Pathfinder Bancorp, Inc. Announces Second Quarter 2023 Net Income of $2.0 Million

OSWEGO, N.Y., Aug. 01, 2023 (GLOBE NEWSWIRE) -- Pathfinder Bancorp, Inc. ("Company") ( PBHC), the holding company for Pathfinder Bank ("Bank"), announced second quarter 2023 net income available to common shareholders of $2.0 million, or $0.32 per basic and diluted share. This reflects a decrease compared to the $3.3 million, or $0.54 per basic and diluted share, earned in the second quarter of 2022. The Company's total revenue, which is comprised of net interest income, before provision for credit losses, and total noninterest income, for the second quarter of 2023 was $10.8 million, decreasing by $456,000, or 4.0%, compared to the same quarter in 2022.

Performance Highlights for the Three Months Ended June 30, 2023

• The Company reported net income of $2.0 million for the three-month period ended June 30, 2023, reflecting a decrease of $1.3 million, or 39.4%, compared to the net income for the same period in 2022.
• Net interest margin remained relatively stable at 2.96% for the second quarter of 2023 reflecting a slight decrease from the 3.14% reported in the second quarter of 2022. Net interest margin was pressured due to liability costs increasing relative to earning asset yields occasioned by rapid increases in interest rates and the inversion (short-term rates higher than long-term rates) of the Treasury and related yield curves.
• A significant development for 2023 has been the increase in the provision for credit losses ("PCL"), which was $1.1 million for the three months ended June 30, 2023 as compared to $59,000 in the prior year quarter. The PCL increase was primarily due to significant deterioration in two large commercial real estate and commercial loan relationships with aggregate outstanding balances of $13.1 million.
• Noninterest expense remained steady at $7.2 million for the three months ended June 30, 2023, representing a marginal increase of 0.4% from the prior-year second quarter. These increases were primarily due to overall inflationary factors, including rising labor costs, and the establishment of the Bank's eleventh full-service branch, partially mitigated by the Company’s continuing cost containment initiatives.

Performance Highlights for the Six Months Ended June 30, 2023

• The Bank's balance sheet saw a slight contraction of total assets as a strategic shift was made towards bolstering liquidity and enhancing loan pipeline yield management. As of June 30, 2023, the Company's assets were $1.39 billion, marking a slight decrease from $1.40 billion from December 31, 2022.
• The Company reported net income of $4.6 million, for the six months ended June 30, 2023, a decrease of $1.6 million, or 26.4%, compared to the net income for the same six month period in the prior year.
• The Bank maintained a stable net interest margin at 2.99% for the first six months of 2023, reflecting a decrease from the 3.10% reported in the same six month period of 2022.
• The PCL was $1.8 million for the six months ended June 30, 2023, an increase of $1.6 million, as compared to $161,000 for the same six month period in 2022.
• Noninterest expense remained steady at $14.7 million for the first six months of 2023, reflecting a modest increase of 2.1% compared to the same period in 2022.
  

James A. Dowd, President and Chief Executive Officer of Pathfinder Bank, discussed the Bank's performance and strategic direction in light of the second quarter of 2023's results, highlighting its increased focus on enhancing liquidity through deposit growth, reduced rates of asset growth in the near term and effective expense management. Mr. Dowd expressed his confidence that the Bank’s well managed asset quality, prudent lending practices, experienced team, and long-standing commitment to exceptional customer service, ensure that Pathfinder is well-positioned to capitalize on opportunities for long-term growth.

"While we, like many of our peer institutions, faced some difficult headwinds this quarter, including a very challenging interest rate environment, resultant margin compression, and increases in labor costs, we remain confident in our ability to manage our business effectively and maintain our commitment to providing exceptional customer service,” said Mr. Dowd. “Overall, in the face of these challenging, short-term conditions, we earned nearly $2 million in the quarter and have earned $4.6 million for the first six months of 2023.”

“We maintain that our long-term investment thesis remains intact, despite the significant declines in the stock prices of Pathfinder and the vast majority of our peers over the past four months. We continue to strongly believe that we are currently well positioned, and will become ever more capable in the future of meeting the needs of our customers in our dynamically expanding local marketplace."

