Pathfinder Bancorp(PBHC) - 2024 Q4 - Annual Report

PART I Business Overview Pathfinder Bancorp, Inc. operates Pathfinder Bank, a commercial bank with $1.47 billion in assets, focusing on lending and deposits General Overview Pathfinder Bancorp, Inc. is a bank holding company for Pathfinder Bank, reporting $1.47 billion in assets and $1.20 billion in deposits at year-end 2024 Consolidated Financial Highlights (as of Dec 31, 2024) | Metric | Amount | | :---------------------- | :--------------- | | Total Consolidated Assets | $1.47 billion | | Total Deposits | $1.20 billion | | Shareholders' Equity | $121.5 million | - The Company's primary business is its 100% ownership of Pathfinder Bank, a New York-chartered commercial bank regulated by the NYSDFS and the FDIC[10][14] - The Company sold its majority interest in the FitzGibbons Agency in October 2024 for total consideration of $2.8 million, recognizing a pre-tax gain of $3.2 million[17] Market Area and Competition The Company operates 13 offices in New York, holding the largest deposit market share in Oswego County at 47.7% - The bank operates seven branches in Oswego County, five in Onondaga County, and one limited purpose office in Oneida County, NY[19] - The local economy is expected to benefit from significant investments in semiconductor manufacturing, particularly near existing branches in Clay and Cicero, NY[20] Deposit Market Share (as of June 30, 2024) | Market Area | Market Share | Rank | | :-------------------------- | :----------- | :-------- | | Oswego County | 47.7% | 1st | | Onondaga County | 2.1% | N/A | | Combined Oswego & Onondaga | 7.9% | 5th of 15 | Lending Activities The Company's primary lending activities focus on commercial and residential real estate loans, with a strategy to grow commercial portfolios - The company's primary lending activities are originating commercial real estate, commercial loans, and one-to-four family residential real estate loans[25] - A strategic focus is to increase commercial real estate and commercial business lending, typically with adjustable or floating rates, to diversify the portfolio and manage interest rate risk[25][26][33] - The bank's lending limit to a single borrower is generally 15% of unimpaired capital and surplus ($23.4 million at year-end 2024) for unsecured loans, with an additional 10% ($15.6 million) if secured by readily marketable collateral[52] Asset Quality Asset quality is managed through continuous review, risk grading, and the CECL methodology adopted on January 1, 2023 - The Company adopted the Current Expected Credit Loss (CECL) methodology for its Allowance for Credit Losses (ACL) on January 1, 2023[67] - The transition to CECL resulted in a one-time, after-tax adjustment of $2.1 million to retained earnings, which included establishing new reserves for held-to-maturity investments and unfunded commitments[71] - The ACL calculation has three main components: specific allowances for individually evaluated loans, quantitative factors for pooled loans based on historical loss patterns correlated with econometric data, and qualitative adjustments for forward-looking conditions[73] Investment Activities Investment activities are governed by a Board-approved policy focused on safety, liquidity, and interest rate risk management - The investment policy's objectives are to manage interest rate risk, generate reasonable returns, provide liquidity, and reduce overall credit risk[81][82] - The portfolio includes a broad range of debt securities, such as U.S. Government and agency obligations, mortgage-backed securities, and corporate bonds, classified as either held-to-maturity (HTM) or available-for-sale (AFS)[83][84] - The Company invests in mortgage-backed securities and collateralized mortgage obligations guaranteed by government-sponsored enterprises (Fannie Mae, Freddie Mac, Ginnie Mae) as well as private issuers to achieve positive spreads and geographic diversification[87] Sources of Funds Primary funds come from local deposits, supplemented by FHLBNY advances, brokered deposits, and reciprocal programs - Deposits are the primary source of funds, supplemented by FHLBNY advances and brokered deposits[92] - The Company uses reciprocal deposit programs (CDARS and ICS) to offer customers FDIC insurance above standard limits[94][95] - The Company has $5.0 million in trust preferred securities maturing in 2037 and $25.0 million in 5.50% fixed-to-floating rate subordinated debt maturing in 2030, which qualify as Tier 1 and Tier 2 capital, respectively[98][100] Supervision and Regulation Pathfinder Bank is extensively regulated by NYSDFS, FDIC, and the Federal Reserve, and was well-capitalized as of December 31, 2024 - Pathfinder Bank is regulated by the New York State Department of Financial Services (NYSDFS) and the Federal Deposit Insurance Corporation (FDIC) The holding company is regulated by the Federal Reserve Board[101] - The Bank must meet minimum capital standards, including a common equity Tier 1 ratio of 4.5%, a Tier 1 ratio of 6.0%, and a total capital ratio of 8.0% It must also maintain a capital conservation buffer of 2.5%[110][114] - The Bank is subject to prompt corrective action regulations, which establish five capital categories As of December 31, 2024, Pathfinder Bank was classified as "well-capitalized"[118][121] - The Company has elected to be a "financial holding company" and qualifies for the Federal Reserve's Small Bank Holding Company Policy Statement, exempting it from risk-based capital rules at the holding company level[138] Federal and State Taxation The Company is subject to federal and