markdown [PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section presents the company's consolidated financial statements and management's discussion and analysis for the reporting period [Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) The consolidated financial statements present the financial position of Pathfinder Bancorp, Inc. as of March 31, 2023, and December 31, 2022, and its results of operations for the three months ended March 31, 2023, and 2022. A key event was the adoption of the Current Expected Credit Loss (CECL) accounting standard on January 1, 2023, which resulted in a one-time $2.1 million reduction to retained earnings. Net income for Q1 2023 was $2.6 million, a decrease from $3.0 million in Q1 2022, primarily due to higher interest expenses and an increased provision for credit losses [Consolidated Statements of Condition (Balance Sheet)](index=3&type=section&id=Consolidated%20Statements%20of%20Condition) This statement details the company's assets, liabilities, and equity at specific points in time Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$1,404,269** | **$1,399,921** | **+0.3%** | | Loans, net | $892,285 | $882,435 | +1.1% | | Total Investment Securities (AFS & HTM) | $388,201 | $386,128 | +0.5% | | Total Deposits | $1,144,262 | $1,125,430 | +1.7% | | Total Liabilities | $1,291,908 | $1,288,339 | +0.3% | | **Total Equity** | **$112,361** | **$111,582** | **+0.7%** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) This statement presents the company's revenues, expenses, and net income over a period Income Statement Highlights (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $9,968 | $9,467 | +5.3% | | Provision for Credit Losses | $692 | $102 | +578.4% | | Noninterest Income | $1,592 | $1,603 | -0.7% | | Noninterest Expense | $7,524 | $7,252 | +3.8% | | **Net Income** | **$2,599** | **$2,950** | **-11.9%** | | **EPS (Voting, basic & diluted)** | **$0.43** | **$0.49** | **-$0.06** | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes the cash inflows and outflows from operating, investing, and financing activities - For the three months ended March 31, 2023, the company experienced: - **Net cash from operating activities:** $6.0 million - **Net cash used in investing activities:** ($10.6 million), primarily due to a net increase in loans - **Net cash from financing activities:** $1.6 million, driven by a net increase in deposits ($18.8 million) which was largely offset by a net decrease in short-term borrowings ($16.8 million)[21](index=21&type=chunk)[22](index=22&type=chunk) [Key Notes to Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide detailed explanations and disclosures supporting the consolidated financial statements - The company adopted the Current Expected Credit Loss (CECL) standard on January 1, 2023. This resulted in a one-time transition adjustment that increased the allowance for credit losses on loans by $1.9 million, established a $450,000 allowance for held-to-maturity securities, and recorded a $552,000 liability for unfunded commitments. The net effect was a $2.1 million reduction in retained earnings[29](index=29&type=chunk)[145](index=145&type=chunk)[168](index=168&type=chunk) - Total nonaccrual loans significantly increased to **$19.1 million** at March 31, 2023, from $9.0 million at December 31, 2022. This **$10.1 million** increase was primarily due to the downgrade of two significant commercial loan relationships, which accounted for $13.0 million of the nonaccrual balance[68](index=68&type=chunk)[205](index=205&type=chunk) - The company utilizes interest rate swaps for hedging purposes. As of March 31, 2023, there were fair value hedges with a notional value of **$56.0 million** on investment securities and **$36.7 million** on loans. Additionally, there were cash flow hedges with a notional value of **$70.0 million** on borrowed funds[112](index=112&type=chunk)[115](index=115&type=chunk)[118](index=118&type=chunk) - At March 31, 2023, the allowance for credit losses (ACL) on loans was **$17.9 million**, or **1.96%** of total loans. This is an increase from $15.3 million, or 1.71% of total loans, at year-end 2022. The increase reflects the CECL adoption, loan growth, and downgrades in loan quality[74](index=74&type=chunk)[208](index=208&type=chunk) [Management's Discussion and Analysis (MD&A)](index=46&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%20(Unaudited)) Management attributes the 11.9% decrease in Q1 2023 net income to a significant rise in interest expense and a larger provision for credit losses, which more than offset the growth in interest income. The Net Interest Margin (NIM) compressed to 3.02% from 3.06% YoY due to rapidly rising funding costs. A key challenge highlighted is the deterioration in asset quality, with nonperforming loans increasing to 2.10% of total loans, driven by two large commercial relationships. The company adopted the CECL accounting standard, resulting in a $2.1 million after-tax reduction to equity. Despite these challenges, the bank remains well-capitalized and has sufficient liquidity [Results of Operations](index=50&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, focusing on revenue, expenses, and profitability trends - Net income decreased by **$351,000 (11.9%)** to **$2.6 million** in Q1 2023 compared to Q1 2022. The decline was primarily driven by a **$3.6 million** increase in interest expense and a **$590,000** increase in the provision for credit losses[160](index=160&type=chunk) - Net interest margin (NIM) decreased by **4 basis points** to **3.02%** in Q1 2023 from 3.06% in Q1 2022. This was caused by the cost of interest-bearing liabilities rising faster (up 127 bps) than the yield on interest-earning assets (up 102 bps) in the current rising rate environment[160](index=160&type=chunk)[162](index=162&type=chunk)[176](index=176&type=chunk) - The provision for credit losses increased to **$692,000** from $102,000 YoY, primarily due to management's decision to downgrade certain commercial real estate and commercial loans within two large borrower relationships[165](index=165&type=chunk)[182](index=182&type=chunk) - Noninterest expense rose **3.8%** to **$7.5 million**, mainly due to a **3.3%** increase in salaries and benefits to respond to inflationary pressures and for staffing a new branch, along with a **36.4%** increase in professional and other services[188](index=188&type=chunk) [Financial Condition](index=59&type=section&id=Financial%20Condition) This section discusses the company's overall financial position, including assets, liabilities, and equity - Total assets increased slightly by **$4.3 million** to **$1.40 billion** at March 31, 2023. The growth was driven by a **$12.4 million** increase in loans, funded by an **$18.8 million** increase in deposits, which allowed for a **$16.8 million** reduction in borrowings[193](index=193&type=chunk)[194](index=194&type=chunk)[195](index=195&type=chunk) - Shareholders' equity increased by **$0.7 million** to **$111.7 million**. The increase was a result of **$2.6 million** in net income and a **$0.6 million** decrease in accumulated other comprehensive loss, which offset a **$2.1 million** reduction from the CECL adoption and **$0.6 million** in dividends[197](index=197&type=chunk) [Loan and Asset Quality](index=61&type=section&id=Loan%20and%20Asset%20Quality%20and%20Allowance%20for%20Credit%20Losses) This section assesses the quality of the company's loan portfolio, nonperforming assets, and credit loss allowances Nonperforming Assets (in thousands) | Metric | March 31, 2023 | Dec 31, 2022 | March 31, 2022 | | :--- | :--- | :--- | :--- | | Total Nonperforming Loans | $19,102 | $9,015 | $7,948 | | Total Nonperforming Assets | $19,323 | $9,236 | $7,948 | | Nonperforming Loans to Total Loans | 2.10% | 1.00% | 0.93% | | Nonperforming Assets to Total Assets | 1.38% | 0.66% | 0.60% | - The significant increase in nonperforming assets was primarily due to placing **$13.0 million** in loans from two large commercial real estate and commercial loan relationships into nonaccrual status during Q1 2023[205](index=205&type=chunk)[206](index=206&type=chunk) - The allowance for credit losses to total loans ratio increased to **1.96%** as of March 31, 2023, compared to 1.71% at year-end 2022, reflecting the adoption of CECL and deteriorating credit quality in specific relationships[208](index=208&type=chunk) [Capital and Liquidity](index=59&type=section&id=Capital%20and%20Liquidity) This section evaluates the company's capital adequacy and ability to meet financial obligations - The Bank met the regulatory definition of a "well-capitalized" institution as of March 31, 2023, exceeding all minimum capital ratios including the capital conservation buffer[198](index=198&type=chunk)[200](index=200&type=chunk) Bank Capital Ratios (Actual) | Ratio | March 31, 2023 | | :--- | :--- | | Total Core Capital (to Risk-Weighted Assets) | 15.11% | | Tier 1 Capital (to Risk-Weighted Assets) | 13.85% | | Tier 1 Common Equity (to Risk-Weighted Assets) | 13.85% | | Tier 1 Capital (to Assets) | 9.68% | - The company has strong liquidity sources. Of the **$1.1 billion** in deposits, **$189.1 million (16.5%)** were uninsured after accounting for collateralized municipal deposits and reciprocal deposit programs. The company also had **$77.1 million** available in credit lines and access to the Federal Reserve's Bank Term Funding Program (BTFP), which has not been used[218](index=218&type=chunk)[219](index=219&type=chunk)[221](index=221&type=chunk) [Controls and Procedures](index=65&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2023. They noted that controls were significantly modified during the quarter to accommodate the adoption of the CECL model for credit losses, which involves increased reliance on third-party experts. No other material changes to internal controls were reported - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2023[227](index=227&type=chunk) - Internal controls were significantly modified during Q1 2023 to implement the new CECL model for accounting for credit losses, a process which involves significant complexity and reliance on independent third-party experts[228](index=228&type=chunk)[229](index=229&type=chunk) [PART II - OTHER INFORMATION](index=67&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section provides additional disclosures on legal proceedings and equity security transactions [Legal Proceedings](index=67&type=section&id=Item%201.%20Legal%20Proceedings) As of March 31, 2023, the company is not a party to any legal proceedings that would be expected to have a material adverse effect on its financial condition or results of operations - The company is not currently a named party in any material legal proceedings[230](index=230&type=chunk) [Share Repurchases](index=67&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase any of its common stock during the first quarter of 2023. As of March 31, 2023, 74,292 shares remained available for repurchase under the existing board-authorized plan from August 2016 - No shares of common stock were repurchased during the three months ended March 31, 2023[232](index=232&type=chunk) - There are **74,292 shares** that may yet be purchased under the publicly announced repurchase plan[232](index=232&type=chunk)
Pathfinder Bancorp(PBHC) - 2023 Q1 - Quarterly Report