“Unfortunately for our current period operating results, we saw a significant increase in the provision for credit losses, which was $1.8 million in the first half of 2023 compared to $161,000 in the first half of the prior year. This $1.7 million increase in the provision for credit losses reflects the deteriorations, which we have been carefully monitoring, within two large commercial real estate and commercial loan relationships. We do not believe that any further increased provisioning was necessary at this time due to any broader loan portfolio deterioration."

“The two large credit relationships currently in full "workout" situations have our Lending Department's full attention, with highly experienced specialists devoted to managing them to the best possible outcomes. Our strategy involves working with the borrowers associated with these credit relationships on individual loan repayment plans and the liquidation of loan collateral, where appropriate. We believe that we are adequately reserved for these loans at this time and expect to announce some charge-offs related to these relationships in the next quarter as a component of the final resolution of these troubled credits."

“The Return on Average Assets ("ROAA") was 0.57%, and the Return on Average Equity ("ROAE") was 6.96% for the second quarter of 2023. Despite the drop from an ROAA of 0.99% and an ROAE of 12.08%, respectively, recorded in the same quarterly period last year, we maintain a positive outlook on these indicators for the second half of 2023,” Dowd further noted.

"Given the expected subdued loan demand resulting from broader economic uncertainty, we anticipate a modest overall loan growth of around 4% annually over the next 6-18 months. We are actively seeking loan opportunities within our markets with our experienced team of lenders to help drive loan growth but we remain very conservative in our underwriting standards. In addition, to enhance liquidity we are prioritizing deposit growth. While this strategy might slow our loan growth rates in the short term, we view it as a crucial trade-off for bolstering our longer-term financial position. We therefore expect the balance sheet to modestly contract as we focus on liquidity and navigate a decrease in the size of our loan pipeline."

“Our ongoing and effective cost management strategies are helping to offset rising labor costs and the short-term financial implications of our recently launched Syracuse branch. Our total interest expense increased, but we've managed to keep our operating expenses flat year-over-year for the second quarter of 2023 and just 2.1% higher year-over-year for the first six months of 2023. The new branch has accumulated about $10.5 million in deposits, a figure essentially unchanged since the end of 2022. Branches typically break even on a cash flow basis in three to five years, so this initial performance is not unexpected. We see this branch, which has brought community banking services to an underserved, but clearly emerging, area and provided additional service access to our growing customer base in downtown Syracuse, as a long-term investment for our Bank and our community."

“The Bank's position amidst the current economic challenges remains resilient. Net interest margin pressures will likely continue to increase, but our interest rate risk management tools, such as in force interest rate swap contracts, as well as our portfolio of floating rate investments and loans, should help to significantly mitigate margin degradation for the remainder of the year. Looking ahead, Dowd added, "The compelling economic growth opportunities in Central New York, spurred by significant private investment, position us for a promising future. We will continue to focus on asset quality and prudent lending practices while meeting the evolving needs of our customers. With a keen eye on the future, Pathfinder Bank is committed to navigating the current challenges and capitalizing on growth opportunities with its consistent and rigorous underwriting standards, strong financial performance, and dedicated team, for the benefit of our customers, employees, and shareholders."

Income Statement for the Three and Six Months Ended June 30, 2023

For the quarter ended June 30, 2023, the Company reported a net income of $2.0 million, marking a decrease of $1.3 million, or 39.4%, from $3.3 million reported in the second quarter of 2022.

Net interest income, before provision for credit losses, decreased by $245,000, or 2.5%, to $9.7 million for the second quarter of 2023, compared to the same period in the previous year. In addition, net income for the quarter ended June 30, 2023 was significantly impacted by the increased provision for credit losses, which rose to $1.1 million for the second quarter of 2023, up from just $59,000 in the second quarter of 2022. This increase was primarily due to re-evaluations of two large loan relationships deemed by management to be experiencing increased credit deterioration. After considering this provision, net interest income fell by $1.3 million, or 13.4%, to $8.6 million, for the second quarter of 2023, from $9.9 million recorded in the corresponding quarter of 2022.