New York State income taxes, filing a combined state franchise tax return - The Company uses the liability method to account for deferred income taxes, recognizing future tax consequences of differences between financial statement carrying amounts and their tax bases[148] - The Company files a combined New York State franchise tax return, with a tax rate of 6.5% for business income up to $5 million and 7.25% for income above that threshold[157] - Pre-1988 tax bad debt reserves of approximately $1.3 million remain subject to recapture into taxable income under certain conditions, such as non-dividend distributions or stock repurchases[152] Human Capital Resources As of December 31, 2024, the Company employed 186 team members, emphasizing a values-driven culture and competitive benefits Employee Headcount and Turnover | Metric | 2024 | 2023 | 2022 | | :--------------------- | :------ | :------ | :------ | | Total Headcount | 186 | 174 | 174 | | Voluntary Turnover % | 23.7% | 23.4% | 25.0% | - The workforce is comprised of approximately 74% women None of the employees are represented by a collective bargaining agreement[161] - The company provides competitive benefits including a 401(k) plan with employer matching and annual contributions, healthcare, paid time off, and an employee assistance program[166] Risk Factors Disclosure of risk factors is not required as the company qualifies as a smaller reporting company - Disclosure of risk factors is not required as the company qualifies as a smaller reporting company[169] Unresolved Staff Comments The Company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[170] Cybersecurity The Company manages cybersecurity through its ICPP, aligning with FFIEC, FDIC, and NYSDFS guidelines, with no material incidents to date - Cybersecurity is managed via the Information & Cybersecurity Program & Policy (ICPP), overseen by the Information Security Officer, Technology Steering Committee, and the Board of Directors[171][172] - The company uses third-party threat analysis tools, including penetration testing and vulnerability scanning, to measure and manage information security risks[173] - To date, the Company has not experienced any cybersecurity incidents that have materially and adversely affected its business, financial condition, or results of operations[174] Properties The Company operates 13 offices across three New York counties, with an aggregate net book value of $19.0 million for premises and equipment - The Company operates a total of 13 offices across three counties in New York[176] - The aggregate net book value of the Bank's premises and equipment was $19.0 million as of December 31, 2024[176] Legal Proceedings The Company is periodically involved in various claims incidental to its business, not expected to have a material adverse impact - The Company is involved in various legal claims incidental to its business, but management does not expect them to have a material adverse impact on its consolidated financial condition[178] Mine Safety Disclosure This section is not applicable to the Company - Not applicable[179] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock trades on NASDAQ under "PBHC," with no repurchases in 2024, and intends to continue quarterly dividends - The Company's voting common stock trades on the NASDAQ Capital Market under the symbol "PBHC"[180] - No shares of common stock were repurchased during the year ended December 31, 2024[180] - The company has historically paid regular quarterly cash dividends and intends to continue this practice, subject to Board approval and financial conditions[183] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's 2024 financial condition and results, noting decreased net income due to higher credit loss provisions and expenses Executive Summary and Results of Operations Net income for 2024 fell to $3.4 million from $9.3 million in 2023, primarily due to increased credit loss provisions and noninterest expenses Key Performance Indicators (2024 vs. 2023) | Metric | 2024 | 2023 | | :-------------------------- | :---------- | :---------- | | Net Income | $3.4 million| $9.3 million| | EPS (Basic & Diluted) | $0.54 | $1.51 | | Return on Average Assets | 0.23% | 0.67% | | Return on Average Equity | 2.75% | 8.09% | | Provision for Credit Losses | $11.0 million| $2.9 million| - The primary drivers for the decrease in net income were an $8.1 million increase in the provision for credit losses and a $5.0 million increase in noninterest expense[236] - Noninterest income increased by $4.4 million, largely due to a $3.2 million pre-tax gain on the sale of the Company's insurance agency assets in October 2024[241] - Nonperforming loans to total loans increased to 2.40% at year-end 2024 from 1.92% at year-end 2023[244] Net Interest Income Net interest income increased by $2.1 million (5.3%) to $41.0 million in 2024, with a slight improvement in net interest margin to 2.98% Net Interest Income and Margin (2024 vs. 2023) | Metric | 2024 | 2023 | Change | | :-------------------------- | :------------ | :------------ | :---------- | | Net Interest Income | $41.0 million | $38.9 million | +5.3% | | Net Interest Margin | 2.98% | 2.95% | +3 bps | | Total Interest Income | $78.4 million | $67.7 million | +15.8% | | Total Interest Expense | $37.4 million | $28.7 million | +30.0% | - The increase in interest income was driven by a $53.4 million increase in average interest-earning assets and a 58 basis point rise in the average yield on those assets[258] - The increase in interest expense was due to a higher interest rate environment and competition for