# Pathfinder Bancorp, Inc.: Form 10-K for the period ended Dec 31, 2023 - Company: [Pathfinder Bancorp, Inc.](/companies/pbhc.md) (CIK 1609065) - Form: 10-K - Filed: 2024-03-22 - Accepted by EDGAR: Mar 22, 2024, 13:56 ET - Period: 2023-12-31 - Accession: 0000950170-24-035248 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1609065/000095017024035248/pbhc-20231231.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1609065/000095017024035248/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Interest expense | 12 months, 2023-01-01 to 2023-12-31 | $28.7m | us-gaap:InterestExpense | | Income tax | 12 months, 2023-01-01 to 2023-12-31 | $2.4m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2023-01-01 to 2023-12-31 | $9.3m | us-gaap:NetIncomeLoss | | Operating cash flow | 12 months, 2023-01-01 to 2023-12-31 | $15.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2023-01-01 to 2023-12-31 | $2.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2023-01-01 to 2023-12-31 | $1.7m | us-gaap:PaymentsOfDividendsCommonStock | | Total assets | at 2023-12-31 | $1.47bn | us-gaap:Assets | | Total liabilities | at 2023-12-31 | $1.35bn | us-gaap:Liabilities | | Long-term debt | at 2023-12-31 | $49.9m | us-gaap:LongTermDebtNoncurrent | | Short-term borrowings | at 2023-12-31 | $125.7m | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2023-12-31 | $119.5m | us-gaap:StockholdersEquity | ## Business As filed, 118,563 characters. ### GENERAL ### Pathfinder Bancorp, Inc. Pathfinder Bancorp, Inc. (the "Company") is a Maryland corporation incorporated in 2014 and headquartered in Oswego, New York. The primary business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. The Company is a registered bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company is also subject to supervision and regulation by the New York State Department of Financial Services (the “NYSDFS”). The Company owns a non-consolidated Delaware statutory trust subsidiary, Pathfinder Statutory Trust II, of which 100% of the common equity is owned by the Company. Pathfinder Statutory Trust II was formed in connection with the issuance of $5.2 million in trust preferred securities. At December 31, 2023 and 2022, 6,099,571 and 6,032,112 shares of Company common stock (voting and non-voting) were outstanding, respectively. Following shareholder approval obtained on June 4, 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding shares of Series B Convertible Perpetual Preferred Stock to an equal number of Series A Non-Voting Common Stock. Neither the previously-issued Series B Convertible Perpetual Preferred Stock, nor the Series A Non-Voting Common Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors, in the same per share amount as paid on the Company’s Voting Common Stock. At December 31, 2023, the Company had total consolidated assets of $1.47 billion, total deposits of $1.12 billion and shareholders' equity of $120.3 million plus a noncontrolling interest of $761,000, which represents the 49% of the FitzGibbons Agency, LLC not owned by the Company. ### Pathfinder Bank The Bank is a New York-chartered commercial bank and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) through the Deposit Insurance Fund (“DIF”). The Bank is subject to supervision and regulation by the NYSDFS, as its chartering agency, and by the FDIC, as its deposit insurer and primary federal regulator. The Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”) and is also subject to certain regulations by the Federal Home Loan Bank System. The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits, together with other sources of funds, in loans secured by commercial and residential real estate, and commercial business and consumer assets other than real estate. In addition, the Bank originates unsecured small business and consumer loans. The Bank also invests a portion of its assets in a broad range of debt securities issued by the United States Government and its agencies and sponsored enterprises, state and municipal governments and agencies, and corporations. The Company also invests in mortgage‑backed securities issued or guaranteed by United States Government sponsored enterprises, collateralized mortgage obligations and similar debt securities issued by both government sponsored entities and private (non-governmental) issuers, and asset-backed securities that are generally issued by private entities. The Company invests primarily in debt securities but will, within certain regulatory limits, invest from time to time in mutual funds and equity securities. The Bank's principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings from the FHLBNY and correspondent financial institutions. The principal source of the Company’s income is interest on loans and investment securities. The Bank's principal expenses are interest paid on deposits and borrowed funds, employee compensation and benefits, data processing and facilities. The Bank also owns 100% of Whispering Oaks Development Corp. (“Whispering Oaks”), a New York corporation that is retained to operate or develop real estate-related projects. Whispering Oaks, through a wholly-owned second-tier subsidiary, is the sole limited partner in an unconsolidated special-purpose real estate management partnership. The partnership currently operates a low-income residential housing facility. The activities of Whispering Oaks resulted in a pre-tax gain of $10,000 in 2023. Additionally, the Bank owns 100% of Pathfinder Risk Management Company, Inc., ("PRMC") which was established to record the 51% controlling interest upon the December 2013 purchase of the FitzGibbons Agency, an Oswego County property, casualty and life insurance brokerage business with approximately $1.3 million in annual revenues. The activities of PRMC resulted in pre-tax income of $263,000 in 2023. The Company’s 51% controlling interest in this entity resulted in income of $134,000 for the Company on a consolidated basis in 2023. ### MARKET AREA AND COMPETITION ### Market Area We provide financial services to individuals, families, small to mid-size businesses and municipalities through our seven branch offices located in Oswego County, NY, four branch offices located in Onondaga County, NY and one limited purpose office located in Oneida County, NY. Our primary lending market area includes both