Pathfinder Bancorp(PBHC) - 2022 Q4 - Annual Report

PART I Business Pathfinder Bancorp, Inc. operates Pathfinder Bank, providing diverse financial services in New York with a focus on commercial lending and community engagement - Consolidated Financial Highlights (as of Dec 31, 2022) | Metric | Value (Millions) | | :--- | :--- | | Total Consolidated Assets | $1,400 | | Total Deposits | $1,130 | | Shareholders' Equity | $111.0 | - The Company's primary business is its investment in Pathfinder Bank, a New York-chartered commercial bank. The Bank's main activities involve attracting public deposits and investing them in commercial and residential real estate loans, as well as commercial business and consumer loans[15][21] - The Bank operates through seven branch offices in Oswego County, four in Onondaga County, and one limited purpose office in Oneida County, NY. Its primary lending market includes Oswego and Onondaga Counties[25] - Pathfinder Bank faces strong competition from money-center banks (JPMorgan Chase, Bank of America), regional banks (M&T, Key Bank), community banks, and local credit unions. Emerging financial technology ("FinTech") companies also represent a new competitive threat[28] Lending Activities The company primarily originates adjustable-rate commercial real estate and business loans, alongside fixed-rate residential mortgages, to diversify its portfolio and manage interest rate sensitivity - The company has strategically increased its focus on commercial real estate and commercial business lending to diversify its portfolio and make it less sensitive to interest rate changes[32] - The Bank participated in the Paycheck Protection Program (PPP), originating 1,177 loans totaling approximately $111.7 million. By the end of 2022, only five PPP loans remained in its portfolio, with gross revenues from PPP activities totaling $707,000 for the year[40] - As of December 31, 2022, the Bank held fifteen pools of loans purchased from third-party lenders with an aggregate amortized cost of $115.2 million. These pools include consumer installment loans, auto loans, home equity lines, and commercial lines of credit[63] Asset Quality The company maintains asset quality through continuous loan review, risk grading, and a three-component Allowance for Loan and Lease Losses (ALLL) methodology to cover probable losses - The Allowance for Loan Losses (ALLL) is based on three components: specific allowances for impaired loans, a general allowance for loan pools using historical loss rates and qualitative factors, and an unallocated component for uncertainties[84] - Interest accrual is generally stopped when a loan becomes 90 days past due or when management has serious doubts about collectability. Loans are restored to accrual status after a sustained period of performance, typically a minimum of six months[72] - Troubled Debt Restructurings (TDRs) are granted to borrowers in financial difficulty and may involve concessions like interest rate reductions or maturity extensions. These loans are returned to accrual status after at least six consecutive months of timely payments under the new terms[75][76] Supervision and Regulation Pathfinder Bank and its holding company are extensively regulated by NYSDFS, FDIC, and the Federal Reserve, meeting 'well capitalized' status and CRA requirements - The Bank is regulated by the New York State Department of Financial Services (NYSDFS) and the Federal Deposit Insurance Corporation (FDIC), while the holding company is regulated by the Federal Reserve Board[117] - The Bank must meet minimum capital standards, including a common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a leverage ratio of 4.0%. As of December 31, 2022, the Bank was categorized as "well capitalized"[127][137] - The Bank is subject to the Community Reinvestment Act (CRA) and received a "satisfactory" rating in its latest FDIC CRA evaluation dated May 13, 2019, and its latest NYCRA rating dated September 30, 2021[144][126] Human Capital Resources The company's human capital strategy focuses on attracting and retaining talent through competitive compensation, benefits, and development, employing 174 team members as of December 31, 2022 - Employee Headcount and Turnover | Year | Headcount | Voluntary Turnover % | | :--- | :--- | :--- | | 2022 | 174 | 25.0% | | 2021 | 173 | 24.2% | | 2020 | 183 | 13.2% | | 2019 | 162 | 18.8% | - As of December 31, 2022, the company employed 174 team members, approximately 75% of whom are women. None are represented by a collective bargaining agreement[171] - The company fosters retention through competitive benefits, career development, and an Employee Stock Ownership Plan (ESOP). As of year-end 2022, over 34% of the staff had been with the company for ten years or more[179] Properties As of December 31, 2022, the company operates twelve offices across three New York counties, with an aggregate net book value of premises and equipment totaling $17.9 million - Office Locations | County | Number of Offices | | :--- | :--- | | Oswego | 7 | | Onondaga | 4 | | Oneida | 1 (limited purpose) | - The aggregate net book value of the Bank's premises and equipment was $17.9 million at December 31, 2022[182] PART II Management's Discussion and Analysis of Financial Condition and Results of Operations Pathfinder