Pathfinder Bancorp, Inc. — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons to 2022. Pathfinder is a community bank holding company operating primarily in Central New York through Pathfinder Bank, with lending concentrated in commercial real estate, commercial business, residential mortgage, and consumer loans. The Company reported consolidated assets of $1.47 billion and deposits of $1.12 billion at year-end.
Key financial results
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total interest income | $67.7 million | $51.1 million | Up $16.6 million |
| Interest expense | $28.7 million | $9.7 million | Up $19.0 million |
| Net interest income | $38.9 million | $41.4 million | Down $2.5 million |
| Net interest margin | 2.95% | 3.24% | Down 29 basis points |
| Provision for credit losses | $2.9 million | $2.8 million | Up $176,000 |
| Noninterest income | $5.2 million | $5.9 million | Down $724,000 |
| Noninterest expense | $29.4 million | $28.9 million | Up $521,000 |
| Income before taxes | $11.8 million | $15.7 million | Down $3.9 million |
| Net income attributable to Pathfinder | $9.3 million | $12.9 million | Down $3.6 million |
| Basic and diluted EPS | $1.51 | $2.13 | Down $0.62 |
| Operating cash flow | $15.4 million | $21.7 million | Down $6.3 million |
Balance sheet and capital. Year-end assets grew 4.7% to $1.47 billion. Net loans were $881.2 million, broadly stable year over year; deposits decreased 0.5% to $1.12 billion. Available-for-sale securities increased to $258.7 million, while held-to-maturity securities declined to $179.3 million at amortized cost. Cash and cash equivalents were $48.7 million. Shareholders’ equity was $119.5 million, and tangible book value per share was $18.83. Pathfinder Bank was categorized as well capitalized, with a 15.05% total risk-based capital ratio and a 10.11% Tier 1 leverage ratio.
Debt and liquidity. Year-end borrowings were $175.6 million, including $125.7 million of short-term FHLB advances and $49.9 million of long-term advances; subordinated debt was $29.9 million. Combined borrowings and subordinated debt totaled approximately $205.5 million. The Bank reported $236.7 million of available credit lines, of which $175.6 million was utilized, leaving $61.1 million available. Brokered deposits were $242.7 million, or 21.7% of deposits. Time deposits totaling $324.5 million mature in 2024, and management warns that replacement funding could cost more.
Credit quality. Nonperforming loans increased to $17.2 million, or 1.92% of loans, from $9.0 million, or 1.00%, in 2022. Nonperforming assets rose to $17.4 million, or 1.19% of assets. Net charge-offs increased to $4.2 million from $370,000; the allowance for credit losses was $16.0 million, equal to 1.78% of loans and 92.73% of nonperforming loans. Management attributed much of the deterioration and charge-offs to a limited number of larger commercial relationships, including a $7.8 million relationship placed on nonaccrual.
Material changes versus 2022
- Higher market rates lifted interest income, but deposit and borrowing costs rose faster: the average cost of interest-bearing liabilities increased to 2.65% from 0.94%. Time-deposit expense was a major contributor to the increase.
- Net income and returns declined: return on average assets fell to 0.67% from 0.96%, and return on average equity to 8.09% from 11.77%.
- Noninterest income fell partly because 2022 included $521,000 of historical tax credits; 2023 also recorded a $255,000 net loss on marketable equity securities, compared with a $352,000 gain in 2022.
- Noninterest expenses rose modestly, including higher software-service costs, nonrecurring legal fees, occupancy costs, and FDIC assessments. Salaries and benefits declined slightly.
- Commercial real estate and commercial and industrial loans together represented a substantial share of the portfolio. Commercial real estate loans grew, while consumer and residential mortgage balances declined.
- The Company adopted CECL on January 1, 2023, replacing the incurred-loss approach and recording a one-time reduction to retained earnings. The filing gives inconsistent figures for the total transition adjustment in different sections; see investor verification items below.
Outlook, risks, and unusual items
- Management expects continued competition for deposits and ongoing pressure on deposit pricing. It intends to emphasize retail and business core deposits while continuing its commercial lending strategy.
- On March 4, 2024, Pathfinder Bank agreed to acquire one Berkshire Bank branch, approximately $198 million of deposits, and approximately $32 million of loans. The transaction is expected to close by the end of the third quarter of 2024, subject to regulatory approvals and other conditions. The Bank will pay a deposit premium estimated at approximately 4.0% of the assumed deposits and assume a lease with anticipated annual payments of approximately $946,000.
- Key risks include interest-rate and net-interest-margin sensitivity; higher funding costs, deposit outflows, and large-depositor concentration; credit deterioration in commercial real estate and commercial lending; changes in local economic conditions and collateral values; and operational, cybersecurity, regulatory, and competitive risks. Management reported no cybersecurity incident that materially adversely affected the Company.
- Available-for-sale securities had $11.7 million of gross unrealized losses at year-end, and held-to-maturity securities had $11.8 million. Management attributed the losses primarily to interest rates and did not consider them credit impairments. The filing does not provide formal earnings or margin guidance.
- The Company declared a quarterly dividend of $0.09 per share for the quarter ended December 31, 2023, paid February 2, 2024. Management’s stated intention to continue regular quarterly dividends remains subject to Board approval, capital needs, regulation, and financial performance.
- The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and no material weaknesses in internal control over financial reporting; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Reconcile the CECL adoption disclosures: the filing describes a $1.9 million loan allowance transition adjustment, additional reserves for held-to-maturity securities and unfunded commitments, and differing totals and after-tax retained-earnings effects in separate sections.
- Confirm deposit stability and repricing exposure, including the $324.5 million of time deposits maturing in 2024, 21.7% brokered-deposit share, uninsured deposits, and public-deposit concentration.
- Track the status and performance of criticized, nonaccrual, and potential-problem loans, particularly the large commercial relationships; assess the adequacy of the $16.0 million allowance against further losses.
- Monitor whether net interest margin stabilizes as asset yields and funding costs reset, and whether core deposits can offset reliance on higher-cost deposits and borrowings.
- Review the Berkshire Bank branch transaction’s approvals, final assumed balances, deposit premium, lease obligations, and integration economics.
- Note that the filing’s MD&A cites cash and cash-equivalent figures that differ from the audited balance sheet; the audited statement reports $48.7 million at December 31, 2023.