Pathfinder Bancorp, Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a stand-alone fourth-quarter report. Pathfinder Bancorp is a community bank holding company operating primarily in Oswego and Onondaga Counties, New York. Its business centers on commercial and residential lending, deposits, and investment securities. COVID-19 materially affected customer activity, interest rates, operations, and credit-risk estimates.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets at year-end | $1.227 billion | $1.094 billion |
| Total loans, before allowance | $826.7 million | $781.3 million |
| Total deposits | $995.9 million | $881.9 million |
| Shareholders’ equity | $97.5 million | $90.4 million |
| Net interest income | $31.6 million | $28.2 million |
| Provision for loan losses | $4.7 million | $2.0 million |
| Noninterest income | $6.5 million | $4.9 million |
| Noninterest expense | $25.1 million | $25.7 million |
| Net income attributable to Pathfinder Bancorp | $7.0 million | $4.3 million |
| Basic and diluted earnings per common share | $1.17 | $0.80 |
| Net interest margin | 2.88% | 2.98% |
| Return on average assets / equity | 0.60% / 7.43% | 0.43% / 5.34% |
Profitability and changes. Net income increased 62.5%, reflecting higher net interest income, increased noninterest income, and lower expenses, partly offset by a $2.7 million increase in loan-loss provision. The efficiency ratio improved to 68.7% from 78.8%. Net interest margin declined 10 basis points as asset yields fell, although lower funding costs helped lift net interest income.
Cash flow and liquidity. Cash and cash equivalents rose $23.3 million to $43.5 million. Operating cash flow was $46.6 million, investing cash flow was negative $149.2 million, and financing cash flow was positive $126.0 million. Financing included deposit growth and proceeds from a new $25 million subordinated loan; investing included securities purchases and loan growth. The Bank reported $61.7 million of unused credit-line availability at year-end.
Debt and capital. Year-end borrowings and subordinated loans totaled $121.5 million: $4.0 million short-term borrowings, $78.0 million long-term borrowings, and $39.4 million subordinated loans. The Bank was well-capitalized; its total risk-based capital ratio was 13.13%, Tier 1 risk-based ratio 11.87%, and Tier 1 leverage ratio 8.63%.
Material changes, outlook, and risks
- Credit quality weakened. Nonperforming loans rose to $21.3 million from $5.2 million; nonperforming loans were 2.58% of loans versus 0.67%. The increase was driven principally by five commercial loans totaling $14.5 million placed on nonaccrual. The allowance rose to $12.8 million, or 1.55% of loans, from $8.7 million, or 1.11%; coverage of nonperforming loans fell to 59.89% from 165.25%.
- COVID-19 accommodations and PPP. The Bank approved 699 PPP loans totaling about $75.3 million; $60.6 million remained outstanding at year-end. Of 618 loans granted payment deferrals totaling $137.4 million, $17.1 million remained in deferral at December 31, 2020. These represented 2.1% of loans. The company cautions that ultimate collectability depends on economic recovery, borrower performance, and collateral values.
- Revenue included significant nonrecurring items. Noninterest income growth included gains from sales of residential mortgages and investment securities. The Bank sold $35.9 million of seasoned mortgages in January 2020, generating a $659,000 gain. Marketable equity securities recorded a net loss of $629,000 for the year, including a $1.2 million second-quarter loss after an investment was restructured and publicly listed; management reported a fourth-quarter recovery in its market value.
- Tax item. The 2020 effective tax rate was 15.9%, compared with 21.4% in 2019. The 2020 rate reflected an expected $316,000 New York State tax refund from amended prior-year returns, filed in the first quarter of 2021.
- Management outlook. Management planned continued commercial lending and core-deposit growth, increased fee-based revenue, expense discipline, and a new Syracuse Southwest branch targeted to open by the end of 2021. The Bank joined the second round of PPP. No specific earnings or revenue guidance was provided.
- Subsequent debt action. In the first quarter of 2021, the Company issued a redemption notice for its $10 million 2015 subordinated loan, payable April 1, 2021. It expects the redemption to reduce annual interest expense by $625,000.
- Internal-control material weaknesses. Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses in related-party transaction controls and loan authorization, disbursement, and file-maintenance controls. Management described remediation efforts. The financial-statement audit opinion was unqualified, but the auditor did not attest to internal-control effectiveness.
- Related-party and other risks. In December 2020, the Bank sold a Syracuse branch-site property for $612,000 to an LLC co-owned by a director and entered into a 32-year lease in January 2021, with annual rent of $201,000 for the first year and $262,000 thereafter. Other risks include COVID-related credit deterioration, commercial real-estate and borrower concentration, deposit competition and brokered-funding reliance, interest-rate sensitivity, and the transition away from LIBOR.
Most important facts for investors to verify
- Whether the $14.5 million commercial nonaccrual relationships and remaining $17.1 million of deferred loans perform as expected, and whether the $12.8 million allowance proves adequate.
- How much of 2020 earnings and noninterest income came from mortgage and securities gains, PPP fees, and the anticipated $316,000 tax refund, versus recurring operations.
- Whether deposit growth is sustainable and whether brokered deposits (17.1% of year-end deposits) and near-term certificate maturities create funding-cost or liquidity pressure.
- Whether management’s remediation resolves the two internal-control material weaknesses, particularly given the related-party branch-site sale and lease.
- The completed redemption of the $10 million subordinated loan, its impact on interest expense and capital, and progress and costs for the planned Syracuse branch.