Bancorp, Inc. reported $12.9 million net income for 2022, with total assets growing to $1.40 billion, driven by loan growth and deposits, while maintaining a 'well-capitalized' status - Key Performance Indicators (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $12.9 million | $12.4 million | | EPS (Basic & Diluted) | $2.13 | $2.07 | | Total Assets | $1.40 billion | $1.29 billion | | Net Interest Income | $41.4 million | $38.3 million | | Provision for Loan Losses | $2.8 million | $1.0 million | | Return on Average Assets | 0.96% | 0.98% | | Return on Average Equity | 11.77% | 11.91% | - Total assets increased by $114.7 million (8.9%) in 2022, primarily funded by a $70.1 million increase in deposits, which was largely driven by a $90.8 million increase in brokered deposits[248] - The provision for loan losses increased by $1.8 million year-over-year, mainly due to the downgrading of a few large commercial real estate and commercial loan relationships and overall loan growth[251][272] Changes in Financial Condition Total assets grew to $1.40 billion at year-end 2022, primarily from increased net loans and held-to-maturity securities, funded by deposits, while shareholders' equity slightly increased - Loan Portfolio Composition (in millions) | Loan Type | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial Real Estate | $344.7 | $287.3 | | Residential Real Estate | $262.0 | $246.3 | | Commercial & Tax Exempt | $163.8 | $156.2 | | Consumer Loans | $92.9 | $110.1 | | Home Equity & Junior Liens | $34.3 | $32.0 | | Total Loans | $897.8 | $832.5 | - Asset Quality Ratios | Ratio | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Nonperforming Assets to Total Assets | 0.66% | 0.65% | | Allowance for Loan Losses to Total Loans | 1.71% | 1.57% | | Allowance for Loan Losses to Nonperforming Loans | 169.93% | 155.99% | - Shareholders' equity increased by $710,000 to $111.0 million. The increase was driven by $12.9 million in net income, but was largely offset by a $10.9 million increase in comprehensive loss, primarily from unrealized losses on available-for-sale securities due to rising interest rates[259][343] Liquidity The company manages liquidity through deposits, borrowings, and credit facilities, with $163.4 million available at year-end 2022, and access to the Federal Reserve's BTFP - Primary liquidity sources include deposits, borrowings from the FHLBNY, loan and investment payments, and operating cash flow[349][350] - At December 31, 2022, the Bank had total available credit lines of $163.4 million from the FHLBNY, the Federal Reserve, and correspondent banks, with $47.4 million of this capacity remaining available[354] - In Q1 2023, the Federal Reserve created the Bank Term Funding Program (BTFP) as an additional liquidity source for banks. Pathfinder is eligible but had not accessed the program as of the filing date[356][357] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022 and 2021, including management's report on internal control and the independent auditor's report Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, loan portfolio, allowance for loan losses, deposits, regulatory capital, and the upcoming CECL adoption - Loan Portfolio by Type (Dec 31, 2022) | Loan Type | Balance (Millions) | % of Total | | :--- | :--- | :--- | | Commercial Loans | $509.1 | 56.6% | | Residential Mortgage Loans | $262.8 | 29.2% | | Consumer Loans | $126.9 | 14.1% | | Total Loans | $898.8 | 100.0% | - Bank Regulatory Capital Ratios (Dec 31, 2022) | Ratio | Actual | Minimum To Be "Well-Capitalized" | | :--- | :--- | :--- | | Total Core Capital (to Risk-Weighted Assets) | 15.14% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 13.88% | 8.00% | | Tier 1 Common Equity (to Risk-Weighted Assets) | 13.88% | 6.50% | | Tier 1 Capital (to Assets) | 9.67% | 5.00% | - The company adopted the new Current Expected Credit Loss (CECL) accounting standard on January 1, 2023. This resulted in a one-time transitional adjustment increasing the allowance for credit losses by $2.3 million, which reduced retained earnings by an after-tax amount of $1.7 million[452][528] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[670][671] - There were no material changes in internal control over financial reporting during the year ended December 31, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[673] PART III Directors, Compensation, Security Ownership, and Accountant Fees This section incorporates information from the Proxy Statement regarding directors, executive compensation, security ownership, related party transactions, and independent accounting firm fees - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and related transactions is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders[677][678][679] - The company's independent registered public accounting firm is Bonadio & Co., LLP. Information on audit and related fees is incorporated by reference from the Proxy Statement[680] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and CEO/CFO certifications - This section lists all exhibits filed with the Form 10-K, including Articles of Incorporation, Bylaws, material contracts like the Securities Purchase Agreement with Castle Creek, debt indentures, and executive compensation plans[682][683] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[686]