deposits, which raised the average rate on interest-bearing liabilities by 68 basis points to 3.33%[254][259] Changes in Financial Condition Total assets increased by $9.1 million to $1.47 billion, driven by loan growth and branch acquisition deposits, with shareholders' equity rising to $121.5 million - Total assets grew by $9.1 million to $1.47 billion at December 31, 2024[272] - Total loans receivable increased by $21.8 million, primarily due to growth in commercial real estate loans and home equity lines acquired from the East Syracuse branch purchase[282][283] - Total deposits increased by $84.5 million to $1.20 billion, mainly from the $186.0 million in deposits assumed in the East Syracuse branch acquisition[310] - Shareholders' equity rose by $2.0 million to $121.5 million, reflecting net income of $3.4 million and a $0.5 million decrease in accumulated other comprehensive loss, partially offset by $2.5 million in total dividends declared[247][334] Quantitative and Qualitative Disclosures About Market Risk Disclosure of quantitative and qualitative disclosures about market risk is not required as the company qualifies as a smaller reporting company - Disclosure of quantitative and qualitative disclosures about market risk is not required as the company qualifies as a smaller reporting company[350] Financial Statements and Supplementary Data This section includes the Company's consolidated financial statements for 2024 and 2023, along with management's report and independent auditor's opinion Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion on the financial statements, identifying the Allowance for Credit Losses as a critical audit matter - The auditor expressed an unqualified opinion, stating the financial statements are fairly presented in accordance with U.S. GAAP[359] - The Allowance for Credit Losses on Loans was identified as a critical audit matter due to the high degree of subjective and complex management judgment required in its calculation[363][366] Consolidated Financial Statements The consolidated financial statements show total assets of $1.47 billion, net loans of $901.7 million, and net income of $3.4 million for 2024 Consolidated Statement of Condition Highlights (December 31) | (In thousands) | 2024 | 2023 | | :------------------------- | :---------- | :---------- | | Total Assets | $1,474,874 | $1,465,798 | | Loans Receivable, Net | $901,743 | $881,232 | | Total Deposits | $1,204,524 | $1,120,067 | | Total Liabilities | $1,353,391 | $1,345,542 | | Total Shareholders' Equity | $121,483 | $120,256 | Consolidated Statement of Income Highlights (Year Ended December 31) | (In thousands) | 2024 | 2023 | | :-------------------------------------------- | :--------- | :--------- | | Net Interest Income | $40,989 | $38,919 | | Provision for Credit Losses | $10,973 | $2,930 | | Noninterest Income | $9,561 | $5,190 | | Noninterest Expense | $34,417 | $29,395 | | Net Income Attributable to Pathfinder Bancorp | $3,383 | $9,293 | Notes to Consolidated Financial Statements The notes detail accounting policies, including CECL adoption, investment securities, loan portfolio, deposits, and the East Syracuse branch acquisition - The Company adopted the CECL methodology for its Allowance for Credit Losses (ACL) on January 1, 2023, resulting in a $2.1 million after-tax charge to retained earnings[398][402] - The allowance for credit losses on loans was $17.2 million (1.88% of year-end loans) at Dec 31, 2024, up from $16.0 million (1.78% of year-end loans) at Dec 31, 2023[466][306] - On July 19, 2024, the Bank acquired the East Syracuse branch from Berkshire Bank, assuming $186.0 million in deposits and acquiring $29.9 million in loans The transaction resulted in $6.3 million of core deposit intangible and $1.2 million of goodwill[610][611] - As of December 31, 2024, the Bank was categorized as "well-capitalized" under regulatory standards, exceeding all minimum capital requirements including the capital conservation buffer[571][572] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The Company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[622] Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2024, with no material changes to internal controls - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[624] - No material changes were made to internal controls over financial reporting during the fourth quarter of 2024[625] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement - Information required by this item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders[628] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2025 Proxy Statement - Information required by this item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders[633] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2025 Proxy Statement - Information required by this item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders[631] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2025 Proxy Statement - Information required by this item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders[631] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2025 Proxy Statement - Information required by this item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders[632] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report - The Company's consolidated financial statements are filed as part of this report under Item 8[634] - A list of exhibits filed with the report is provided, including articles of incorporation, bylaws, material agreements, and required certifications[634][635][637] Form 10-K Summary No Form 10-K summary is provided - None[636]