Pathfinder Bancorp, Inc. (PBHC) is a bank holding company headquartered in Oswego, New York, whose primary subsidiary is Pathfinder Bank, a New York state-chartered commercial bank. Over the course of its 143-year history, Pathfinder Bank has evolved from a small mutual savings bank into a diversified community banking institution serving businesses and individuals throughout Central New York.

Business Overview and History

Pathfinder Bank was founded in 1859 as a community bank in central New York. In 2011, Pathfinder Bancorp, Inc. was formed as the bank holding company for Pathfinder Bank, providing greater flexibility to pursue strategic growth initiatives. Under the leadership of President and CEO James A. Dowd, who joined the company in 2006, Pathfinder has steadily grown its commercial banking operations, diversifying its revenue streams beyond the traditional retail banking model.

In 2012, the company made a strategic decision to freeze participation and benefit accruals under its defined benefit pension plan to reduce earnings volatility and better manage pension obligations. This move allowed Pathfinder to focus on its core banking operations and growth strategies.

As part of its balance sheet management strategy, Pathfinder Bank acquired diversified pools of loans originated by unrelated third parties in 2017 and 2019. These acquisitions helped diversify the bank's loan portfolio and supplement organic loan growth. However, challenges arose in 2023 when the primary servicer of one of these purchased loan pools declared bankruptcy, requiring the bank to work diligently to collect on remaining unpaid balances and minimize losses.

Despite these challenges, Pathfinder continued its growth trajectory. In 2021, the bank completed six additional transactions to acquire more purchased loan pools, further expanding its portfolio. The bank's strategic focus on both organic growth and acquisitions has been instrumental in its expansion.

As of September 30, 2024, Pathfinder Bank reported total assets of $1.48 billion, a 17.3% increase from the prior year-end. This growth was driven by the company's July 2024 acquisition of the East Syracuse, NY branch of Berkshire Bank, which added $186 million in deposits and $30 million in loans to Pathfinder's balance sheet. The bank also maintains a wholly-owned insurance agency subsidiary, FitzGibbons Agency, LLC, which contributed $28,000 to Pathfinder's net income in the third quarter of 2024 before the subsidiary was sold to Marshall Sterling Enterprises, Inc. on October 1, 2024.

Pathfinder's loan portfolio has grown from approximately $200 million in 2006 to nearly $922 million as of September 30, 2024, a more than 360% increase, with commercial and industrial loans comprising 57.9% of total loans. The bank's focus on commercial lending has been a key driver of its success, allowing it to diversify its revenue streams and provide tailored solutions to businesses in its markets.

Financials and Performance

For the nine months ended September 30, 2024, Pathfinder Bancorp reported net income available to common shareholders of $524,000, or $0.09 per diluted share, compared to $6.76 million, or $1.10 per diluted share, for the same period in 2023. This decrease was primarily attributable to a $7.3 million increase in the provision for credit losses, which the company cited as a result of a comprehensive loan portfolio review undertaken in the third quarter.

Net interest income for the first nine months of 2024 was $30.61 million, up 2.9% from the prior-year period, driven by a 70 basis point expansion in the net interest margin to 2.97%. This improvement was partially offset by a $9.0 million increase in interest expense due to higher funding costs. Noninterest income grew 20.2% year-over-year to $4.66 million, reflecting gains in areas such as debit card interchange fees, bank-owned life insurance earnings, and loan servicing fees.

For the most recent fiscal year 2023, Pathfinder reported revenue of $43.08 million, net income of $9.29 million, operating cash flow of $15.43 million, and free cash flow of $13.47 million. However, in the most recent quarter (Q3 2024), the company's performance declined, with revenue decreasing 10.5% year-over-year to $4.47 million and a net loss of $4.64 million.

Pathfinder's loan portfolio stood at $921.66 million as of September 30, 2024, representing a 2.73% increase from December 31, 2023. The portfolio is diversified across residential mortgage loans ($259.31 million), commercial loans ($534.51 million), and consumer loans ($129.41 million). The allowance for credit losses on loans was $17.27 million, or 1.87% of total loans.

The deposit base totaled $1.20 billion as of September 30, 2024, up 6.80% from December 31, 2023. Core deposits represented 77.45% of total deposits, with noninterest-bearing demand deposits growing 23.47% to $210.11 million. The cost of deposits, excluding the impact of the core deposit intangible from the East Syracuse branch acquisition, was 1.99% at the end of the third quarter.

Pathfinder's investment securities portfolio totaled $442.60 million as of September 30, 2024, down 1.63% from the prior year-end. The portfolio provided $21.20 million in interest and dividend income during the third quarter of 2024, with an effective yield of 5.59%.

Liquidity

Pathfinder's balance sheet remained strong, with a Tier 1 capital ratio of 13.26% and a total risk-based capital ratio of 14.52% as of September 30, 2024, well above regulatory "well-capitalized" thresholds. The company's liquidity position was also favorable, with $35.3 million in cash and cash equivalents and an additional $196.8 million in investment securities providing ample funding sources.

The company's debt-to-equity ratio stood at 0.50 as of September 30, 2024, indicating a conservative capital structure. Pathfinder had $232.7 million in available credit lines with the FHLBNY, Federal Reserve Bank, and other correspondent banks, with $100.1 million utilized as of the same date. The current ratio and quick ratio both stood at 19.54, demonstrating strong short-term liquidity.

Guidance and Outlook

In conjunction with the release of its third quarter 2024 results, Pathfinder Bancorp provided limited forward guidance, citing ongoing economic uncertainty. The company noted that it would continue to focus on organic growth opportunities, integration of the East Syracuse branch acquisition, and maintaining prudent risk management practices.

While the increase in the provision for credit losses weighed on recent earnings, Pathfinder's management team expressed confidence in the quality of the bank's loan portfolio and its ability to navigate the current economic environment. The company's diversified business model, which includes commercial banking, retail banking, and insurance operations, is expected to provide stability and support future growth initiatives.

Risks and Considerations

As with any financial institution, Pathfinder Bancorp faces various risks that could impact its performance, including interest rate fluctuations, economic conditions in its Central New York markets, regulatory changes, and competition from larger regional and national banks. The company's reliance on commercial lending also exposes it to potential credit quality issues, though management has demonstrated a disciplined approach to risk management.

Additionally, the successful integration of the East Syracuse branch acquisition will be critical to realizing the anticipated benefits of this transaction. Pathfinder must effectively manage the transition of customers, systems, and operations to ensure a seamless experience and maintain the branch's profitability.

The company's performance is closely tied to the economic conditions in its primary operating areas of Oswego and Onondaga counties in New York state. As a smaller regional bank, Pathfinder does not have significant operations outside of its local market area, which could limit its growth potential but also provides a focused approach to serving its community.

Conclusion

Pathfinder Bancorp, Inc. has built a strong community banking franchise in Central New York, leveraging its diverse revenue streams and strategic focus on commercial lending to drive growth. While recent financial results were impacted by increased credit provisioning, the company's solid capital position, ample liquidity, and experienced management team position it well to navigate the current economic environment and capitalize on future opportunities.

The bank's diversified loan portfolio, growing deposit base, and investment securities operations provide a stable foundation for continued operations. However, the recent decline in quarterly performance highlights the challenges faced by regional banks in the current economic climate.

As Pathfinder continues to execute on its strategic initiatives, investors will closely monitor the bank's ability to maintain its financial performance, improve asset quality, and identify new avenues for sustainable growth. The company's success will depend on its ability to leverage its strong market position in Central New York while adapting to changing economic conditions and competitive pressures in the banking industry.