Pathfinder Bancorp, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Pathfinder Bancorp is a bank holding company whose primary business is Pathfinder Bank, serving mainly Oswego and Onondaga counties in New York. This unaudited filing covers the three months ended March 31, 2023; income and cash-flow comparisons are against Q1 2022, while balance-sheet comparisons are against December 31, 2022. The company cautions that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.404 billion | $1.400 billion at Dec. 31, 2022 |
| Loans, before allowance | $910.2 million | $897.7 million at Dec. 31, 2022 |
| Total deposits | $1.144 billion | $1.125 billion at Dec. 31, 2022 |
| Net interest income | $10.0 million | $9.5 million in Q1 2022 |
| Net interest income after credit-loss provision | $9.3 million | $9.4 million in Q1 2022 |
| Net income attributable to Pathfinder Bancorp | $2.6 million | $3.0 million in Q1 2022 |
| Basic and diluted EPS | $0.43 per voting and non-voting share | $0.49 in Q1 2022 |
| Net interest margin | 3.02% | 3.06% in Q1 2022 |
| Cash and cash equivalents | $32.3 million | $35.3 million at Dec. 31, 2022 |
| Operating cash flow | $6.0 million | $4.1 million in Q1 2022 |
| Shareholders’ equity | $111.7 million | $111.0 million at Dec. 31, 2022 |
Interest and dividend income rose to $15.0 million from $11.0 million, but interest expense increased to $5.1 million from $1.5 million as deposit and borrowing costs rose. The provision for credit losses was $692,000, versus $102,000. Noninterest income was $1.6 million, roughly flat year over year; noninterest expense rose 3.8% to $7.5 million. The effective tax rate was 20.0%, versus 19.4%.
At March 31, total borrowings were $99.2 million, comprising $43.5 million short-term and $55.7 million long-term borrowings; subordinated debt was an additional $29.8 million. The Bank reported $176.3 million of available credit lines, of which $99.2 million was used. Management reported compliance with its liquidity policy and that the Bank was well-capitalized, with a 9.68% Tier 1 leverage ratio and 13.85% Tier 1 risk-based capital ratio.
Material changes and asset quality
- Net income attributable to the company fell 11.9% year over year, primarily reflecting higher funding costs, a larger credit-loss provision, and higher operating expenses.
- Average earning-asset yield increased to 4.56% from 3.54%, while the average cost of interest-bearing liabilities rose to 1.88% from 0.61%. Management attributed the increases to rising interest rates and deposit competition.
- Nonaccrual loans increased to $19.1 million, or 2.10% of loans, from $9.0 million, or 1.00%, at year-end 2022. The increase largely reflected two commercial borrower relationships totaling $13.0 million placed on nonaccrual; management said they were under active resolution management.
- The allowance for credit losses was $17.9 million, or 1.96% of loans, compared with $15.3 million, or 1.71%, at year-end. Coverage of nonperforming loans was 93.55%, down from 169.93% at year-end. Annualized net charge-offs were 0.01% of average loans.
- On January 1, 2023, Pathfinder adopted CECL. The transition increased the loan allowance by $1.9 million, established a $450,000 reserve for held-to-maturity securities, and added $552,000 of liabilities for unfunded commitments. After tax effects, retained earnings decreased approximately $2.1 million; this transition adjustment did not affect Q1 earnings.
- Available-for-sale securities had $13.2 million of aggregate unrealized losses at quarter-end; held-to-maturity securities’ fair value was $12.1 million below amortized cost. Management said it did not intend, and was not more likely than not required, to sell the HTM securities before recovery of cost.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or balance-sheet guidance. Management anticipated further personnel expense increases during 2023 as vacancies are filled and compensation adjustments occur. It also said it would evaluate whether additional pension-plan contributions were needed.
- Management cited risks including local economic and real-estate conditions, inflation and interest-rate changes, deposit outflows and competition, credit-loss estimates, regulatory and FDIC assessment changes, cybersecurity and fraud, and effects of recent bank failures. Forward-looking statements are subject to uncertainty and the company disclaims an obligation to update them.
- At quarter-end, deposits included $382.7 million nominally above FDIC insurance limits. After reciprocal coverage and pledged collateral for municipal deposits, management identified $189.1 million, or 16.5% of deposits, as uninsured.
- The Bank had $183.0 million in outstanding commitments to extend credit and standby letters of credit. The related allowance for off-balance-sheet exposures was $552,000. The Bank had not accessed the Federal Reserve’s Bank Term Funding Program as of the filing date.
- Q1 included $73,000 in net gains on investment-security sales and redemptions. Q1 2022 included a nonrecurring $176,000 gain from early termination of a derivative contract. Management attributed higher professional fees in Q1 2023 primarily to legal fees.
- Management concluded disclosure controls were effective as of March 31, 2023. The filing reports no material adverse legal proceeding and no material change in internal control over financial reporting other than CECL-related control changes.
Important facts for investors to verify
- Track the two downgraded commercial relationships, their resolution, nonaccrual balances, and the adequacy of the allowance under CECL.
- Monitor deposit mix, deposit pricing, uninsured deposit levels, borrowing needs, and available liquidity as competition and interest rates change.
- Assess whether asset yields can continue to offset rising funding costs and pressure on net interest margin.
- Review the sensitivity of securities values and capital to interest-rate movements, including unrealized losses and the HTM portfolio’s fair-value discount.
- Reconcile the filing’s inconsistent discussion of Paycheck Protection Program fee recognition: one passage reports $900,000 for Q1 2023, while another reports less than $1,000; the filing text does not provide a clear value.