Oswego and Onondaga Counties. However, our primary deposit generating area is concentrated in Oswego County and in the areas surrounding our Onondaga County branches. The economies of Oswego County and Onondaga County are based primarily on manufacturing, energy production, health care, education, and government. In addition to financial services, the broader Central New York market has a more diverse array of economic sectors, including food processing production and transportation. The region has more recently also developed particular strength in the commercialization of certain emerging technologies such as bio-processing, medical devices, aircraft systems and renewable energy. Based on recent independent market survey reports, median home values were $216,750 in Onondaga County and $162,500 in Oswego County at the end of 2023. Home values have shown modestly accelerating increases in recent years within the Syracuse, NY metro area, including Onondaga and Oswego Counties. The increases in home values within the Company's lending areas followed a period in which those home values exhibited relative stability compared to many other areas of the country during the economic downturns that have occurred in the last 15 years. ### Competition Pathfinder Bank encounters strong competition both in attracting deposits and in originating real estate and other loans. Our most direct competition for deposits and loans comes from commercial banks, savings institutions and credit unions in our market area. Local credit unions, some of which also have more assets than the Company, are particularly strong competitors for consumer deposits and consumer loans. In addition, potential new competitors may be emerging that are generically defined as financial technology (also referred to as “FinTech” or “fintech”) companies. These entities seek to employ new technology and various forms of innovation in order to compete with traditional methods of delivering financial services. The advanced use of smartphones for mobile banking, automated investing services and cryptocurrency are examples of such technologies. Financial technology companies consist of both well-capitalized startup entities, divisions of established financial institutions and/or established technology companies. These entities seek to replace or supplement the financial services provided by established financial service entities, such as the Company. Many established financial institutions are now implementing, or planning to implement, various forms of fintech solutions and technologies in order to broaden their product and service offerings and/or to gain improved competitive positions in this emerging marketplace. Some of these technologies either have been implemented to varying degrees by the Bank, or will be available to the Bank for future implementation through its network of service providers and computer system vendors. It cannot be predicted with certainty at this time how effective these new competitors will be in our marketplace or what costs the Company will incur in the future to implement and maintain competitive technologies. Our primary focus is to build and develop profitable consumer and commercial customer relationships while maintaining our role as a community bank. We compete for deposits by offering depositors a high level of personal service, a wide range of competitively-priced financial services, and a well distributed network of branches, ATMs, and electronic banking. We compete for loans through our competitive pricing, our experienced and active loan officers, local knowledge of our market and local decision making, strong community support and involvement, and a highly reputable brand. Notwithstanding the significant but temporary economic dislocations associated with the COVID-19 pandemic in 2020 and 2021, overall economic activity in the local marketplace and, more specifically, demand for commercial and residential loans grew significantly over the past decade. This growth in overall loan demand in our market area also attracted increased competition from financial institutions for those loans. Additionally, from a competitive perspective, some of our competitors offer products and services that we do not offer, such as trust services and private banking. As of June 30, 2023, based on the most recently-available FDIC data, we had the largest market share in Oswego County, representing 48.6% of all deposits, and we additionally held 2.0% of all deposits in Onondaga County. In addition, when combining both Oswego and Onondaga Counties, we have the fifth largest market share of fifteen institutions, representing 7.9% of the total market. ### LENDING ACTIVITIES ### General Our primary lending activities are originating commercial real estate and commercial loans, the vast majority of which have periodically adjustable rates of interest, and one-to-four family residential real estate loans, the majority of which have fixed rates of interest. Our loan portfolio also includes municipal loans, home equity loans and lines and consumer loans. In order to diversify our loan portfolio, increase our revenues, and make our loan portfolio less interest rate sensitive, the Company has actively sought to increase its commercial real estate and commercial business lending activities, consistent with safe and sound underwriting practices. Accordingly, we offer adjustable-rate commercial mortgage loans and floating rate commercial loans and lines of credit. ### Commercial Real Estate Loans Over the past several years, we have focused on originating commercial real estate loans, and we believe that commercial real estate loans will continue to provide growth opportunities for us. We expect to increase, subject to our underwriting standards and market conditions, this business line in the future with a target loan size of $500,000 to $2.0 million to small businesses and real estate projects in our market area. Commercial real estate loans are secured by properties such as multi-family residential, office, retail, warehouse and owner-occupied commercial properties. Our commercial real estate underwriting policies provide that such real estate loans are typically made in amounts up to 80% of the appraised value of the property. Commercial real estate loans are offered with interest rates that are