Pathfinder Bancorp, Inc. quarterly report, Q3 FY2023

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Pathfinder Bancorp, Inc. — Q3 2023 Form 10-Q

Business and period. Pathfinder Bancorp is a bank holding company whose primary business is its investment in Pathfinder Bank, serving mainly Oswego and Onondaga counties in New York. This unaudited report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. Amounts below are in U.S. dollars.

Financial results and position

  • Q3 earnings: Interest and dividend income was $17.7 million, up 32.0% year over year, but interest expense increased to $7.6 million from $2.6 million. Net interest income declined 6.7% to $10.1 million; after an $833,000 provision for credit losses, net interest income was $9.2 million. Net income attributable to Pathfinder Bancorp was $2.2 million, down 31.6%; diluted EPS was $0.35 versus $0.52.
  • Nine-month earnings: Interest and dividend income rose to $49.3 million from $36.1 million, while interest expense rose to $19.6 million from $5.8 million. Net interest income decreased 1.5% to $29.8 million; after a $2.7 million credit-loss provision, it was $27.1 million. Net income attributable to the company was $6.8 million versus $9.4 million; diluted EPS was $1.10 versus $1.55.
  • Margins and returns: Net interest margin was 3.07% for Q3, down from 3.32%; for the first nine months it was 3.02%, down from 3.18%. Return on average assets was 0.63% for Q3 and 0.65% year to date, down 30 and 29 basis points, respectively.
  • Revenue mix and expenses: Noninterest income was $1.2 million in Q3, up 2.8%, and $3.9 million year to date, down 4.6%. Noninterest expense rose 5.3% to $7.7 million in Q3 and 3.2% to $22.4 million year to date. Higher professional/software costs, a new branch, and inflation contributed to expense increases; lower debit-card income and marketable-equity losses weighed on fee income.
  • Balance sheet: Total assets were $1.401 billion, essentially unchanged. Loans were $896.1 million, down $1.6 million; deposits were $1.128 billion, up $2.4 million. Shareholders’ equity was $113.8 million, up $2.8 million. Cash and cash equivalents were $24.5 million, down from $35.3 million at year-end.
  • Cash flow: For the first nine months, operating activities provided $7.0 million; investing activities used $13.9 million; and financing activities used $3.9 million. Cash declined by $10.8 million. The MD&A narrative appears to describe investing cash flow as an inflow, contrary to the cash-flow statement; see investor checks below.
  • Debt and liquidity: At quarter-end, short- and long-term borrowings totaled $110.6 million and subordinated debt was $29.9 million. The company reported $189.3 million of available credit facilities, of which $110.6 million was used, leaving $78.7 million available. Of $1.13 billion in deposits, $165.4 million, or 15.0%, was considered uninsured after reciprocal-deposit and collateral protections.
  • Capital: The Bank met the regulatory definition of “well-capitalized” and exceeded applicable capital-buffer requirements. Its Tier 1 leverage ratio was 10.11%; Tier 1 risk-based and Tier 1 common equity ratios were each 13.51%.

Material changes and credit quality

  • Funding costs rose faster than asset yields: Q3 average rates on interest-bearing liabilities increased 183 basis points year over year, compared with a 126-basis-point rise in average yields on earning assets. Higher deposit competition and rates were key pressures on earnings and margin.
  • Nonaccrual loans increased to $16.2 million, or 1.8% of loans, from $9.0 million and 1.0% at year-end 2022. Two commercial real estate/commercial relationships accounted for $11.5 million across 19 loans and were placed under active resolution management.
  • Past-due loans totaled $28.7 million; $16.0 million was 90 or more days past due. The allowance for loan credit losses was $15.8 million, or 1.8% of loans, compared with $15.3 million, or 1.7%, at year-end. The allowance was 97.5% of nonperforming loans, down from 169.9%.
  • Q3 net charge-offs were elevated: the annualized net charge-off ratio was 0.61%, versus 0.03% in Q3 2022. Management attributed higher provisions primarily to the two deteriorating commercial relationships and described ongoing monitoring, borrower repayment plans, and collateral liquidation where appropriate.
  • Available-for-sale securities had $16.7 million of aggregate unrealized losses at September 30, primarily attributed to interest-rate and yield-curve changes; held-to-maturity securities had $15.5 million of unrealized losses. Management reported no material credit-loss impairment in the AFS portfolio and said it did not intend, and was not more likely than not required, to sell HTM securities before recovery.
  • The company adopted CECL on January 1, 2023. The filing reports a $2.9 million total transition adjustment for loans, HTM securities, and unfunded commitments; the equity discussion separately describes a $2.1 million reduction to retained earnings. The distinction should be reconciled.

Outlook, risks, and other disclosures

  • The filing provides no specific earnings, margin, or balance-sheet guidance. Management cautions that interim results are not necessarily indicative of full-year results.
  • Management identifies risks including local real-estate and economic conditions, inflation, interest-rate and deposit competition, deposit outflows and funding costs, credit-loss estimation, regulation and capital requirements, cybersecurity, fraud, natural disasters, and potential higher FDIC assessments. It also notes the possible need for further pension-plan contributions during 2023.
  • A one-time $73,000 reduction in Q3 debit-card interchange income reflected revised estimates of customer rewards expected to be redeemed. Professional-services expense included nonrecurring consulting fees in Q3 and legal and consulting fees year to date.
  • The Board declared a $0.09-per-share quarterly dividend, paid November 10, 2023. Management concluded disclosure controls were effective as of September 30, 2023. The company reported no material adverse legal proceeding.

Important facts for investors to verify

  1. Reconcile the MD&A description of investing cash flow as a $13.9 million inflow with the cash-flow statement’s $13.9 million outflow, and confirm the stated drivers of the cash movement.
  2. Clarify the CECL transition disclosures: the $2.9 million total adjustment versus the $2.1 million retained-earnings reduction, including the effects of tax and presentation.
  3. Track resolution, collateral values, charge-offs, and reserve adequacy for the two commercial relationships, along with the rise in nonaccrual and 90-day-past-due loans.
  4. Assess deposit stability, the $165.4 million considered uninsured, remaining borrowing capacity, and sensitivity of funding costs and net interest margin to rates and competition.
  5. Monitor the sizable unrealized securities losses, the potential effects of further rate movements, and the company’s ability to hold HTM securities until recovery.