Noninterest income for the second quarter of 2023 was $1.1 million, a decrease of $211,000 from the second quarter of 2022. As a result, total revenues after provision for credit losses decreased by $1.5 million, or 13.7%, to $9.7 million for the second quarter of 2023 from $11.2 million in the same quarter of the previous year. Noninterest expenses increased to $7.2 million in the second quarter of 2023, a rise of $28,000, or 0.4%, driven largely by inflationary pressures on labor costs, and incremental operations expenses related to the Bank’s addition of its eleventh full-service branch in late 2022.

Net interest income, before provision for credit losses, for the first six months of 2023 increased $256,000, or 1.32%, to $19.7 million when compared to $19.4 million for the first half of 2022. Interest and dividend income for the six months ended June 30, 2023 was $31.7 million, an increase of $9.0 million, or 39.6%, compared to $22.7 million for the same period in 2022. The increase was primarily due to an $8.1 million increase in interest income from loans and taxable debt securities, a $673,000 increase in interest income from tax-exempt securities, and $243,000 in other interest-earning sources. These increases were substantially offset by increases in interest paid on interest-bearing liabilities of $8.7 million.

Noninterest income for the first six months of 2023 was $2.7 million, a decrease of $222,000, or 7.7%, when compared to $2.9 million for the first six months of 2022. Noninterest expenses increased $300,000, or 2.1% to $14.7 million for the first half of the year when compared to $14.4 million for the same period of 2022. The relatively small year-over-year increase in noninterest expenses reflects management's continual focus on operational efficiencies and effective cost controls.

Components of Net Interest Income

In the second quarter of 2023, the Company's net interest income, before provision for credit losses, was reported at $9.7 million, indicating a 2.5% decrease, or a reduction of $245,000, from the corresponding quarter in 2022. This decrease was the result of a rise in interest expense that was partially offset by a rise in interest and dividend income. Interest and dividend income in the second quarter of 2023 was reported at $16.6 million, marking substantial growth from the previous year's quarter, largely driven by increases in interest rates and, secondarily, growth of the average balances of interest-earning assets year-over-year. More specifically, this growth in interest and dividend income can be attributed to a significant boost of $2.8 million in loan interest income along with a $2.0 million rise in interest income generated from taxable and tax-exempt investment securities.

However, this increase in interest income was offset by a significant increase in interest expenses related to interest-bearing liabilities, which spiked by 298.4% (an increase of $5.2 million) to $6.9 million. The upswing in interest expense was predominantly a result of a change in the Bank's deposit mix and a rise in average rates paid on interest-bearing liabilities, reflecting the competitive conditions in the current interest rate environment.

As a result, the net interest margin for the second quarter of 2023 was 2.96%, reflecting a drop of 18 basis points compared to the net interest margin in the second quarter of 2022. Despite the daunting challenges brought about by the rising interest rate environment, particularly with respect to short term interest rates, the Company's management has actively repositioned its assets and liabilities to maintain a relatively stable net interest margin through the first six months of 2023.

In the first six months of 2023, the Company's net interest income, before provision for credit losses, was reported at $19.7 million, an increase of $256,000, or 1.32% as compared to the same six month period in the prior year. This increase was the result of a rise in interest and dividend income that was partially offset by a rise in interest expense. Interest and dividend income in the first half of 2023 was $31.7 million, as compared to $22.7 million for the first six months of 2022. Partially offsetting the increase in interest income in the first six months of 2023 was an increase in interest expense from $3.2 million in the six months ended June 30, 2022 to $12.0 million in the same six month period of 2023.

Provision for Credit Losses

The Bank continued to maintain a vigilant approach towards risk management in the second quarter of 2023. The Bank reported a provision for credit losses of $1.1 million, representing a significant increase compared to the $59,000 reported in the same period in 2022. This increase can primarily be attributed to two large commercial real estate and commercial loan relationships experiencing credit deterioration, which necessitated a higher provision to recognize the effects of increased risk within these relationships. It is important to note that while the increase is substantial, it is isolated to two large loan relationships, and the Bank's overall loan portfolios, outside of those relationships, have seen no broad-based deterioration.