generally fixed for up to three or five years then are adjustable based on the FHLBNY advance rate. Contractual maturities generally do not exceed 20 years. In reaching a decision whether to make a commercial real estate loan, we consider market conditions, operating trends, net cash flows of the property, the borrower’s expertise and credit history, and the appraised value of the underlying property. We will also consider the terms and conditions of the leases and the stability of the tenant base. Environmental due diligence is generally conducted for commercial real estate loans. Typically, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the owners of 20% or more of the borrowing entity. A commercial real estate borrower’s financial condition is monitored on an ongoing basis by requiring current financial statements, rent rolls, payment history reviews, property inspections and periodic face-to-face meetings with the borrower. We generally require borrowers with aggregate outstanding balances exceeding $100,000 to provide annual updated financial statements and/or federal tax returns. These requirements also apply to all guarantors on these loans. Loans secured by commercial real estate generally have greater credit risk than one-to-four family residential real estate loans. The increased credit risk associated with commercial real estate loans is a result of several factors, including larger loan balances concentrated with a limited number of borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan. Furthermore, the repayment of loans secured by commercial real estate properties typically depends upon the successful operation of the real property securing the loan. If the cash flows from the property are reduced, the borrower’s ability to repay the loan may be impaired. However, commercial real estate loans generally have higher interest rates than loans secured by one-to-four family residential real estate. ### Commercial Loans Our commercial lines of credit are typically adjustable rate lines, indexed to the prime interest rate. We typically originate commercial loans, including commercial term loans and commercial lines of credit, on the basis of a borrower’s ability to make repayment from the cash flows of the borrower’s business, conversion of current assets in the normal course of business (for seasonal working capital lines), the industry and market in which they operate, experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial loans and commercial lines of credit is substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial loans and commercial lines of credit that we originate have greater credit risk than one-to-four family residential real estate loans. Commercial term loans are typically secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets, or, in some circumstances, such loans may be unsecured. From time to time, we also originate commercial loans that are guaranteed by the United States Small Business Administration (“SBA”) or United States Department of Agriculture (“USDA”) loan programs. Over the past several years, we have focused on increasing our commercial lending and our business strategy is to continue to increase our originations of commercial loans to small businesses in our market area, subject to our underwriting standards and market conditions. Our commercial loans are generally comprised of adjustable-rate loans, indexed to the prime rate, with terms consisting of three to seven years, depending on the needs of the borrower and the useful life of the underlying collateral. We make commercial loans to businesses operating in our market area for purchasing equipment, property improvements, business expansion or working capital. If a commercial loan is secured by equipment, the maturity of a term loan will depend on the useful life of the equipment purchased, the source of repayment for the loan and the purpose of the loan. We generally obtain personal guarantees on our commercial loans. The Bank also participated in the Paycheck Protection Program (“PPP”), a specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”) pursuant to the CARES Act and subsequent legislation. Gross revenues recognized from PPP loan activities were $-0- and $707,000 in the years ended December 31, 2023 and 2022, respectively. ### Residential Real Estate Loans We currently offer one-to-four family residential real estate loans, made to borrowers in our general market area, with terms up to 30 years that are generally underwritten according to Federal National Mortgage Association (“Fannie Mae”) guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed-rate and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which as of December 31, 2023, was generally $726,200 for single-family homes in our market area. We hold our one-to-four family residential real estate loans in our portfolio but do sell mortgages into the secondary market, at management’s discretion, as a source of liquidity or as a means of managing liquidity and interest-rate risks. A significant portion of our retained loan portfolio consists of fixed-rate one-to-four family residential real estate loans with terms in excess of 15 years. We also originate one-to-four family residential real estate loans secured by non-owner occupied properties. However, we generally do not make loans in excess of 80% loan-to-value on non-owner occupied properties. Our fixed-rate one-to-four family residential real estate loans include loans that generally amortize on a monthly basis over periods between 10 to 30 years. Fixed-rate one-to-four family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans. Our adjustable-rate one-to-four family residential real estate loans generally consist of loans with initial interest rates fixed for one, three, or five years, and annual adjustments thereafter are indexed based on changes in the one-year United States Treasury bill constant maturity rate. Our adjustable-rate mortgage loans generally have an interest rate adjustment limit of 200 basis points per adjustment, with a maximum lifetime interest rate adjustment limit of 600 basis points. Although adjustable-rate one-to-four family residential real estate loans may reduce, to an extent, our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from a borrower also increase (subject to rate caps), thereby increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments. ### Residential Construction Loans Our one-to-four family residential real estate loan portfolio also includes residential constructions loans. Our residential construction loans generally have initial terms of up to six months, subject to extension, during which the borrower pays interest only. Upon completion of construction, these loans typically convert to permanent loans secured by the completed residential real estate. Our construction loans generally have rates and terms comparable to residential real estate loans that we originate. ### Tax-exempt Loans We make loans to local governments and municipalities for either tax anticipation or for small expenditure projects, including equipment acquisitions and construction projects. Our municipal loans are generally fixed for a term of one year or less, and are generally unsecured. Interest earned on municipal loans is tax exempt for federal tax purposes, which enhances the overall yield on each loan. Generally, the municipality will have a deposit relationship with us along with the lending relationship. We also make tax-exempt loans to commercial borrowers based on obligations issued by a state or local authority to provide economic development such as the state dormitory authority. ### Home Equity Loans and Junior Liens Home equity loans and junior liens are made up of lines of credit secured by owner-occupied and non-owner occupied one-to-four family residences and second and third real estate mortgage loans. Home equity loans and home equity lines of credit are generally underwritten using the same criteria that we use to underwrite one-to-four family residential mortgage loans. We typically originate home equity loans and home equity lines of credit on the basis of the applicant's credit history, an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan, and the value of the collateral securing the loan. Home equity loans are offered with fixed interest rates. Lines of credit are offered with adjustable rates, which are indexed to the prime rate, and with a draw period of up to 10 years and a payback period of up to 20 years. The loan-to-value ratio for our home equity loans is generally limited to 80% when combined with the first security lien, if applicable. The loan to value of our home equity lines of credit is generally limited to 80%, unless the Bank holds the first mortgage. If we hold the first mortgage, we will permit a loan to value of up to 90%, and we adjust the interest rate and underwriting standards to compensate for the additional risk. Home equity loans and junior liens secured by junior mortgages have greater risk than one-to-four family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for credit losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to work out the relationship in order to avoid foreclosure because the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Moreover, decreases in real estate values could adversely affect our ability to fully recover the loan balance in the event of a default. ### Consumer Loans We are authorized to make loans for a variety of personal and consumer purposes and our consumer loan portfolio consists primarily of automobile, recreational vehicles and unsecured personal loans, as well as unsecured lines of credit and loans secured by deposit accounts. Our procedure for underwriting consumer loans includes an assessment of the applicant’s credit history and ability to meet existing obligations and payments for the proposed loan, as well as an evaluation of the value of the collateral security, if any. Consumer loans generally entail greater credit-related risk than one-to-four family residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. As a result, consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower. The Company will invest from time to time in pools of collateralized consumer loans originated and serviced by financial institutions operating outside of the Company’s primary market area. Third party-originated consumer loan pools are generally acquired primarily when, in the view of management, they offer superior risk vs. return characteristics to debt securities. Such pools will, in some instances, have projected economic advantages in terms of yield and/or other portfolio characteristics, such as interest rate risk sensitivity, superior to debt securities that would otherwise be purchased and are acquired to increase the overall performance characteristics of the Company’s interest earning-asset portfolios viewed as a whole. Loans acquired through these transactions are required by the Company’s internal policies to be underwritten to standards that are consistent with those of the Company’s own underwriting guidelines and internal practices. ### Loan Originations, Purchases, Sales and Servicing We benefit from a number of sources for our loan originations, including real estate broker referrals, existing customers, borrowers, builders, attorneys, and “walk-in” customers. Our loan origination activity may be affected adversely by a rising interest rate environment which may result in decreased loan demand. Other factors, such as the overall health of the local economy and competition from other financial institutions, can also impact our loan originations. Although we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed-rate versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in our market area. These lenders include commercial banks, savings institutions, credit unions, and mortgage banking companies that also actively compete for local real estate loans. Accordingly, the volume of loan originations may vary from period to period. The majority of the fixed rate residential loans that are originated each year meet the underwriting guidelines established by Fannie Mae. While infrequent, in the past, we have sold residential mortgage loans in the secondary market, and we may do so in the future, although we continue to service loans once they are sold. From time to time, although infrequent, we may purchase commercial real estate loan participations in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. We also have participated out portions of commercial and commercial real estate loans that exceeded our loans-to-one borrower legal