Pathfinder Bancorp, Inc. quarterly report, Q1 FY2024

Full document

Pathfinder Bancorp, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; unaudited. Pathfinder Bancorp is the parent of Pathfinder Bank, a New York-chartered commercial bank. Dollar amounts below are in millions unless otherwise stated.

Financial performance and position

  • Earnings: Net income attributable to Pathfinder Bancorp was $2.12 million, down 18.4% from $2.60 million a year earlier. Diluted earnings per voting and non-voting share were $0.34, versus $0.43. Return on average assets fell to 0.59%.
  • Interest income and margins: Interest and dividend income increased 23.7% to $18.61 million, but interest expense rose 81.5% to $9.21 million. Net interest income declined 5.7% to $9.40 million; net interest margin narrowed 27 basis points to 2.75%. Average asset yield increased to 5.44%, while average cost of interest-bearing liabilities rose to 3.26%.
  • Other income and expenses: Noninterest income increased 9.1% to $1.74 million, including a $245,000 nonrecurring lease-expense refund and $108,000 gain on marketable equity securities. Noninterest expense rose 2.4% to $7.71 million, mainly from salaries and benefits. Effective tax rate was 19.7%, compared with 20.0%.
  • Credit costs and quality: Provision for credit losses was $726,000, compared with $692,000. The loan allowance was $16.66 million, or 1.87% of loans. Nonperforming loans were $19.65 million (2.20% of loans), up from $17.23 million (1.92%) at year-end 2023; allowance coverage of nonperforming loans was 84.8%. Total past-due loans were 5.5% of loans, up from 3.7% at year-end.
  • Balance sheet: Total assets were $1.454 billion, down 0.8% from year-end. Loans were $891.5 million, down $5.7 million; deposits were $1.146 billion. Shareholders’ equity was $121.8 million, and total equity including noncontrolling interest was $122.6 million.
  • Funding, debt and liquidity: Short- and long-term borrowings totaled $137.4 million, down from $175.6 million at year-end; subordinated debt was $30.0 million. Cash and cash equivalents declined to $29.2 million. The Bank reported $225.5 million of credit availability, of which $137.4 million was used, leaving $88.1 million available. Deposits classified as uninsured were $126.9 million, or 11.1% of deposits; other nominally uninsured balances included reciprocal-program coverage and collateralized municipal deposits.
  • Cash flows: Operating activities provided $0.50 million; investing activities used $7.40 million; financing activities used $12.61 million. Cash and cash equivalents declined $19.51 million during the quarter.
  • Capital: The Bank met the regulatory definition of “well-capitalized” and exceeded applicable minimums, including buffer requirements. At March 31, Tier 1 capital to risk-weighted assets was 14.39%, total core capital to risk-weighted assets was 15.65%, and Tier 1 capital to assets was 10.13%.

Material changes versus the prior comparable period

  • Profit and EPS declined as higher funding costs outweighed increased interest income. Interest expense rose $4.14 million, while interest income rose $3.57 million.
  • Margin compression reflected a 138-basis-point rise in the average cost of interest-bearing liabilities, partly offset by an 88-basis-point increase in average earning-asset yield.
  • Recurring noninterest income was broadly stable; lower debit interchange income and a securities-sale loss were offset in part by higher fees and the one-time lease refund.
  • Compared with December 31, 2023, cash and cash equivalents and loans declined, while available-for-sale securities and deposits increased based on the consolidated statements.
  • Net charge-offs were low in Q1: the annualized net charge-off ratio was 0.01%, compared with 0.47% in Q4 2023.

Outlook, risks and unusual items

  • The filing provides no quantitative earnings or margin guidance and cautions that first-quarter results are not necessarily indicative of full-year results.
  • Management expects further personnel expense increases as it fills vacancies and makes targeted compensation adjustments. It also describes continued investment in operational efficiency and technology.
  • On March 4, 2024, the Bank agreed to acquire a Berkshire Bank branch and related assets, including approximately $32 million of loans, and assume approximately $198 million of deposits. The transaction is expected to close by the end of Q3 2024, subject to regulatory approval and other conditions. The Bank expects to pay a deposit premium of approximately 4.0% and assume an existing lease with anticipated annual payments of approximately $946,000.
  • Key risks include interest-rate and deposit-competition pressures, local economic conditions and commercial-loan concentrations, rising delinquencies and nonperforming loans, securities valuation sensitivity to interest rates, and execution and integration risks related to the proposed branch acquisition. Management estimated that a 25% adverse change in commercial-loan qualitative reserve factors could increase the allowance by approximately $1.0 million.
  • Available-for-sale securities had an unrealized loss of approximately $10.7 million relative to amortized cost; held-to-maturity securities had an unrealized loss of approximately $10.8 million. Management attributed valuation changes primarily to interest rates and stated it did not intend, and was not more likely than not required, to sell the HTM securities before recovery.
  • Off-balance-sheet commitments to extend credit and standby letters of credit totaled $215.0 million; the related allowance was $600,000. Management reported effective disclosure controls, no material control changes, and no material adverse legal proceedings.

Important facts for investors to verify

  1. Deposit figures: The filing gives inconsistent December 31, 2023 deposit totals: $1,120.1 million in the consolidated statements and $1,125.4 million in an MD&A deposit table. MD&A also cites a $20.7 million quarterly increase, while the statements imply an increase of approximately $26.0 million.
  2. Cash-flow discussion: The cash-flow statement reports a net increase in deposits in financing activities, while the MD&A liquidity narrative refers to a decrease in deposits. Reconcile the narrative to the underlying statements.
  3. Credit trends: Review the increase in nonperforming and past-due loans, the $1.4 million commercial real estate downgrade, reserve coverage, and the $42.7 million of potential problem loans.
  4. Funding and liquidity: Track deposit mix, uninsured balances, borrowing usage, available liquidity, and the cost of retaining or replacing time deposits.
  5. Acquisition and earnings quality: Confirm regulatory approval, closing terms, deposit retention and integration costs for the Berkshire branch transaction; distinguish recurring income from the one-time lease refund and other gains.