.0 million, or 1.00%, at year-end 2022. The increase principally reflects two deteriorating commercial real estate/commercial relationships. Twenty-five loans associated with those relationships totaled $13.1 million at quarter-end.
- The allowance for credit losses was 2.11% of loans, compared with 1.71% at year-end. Allowance coverage of nonperforming loans was 92.37%, down from 169.93% at year-end.
- Deposits declined $24.3 million from year-end; FHLB borrowings increased $13.5 million to $129.5 million. Total assets declined $7.6 million.
- Available-for-sale securities had $13.7 million of aggregate unrealized losses versus $14.8 million at year-end; held-to-maturity securities had $14.6 million of fair-value losses versus $12.9 million at year-end. Management attributed the marks primarily to interest-rate conditions and said it did not intend, and was not more likely than not required, to sell the HTM securities before recovery.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management said it expects some charge-offs related to the two troubled credit relationships in the next quarter as resolutions progress. The relationships are under active management, including repayment plans and possible collateral liquidation.
- The company adopted CECL on January 1, 2023. The transition adjustment of $2.9 million, including new reserves for HTM securities and unfunded commitments, reduced retained earnings rather than current-period income. The filing identifies credit-loss estimates and qualitative factors as significant areas of judgment.
- Management anticipates further personnel expense increases during the remainder of 2023 as vacancies are filled and compensation adjustments occur. It also said it will evaluate whether additional pension-plan contributions are needed during 2023.
- Liquidity resources included $188.4 million of available credit lines, of which $61.9 million remained unused, and access to the Federal Reserve Bank Term Funding Program if needed. Of $341.0 million of nominally uninsured deposits, $170.5 million was considered uninsured after reciprocal coverage and municipal collateral arrangements.
- The Bank reported capital ratios above applicable well-capitalized and capital-buffer requirements, including a 9.94% Tier 1 leverage ratio and 14.16% Tier 1 risk-based capital ratio.
- Risks cited include local economic and real-estate conditions, borrower credit deterioration, deposit outflows and funding costs, interest-rate changes, securities valuation, regulatory changes, cybersecurity, fraud, and operational disruptions. Management reported effective disclosure controls and no material adverse legal proceedings.
Important facts for investors to verify
- Reconcile the Q2 net interest margin discrepancy: 2.96% in the table versus 2.99% in MD&A.
- Track payment performance, collateral values, reserve adequacy, and any charge-offs for the two troubled commercial relationships, including the reported $3.5 million of unsecured balances.
- Monitor deposit trends, deposit pricing, uninsured deposit exposure, borrowing levels, and remaining contingent liquidity capacity.
- Assess the effect of further rate changes on net interest margin and on the market value of AFS and HTM securities.
- Review future earnings for the impact of CECL estimates, potential credit-loss provisions, and anticipated compensation and branch-related costs.