lending limit and for purposes of risk diversification. In recent years, the Bank has purchased broadly-diversified pools of essentially homogenous loans from originators outside of the Bank’s market area. These originators generally specialize in loan types, such as consumer loans, other than those loan types that the Bank specializes in. These loans, which are generally relatively short in duration, are acquired to provide supplementary interest income as well as to provide improvements to the Bank’s overall asset/liability mix, particularly with respect to interest rate risk. Third party-originated loan pools are acquired primarily when, in the view of management, they offer superior risk vs. return characteristics to debt securities. Such loans are generally acquired through the facilitation of third-party brokerages and are serviced in perpetuity by the originating entries or their designees. Funding for loan purchases of this type is generally obtained through incremental usage of brokered deposits and/or other forms of borrowed funds. The Bank intends to purchase similar pools of loans on an occasional basis in the future if and when management believes that it is economically advantageous to do so. See Note 5 within the Notes to consolidated financial statements contained herein. ### Loan Approval Procedures and Authority The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by management and the Board of Directors. Our policies are designed to provide loan officers with guidelines on acceptable levels of risk, given a broad range of factors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan, if applicable. The Board of Directors grants loan officers individual lending authority to approve extensions of credit. The level of authority for loan officers varies based upon the loan type, total relationship, form of collateral and risk rating of the borrower. Each loan officer is charged with the responsibility of achieving high credit standards. Individual lending authority can be increased, suspended or removed by the Board of Directors, as recommended by the President or Executive Vice President and Chief Banking Officer. If a loan is in excess of any individual loan officer’s lending authority, the extension of credit must be referred to the Officer Loan Committee (“OLC”) or the Executive Loan Committee ("ELC"), depending on either the size of the loan or the loan relationship. The OLC is comprised of select senior officers, and the ELC includes certain members of the Board of Directors. ### Loans to One Borrower Under New York law, New York commercial banks are subject to loans-to-one borrower limits, which are substantially similar as those applicable to national banks, which generally restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus, which was $24.0 million at December 31, 2023, on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus, which was $16.0 million at December 31, 2023, if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate), subject to exceptions. Additionally, our internal loan policies limit the total related credit to be extended to any one borrower (after application of the rules of attribution), with respect to any and all loans with the Bank to 10% of Tier 1 and 2 capital, subject to certain exceptions. The indebtedness includes all credit exposure whether direct or contingent, used or unused. ### ASSET QUALITY ### Loan Delinquencies and Collection Procedures When a loan becomes delinquent, we make attempts to contact the borrower to determine the cause of the delayed payments and seek a solution to permit the loan to be brought current within a reasonable period of time. The outcome can vary with each individual borrower. The Bank strictly adheres to the requirements of federal and New York State laws and regulations with respect to consumer loan collections. Commercial loans may experience longer workout times than consumer loans and may trigger a need for complex loan modifications. ### Specifically-Identified Loans, Non-performing Loans and Loan Modifications The policy of the Bank is to provide a continuous assessment of the quality of its loan portfolio through the maintenance of an internal and external loan review process. The process incorporates a loan risk grading system designed to recognize degrees of risk on individual commercial and mortgage loans in the portfolio. Management is responsible for monitoring of asset quality and risk grade designations, which are communicated to the board on a regular basis. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans generally is applied against principal or interest if it is recognized on the cash basis method. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally for a minimum of six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Our Allowance for Credit Losses policy (“ACL”) establishes criteria for specifically-identified loans to be measured for impairment based on the following: Residential and Consumer Loans: - All loans rated substandard or worse, on nonaccrual, and above our total related credit (“TRC”) threshold balance of $300,000. Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans: - All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000. Specifically-identified loans are determined by the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value. ### Foreclosed real estate Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are recorded to the allowance for credit losses. Values are derived from appraisals of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. Loan delinquencies together with properties within our Foreclosed Real Estate portfolio are reviewed monthly by the Board of Directors. ### Classified Assets Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific allowance for credit losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management. ### Allowance for Credit Losses Management extensively reviews recent trends in historical losses, qualitative factors, including concentrations of loans to related borrowers and concentrations of loans by collateral type, and specific reserve requirements on loans individually evaluated in its determination of the adequacy of the credit losses. Therefore, the allowance for credit losses (ACL) represents management’s estimate of losses inherent in credit-exposed