Pathfinder Bancorp, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with full-year 2020. Pathfinder Bancorp is a bank holding company operating Pathfinder Bank, primarily in Oswego and Onondaga Counties, New York.
Financial results and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net income attributable to Pathfinder Bancorp | $12.4 million | $7.0 million | +78.5% |
| Basic and diluted EPS | $2.07 | $1.17 | +77% |
| Net interest income | $38.3 million | $31.6 million | +21.0% |
| Provision for loan losses | $1.0 million | $4.7 million | Down $3.7 million |
| Noninterest income | $6.2 million | $6.5 million | Down 3.9% |
| Noninterest expense | $27.5 million | $25.1 million | Up 9.6% |
| Total assets at year-end | $1.285 billion | $1.227 billion | Up 4.7% |
| Loans receivable, net | $819.5 million | $812.7 million | Up $6.8 million |
| Deposits | $1.055 billion | $995.9 million | Up 6.0% |
| Shareholders’ equity | $110.3 million | $97.5 million | Up 13.2% |
- Net interest margin rose to 3.21% from 2.88%; the net interest rate spread increased to 3.06% from 2.68%. Interest income rose $3.3 million, while interest expense fell $3.3 million, largely reflecting lower deposit and borrowing costs.
- Return on average assets was 0.98%, versus 0.60%; return on average equity was 11.91%, versus 7.43%. The efficiency ratio improved to 63.07% from 68.71%.
- Cash and cash equivalents were $37.1 million, down from $43.5 million. Cash provided by operating activities was $20.2 million; investing activities used $70.0 million; financing activities provided $43.5 million.
- Borrowings and subordinated loans totaled $106.7 million, versus $121.5 million. The company redeemed its $10 million 2015 subordinated loan in April 2021; subordinated loans ended the year at $29.6 million. Bank regulatory capital ratios remained above required levels, and the Bank was classified as well-capitalized.
- Brokered deposits were $157.8 million, or 15.0% of deposits, compared with $170.0 million, or 17.1%, in 2020. The Bank reported $70.5 million of unused capacity on available credit lines at year-end.
Material changes versus 2020
- Earnings improved on higher net interest income and a lower loan-loss provision. Provision expense declined as nonaccrual loans fell and management cited improving economic conditions.
- Nonperforming loans declined to $8.3 million from $21.3 million, and the ratio of nonperforming loans to total loans fell to 1.00% from 2.58%. Net charge-offs nevertheless increased to $1.0 million from $599,000; net charge-offs to average loans rose to 0.12% from 0.08%.
- Total loans grew modestly, but the mix shifted: consumer loans increased, partly following purchases of two consumer loan pools, while commercial loans declined, largely because $41.3 million of PPP loans were forgiven. Commercial real estate represented about 34.5% of total loans.
- Investment securities increased to $351.5 million in combined available-for-sale and held-to-maturity carrying amounts, from $299.5 million. Noninterest income fell mainly because 2020 included larger securities and mortgage-loan sale gains; recurring noninterest income before gains increased 9.0%.
- Deposits rose $59.4 million, including $71.6 million growth in customer deposits, partly offset by lower brokered deposits. Noninterest expense increased as activity normalized after pandemic-related restrictions, alongside higher staffing, professional services, audits, technology, and FDIC assessment costs.
Outlook, commentary, risks and unusual items
- Management plans to continue emphasizing commercial and commercial real estate lending, core nonmaturity deposits, fee income, technology investment, and expense control. It said the expense-control program is intended to limit expense growth; no numerical earnings or margin guidance was provided.
- The Bank expected to open a new Southwest Syracuse branch by the second quarter of 2022. Management also identified Onondaga County as a focus for potential branch expansion.
- The PPP ended in May 2021. At year-end, 256 PPP loans totaling $19.3 million remained outstanding; the filing reports $716,000 of unearned PPP fee income. The company stated it had no COVID-related loans in deferral status at December 31, 2021.
- Key risks include credit deterioration and allowance-estimation uncertainty; commercial real estate and business borrower exposure; interest-rate, inflation, economic and securities-market changes; competition; regulation and capital constraints; cybersecurity and technology; and possible renewed COVID-19 disruption. Management noted that higher interest rates could affect loan demand, funding costs, borrower repayment, and securities values.
- The portfolio includes $128.5 million of purchased loan pools originated by third parties, including unsecured consumer loans. Their performance depends in part on originating institutions and servicers; management reported that performance had substantially met expectations.
- Management’s allowance for loan losses was $12.9 million, or 1.57% of year-end loans. The estimate relies on qualitative economic and portfolio assumptions; the external auditor identified this estimate’s qualitative adjustments as a critical audit matter.
- Management reported that a material weakness in loan and related-party controls identified in 2020 was remediated by December 31, 2021. It concluded year-end disclosure controls were effective; the auditor’s report describes expanded loan testing due to control weaknesses during part of the year. The financial statements received an unqualified audit opinion.
- The company converted its outstanding Series B preferred shares into non-voting common stock in 2021. The board declared a $0.07-per-share fourth-quarter dividend payable in February 2022; after year-end, it declared a $0.09 dividend payable in May 2022.
- Other unusual items included a $316,000 New York State tax refund recognized in 2020, contributing to that year’s lower effective tax rate, and a $10 million subordinated-debt redemption in 2021. The effective tax rate rose to 22.4% from 15.9%.
Important facts for investors to verify
- Reconcile the filing’s nonperforming-asset ratios: the selected financial data reports 0.65% for 2021 and 1.74% for 2020, while MD&A elsewhere states 0.99% and 2.58%. The nonperforming-loan ratio is reported as 1.00% and 2.58%, respectively.
- Review commercial credit quality and delinquency trends: past-due loans rose to $17.9 million from $15.3 million, and potential problem loans were reported at $43.6 million, excluding impaired loans.
- Assess the concentration and performance of purchased loan pools, including unsecured consumer exposures, and the assumptions underlying the $12.9 million allowance.
- Examine deposit retention and liquidity needs, particularly $185.9 million of time deposits scheduled to mature in 2022 and the Bank’s reliance on brokered deposits and borrowings.
- Confirm the impact of the 2021 control remediation and follow-up testing, given the auditor’s reference to control weaknesses during part of the year and the company’s conclusion that they were remediated at year-end.
- Evaluate sensitivity to interest-rate changes and the investment portfolio’s fair-value movements, including private-label mortgage securities and unrealized losses.