Management reaffirms its commitment to adhering to conservative loan classification and reserve-building methodologies in the current environment. The Bank will continue to closely monitor the credit-sensitive portfolios and apply its proven analysis methods. This proactive approach ensures the Bank's continued stability and resilience in the face of uncertain economic conditions. Further details regarding the asset quality and ongoing analyses can be found in the Asset Quality section.

As of January 1, 2023, Pathfinder Bank successfully transitioned from the Incurred Loss Model to the Current Expected Credit Loss ("CECL") methodology, in compliance with the Financial Accounting Standards Board ASU 2016-13. This transition necessitates the estimation of expected credit losses over the expected term of financial assets, taking into account past events, current conditions, and reasonable and supportable forecasts that affect future collectability.

The transition to CECL on January 1, 2023, was accounted for as a one-time increase in the Allowance for Credit Losses ("ACL"), with a corresponding adjustment to retained earnings, adjusted for income tax effects. This transition did not impact the Bank's earnings or earnings per share at adoption but resulted in an increase of $2.9 million in the Allowance for Credit Losses. The Bank's retained earnings reflects the one-time transition adjustment of $2.1 million, or $0.36 per share, after income tax effects, recorded on January 1, 2023.

Noninterest Income

The Company's noninterest income for the second quarter of 2023 amounted to $1.1 million, reflecting a reduction of $211,000, compared to the $1.3 million reported in the same quarter of 2022. This variation can primarily be attributed to the factors influencing recurring noninterest income, which excludes volatile items such as unrealized gains or losses on equity securities, as well as nonrecurring gains on sales of loans, investment securities, foreclosed real estate, premises, and equipment.

The following table details the components of noninterest income for the three and six months ended June 30, 2023, and 2022:

Noninterest income before gains and losses was $1.1 million in the quarter ended June 30, 2023, a decrease of $140,000, or 11.0%, as compared with the same three month period in 2022. This decrease was largely attributable to a decline of $119,000 in debit card interchange fees received during the quarter ended June 30, 2023, as compared to the same quarterly period in 2022. This quarterly decline relates to timing factors between the first two quarters of 2023. Debit card interchange fees collected in the first half of 2023 remain consistent with the level of fees collected in the first six months of 2022.

Noninterest income before gains and losses was $2.6 million in the six months ended June 30, 2023, an increase of $52,000, or 2.0%, as compared with the same six month period in 2022. This increase was largely attributable to an increase of $100,000 in insurance agency revenue, a $28,000 increase in service charges on deposits, a $16,000 increase on bank owned life insurance, partially offset by an aggregate decrease in all other recurring noninterest income categories of $92,000.

For the three and six month periods ended June 30, 2023, there was an unrealized loss on equity securities of $169,000. This is an increased loss of $140,000 and $208,000 when compared to the three and six months ended June 30, 2022, respectively. This unrealized loss is considered to be due to temporary market conditions and was not considered in the calculation of the PCL for the three or six months ended June 30, 2023.

Noninterest Expense

For the second quarter of 2023, the Company reported noninterest expenses of $7.2 million. This represents an increase of approximately $28,000, or 0.4%, compared to the same quarterly period in 2022. The increase in noninterest expenses can be attributed to two primary factors: the current inflation rate, particularly impacting labor costs, and the addition of the Bank's eleventh full-service branch in November 2022. The increase in salaries and benefits was mainly due to necessary adjustments made to individual staff salaries in response to the inflationary pressures experienced across the market. These adjustments are crucial in maintaining competitive remuneration packages to attract and retain talent in the dynamic banking sector.

For the first six months of 2023, the Company reported noninterest expenses of $14.7 million, representing an increase of approximately $300,000, or 2.1%, compared to the same period in 2022. This limited level of noninterest expense increases, in the first six months of 2023, as compared to the same six month period in 2022, demonstrates the success of the Company's expense management efforts in a challenging economic climate, including inflationary pressures, particularly in the labor market.

The Company acknowledges the continued upward pressure on labor costs and remains committed to maintaining a balance between competitive remuneration for its staff and prudent expense management to safeguard the Company's profitability. These reported facts showcase the Company's commitment to transparency and conservative financial management while investing in its human resources and expanding its service outlets to better serve customers and strengthen its market position.

The following table details the components of noninterest expense for the three and six months ended June 30, 2023, and 2022: