Pathfinder Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 31, 2023. Pathfinder Bancorp is a New York community bank holding company operating primarily through Pathfinder Bank in Oswego and Onondaga Counties. The bank focuses on commercial and commercial real estate lending as well as residential mortgages, consumer lending, and deposits. Unless otherwise noted, amounts below are consolidated.
Financial results and position
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total assets | $1.400 billion | $1.285 billion | Up 8.9% |
| Total loans, before allowance | $897.8 million | $832.5 million | Up 7.8%; commercial real estate growth led |
| Total deposits | $1.125 billion | $1.055 billion | Up $70.1 million |
| Net interest income | $41.4 million | $38.3 million | Up 8.1% |
| Provision for loan losses | $2.8 million | $1.0 million | Higher following credit downgrades and loan growth |
| Noninterest income | $5.9 million | $6.2 million | Down 5.1% |
| Noninterest expense | $28.9 million | $27.5 million | Up 5.0% |
| Net income attributable to Pathfinder | $12.9 million | $12.4 million | Up 4.2% |
| Basic and diluted EPS | $2.13 | $2.07 | Up from prior year |
| Net interest margin / spread | 3.24% / 3.05% | 3.21% / 3.06% | Margin edged up; spread edged down |
| Efficiency ratio | 61.1% | 63.1% | Improved |
Interest and dividend income rose to $51.1 million from $45.8 million as average interest-earning assets and yields increased. Interest expense also increased, to $9.7 million from $7.5 million, reflecting higher deposit costs and a larger average balance of interest-bearing liabilities. Return on average assets was 0.96% (0.98% in 2021); return on average equity was 11.77% (11.91%). Book value per common share was $18.40, versus $18.43.
Operating cash flow was $21.7 million; investing cash outflow was $131.2 million; financing cash inflow was $107.6 million. Cash and cash equivalents decreased $1.9 million to $35.3 million. Investing outflows included securities purchases and $66.3 million of net loan growth.
At year-end, loans receivable, net, were $882.4 million. Available-for-sale securities were $191.7 million and held-to-maturity securities were $194.4 million; the latter had a disclosed fair value of $181.5 million. Shareholders’ equity was $111.0 million, or $111.6 million including noncontrolling interest. Accumulated other comprehensive loss was $12.2 million, substantially reflecting unrealized securities losses and retirement-plan changes.
Borrowings and subordinated debt totaled $145.7 million: $60.3 million short-term borrowings, $55.7 million long-term borrowings, and $29.7 million subordinated debt. The Bank reported regulatory capital ratios of 15.14% total capital to risk-weighted assets, 13.88% Tier 1 risk-based capital, and 9.67% Tier 1 capital to adjusted assets; it remained “well-capitalized” and exceeded applicable capital-buffer requirements.
Material changes versus 2021
- Net income increased modestly despite higher credit-loss provision and operating expenses; lower income tax expense partly offset those costs.
- Loans grew $65.3 million, while commercial real estate loans increased $57.4 million. Consumer loans declined $15.0 million. The loan portfolio was 56.7% commercial, 29.2% residential mortgage, and 14.1% consumer at year-end.
- Brokered deposits increased $90.8 million to $248.6 million, or 22.1% of deposits, compared with $157.8 million, or 15.0%, in 2021. Customer deposits declined $20.7 million overall; noninterest-bearing deposits were $183.7 million, down from $191.9 million.
- Net charge-offs fell to $370,000 from $866,000, while the allowance for loan losses rose to $15.3 million from $12.9 million. Nonperforming loans were $9.0 million, approximately 1.00% of loans, versus $8.3 million and 1.00% a year earlier.
- Nonperforming assets rose to $9.2 million from $8.3 million. Past-due loans increased to 3.21% of loans from 2.14%; total loans past due were $26.0 million in the detailed year-end table.
- The available-for-sale portfolio’s unrealized losses contributed to the increase in accumulated other comprehensive loss. A separate securities disclosure reported $12.9 million of unrealized losses on held-to-maturity securities at year-end.
- Annual dividends declared per common share increased to $0.36 from $0.28. The company reported no common-stock repurchases in 2022.
Outlook, management commentary, and risks
- Management’s strategy emphasizes commercial and commercial real estate lending, local core-deposit growth, expansion in the Syracuse-area market, fee-based services, technology investment, and expense discipline. The filing does not provide numerical earnings or growth guidance.
- Management attributed the higher loan-loss provision mainly to downgrades of four commercial real estate and commercial relationships totaling approximately $12.0 million. It cited a $2.0 million potential allowance sensitivity to a 25% negative or positive change in qualitative factors used for commercial loans.
- The company adopted the expected-credit-loss (CECL) standard on January 1, 2023. The filing describes a one-time transition increase in credit-loss reserves of $2.2 million in MD&A and $2.3 million in a note; both sections report an approximately $1.7 million after-tax reduction to retained earnings/tangible book value. The difference in the stated pretax amount is not reconciled in the filing text provided.
- Liquidity sources include deposits, FHLB advances, other credit lines, loan and securities cash flows, and brokered deposits. At December 31, 2022, $116.0 million of approximately $163.4 million in available lines was utilized, leaving $47.4 million available. Time deposits totaling $216.2 million were scheduled to mature within one year. Management warned that replacement funding could cost more if deposits do not renew.
- Following highly publicized bank failures in early 2023, the Bank Term Funding Program became an additional potential liquidity source. Management stated that the Bank had not accessed it as of the filing date.
- Uninsured deposits were $501.2 million at year-end. Brokered-deposit growth, deposit competition, interest-rate changes, commercial real estate conditions, borrower credit quality, and the fair value of securities are important risks. The company also disclosed $216.0 million of commitments to extend credit and standby letters of credit.
- Unusual items included $521,000 of federal and New York historic tax credits related to the new Southwest Corridor branch, $176,000 of realized hedge income, and a $379,000 impairment charge on property classified as held for sale. Management expected to complete the property sale during 2023. PPP-related fee income declined as the program wound down; five PPP loans totaling $203,000 remained at year-end.
- The company reported that legal claims, primarily foreclosures, were not expected to have a material adverse effect. The financial statements received an unqualified audit opinion. Management concluded that disclosure controls and internal control over financial reporting were effective, with no material weaknesses identified; the independent auditor did not provide an internal-control attestation.
- James A. Dowd, previously serving as interim CEO and president, was named permanent CEO and president on March 29, 2023.
Important facts for investors to verify
- Whether brokered and uninsured deposit levels, deposit renewals, and available borrowing capacity remain stable after year-end, and whether the Bank subsequently used the Bank Term Funding Program.
- Trends in commercial real estate and commercial credit quality, past-due balances, criticized loans, and the allowance after adoption of CECL.
- The exact CECL transition adjustment: the filing gives both $2.2 million and $2.3 million pretax, with an approximately $1.7 million after-tax effect.
- Potential liquidity or capital implications of the securities portfolio’s unrealized losses, including the difference between available-for-sale and held-to-maturity accounting and the amount of pledged collateral.
- How recurring earnings develop as deposit funding costs rise and one-time items, including historic tax credits and remaining PPP fees, diminish.
- Progress and realized returns from the Syracuse-area branch expansion, commercial lending growth, and expense-control plans.