asset portfolios, including the loan portfolio, unfunded loan commitments and the portion of the investment securities portfolio classified as held-to maturity (HTM). The ACL is established as of the date of the statement of condition and it is recorded as a reduction of either loans or HTM securities or as an other liability, in the case of unfunded loan commitments, in accordance with generally accepted accounting principles (GAAP). In June 2016, the Financial Accounting Standards Board (“FASB”) issued *Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments*, requiring financial institutions, such as the Bank, to adopt the Current Expected Credit Loss (“CECL”) methodology according to a specified implementation timeline. In order to meet this timeline requirement, the Bank adopted the CECL methodology for calculating its ACL on January 1, 2023. The amended guidance replaced the previously-required allowance for loan and lease losses (“ALLL”) calculated under what was known as the Incurred Loss Model. The ACL represents a valuation account that is deducted from the amortized cost basis of includable financial assets to present their net carrying value at the amount expected to be collected over the entire life of those assets. The income statement now reflects the measurement of credit losses for newly recognized financial assets as well as expected increases, or decreases, of expected credit losses that have taken place during the reporting period. When determining the ACL, expected credit losses over the expected term of the financial asset will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amount. In addition, the amended guidance requires credit losses relating to assets such as held-to-maturity debt securities and open contractual funding commitments to be recorded through the ACL. Because the CECL methodology requires that reserves be established within the ACL for a broad range of financial assets, including all loans, through the entirety of their expected lives and also considers categories of financial instruments, such as open funding commitments, the initial ACL upon adoption would, in most cases, be expected to be greater than the ALLL that it replaced. This was the case with the Company's adoption of the CECL model in on January 1, 2023. In addition, the CECL model is designed to be more forward looking than the ILM and reflects a number of factors, most notably the estimation of cumulative credit losses through the entirety of the expected life of each evaluated financial instrument, periodic provisions for credit losses may, in the future, be more volatile than the historical patterns previously established under the ILM. At December 31, 2022 the Company calculated its ALLL utilizing the Incurred Loss Model ("ILM") methodology, as required under GAAP on that date. As noted above, on January 1, 2023, the Company adopted the CECL model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total ALLL of $15.3 million, of which $4.8 million was related to impaired loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis. On January 1, 2023 the Company recorded a one-time CECL transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans, evaluated collectively in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to impaired loans at December 31, 2022 was not affected by the transition to the CECL methodology at January 1, 2023. The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.1 million, net of the effects of tax, on January 1, 2023, which was recorded to retained earnings on that date. The ACL is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is increased by the provision for credit losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are recorded against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. All or part of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all or part of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, unless productive collection efforts are providing results. Consumer loans may be charged off earlier in the event of bankruptcy, or if there is an amount that is deemed uncollectible. No portion of the ACL is restricted to any individual loan type and the entire allowance is available to absorb any and all credit losses. The ACL is based on three major components which are: (i) specific components for specifically-identified loans, (ii) quantitative factors, applied to nonspecifically-identified loans derived from historical bank-specific and industry loss charge-off patterns that have been correlated to prior period econometric factors, and (iii) a broad range of qualitative factors intended to provide further forward-looking perspectives on overall credit quality. The first component is the specific allowance that relates to loans that are specifically-identified or where analysis for impairment is appropriate. For these loans, an allowance is established when the discounted cash flows or collateral value of the specifically-identified loan are lower than the carrying value of the loan. A loan is considered specifically-identified when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Specifically-identified loans are measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of our loans utilize the fair value of the underlying collateral. Factors considered by management in determining specifically-identified loans include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not specifically-identified. Management determines the significance of payment delays and shortfalls on a case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reason for the delay, the borrower’s prior payment record and the amount of shortfall in relation to what is owed. When a loan is determined to be specifically-identified, we will reevaluate the collateral which secures the loan. For real estate loans, we will obtain a new appraisal or broker’s opinion, whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from an independent firm able to provide such an evaluation. Collateral will be inspected not less than annually for all specifically-identified loans and will be reevaluated not less than every two years. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of homogeneous loans, including purchased loans, are evaluated for borrowers experiencing financial difficulties in the aggregate. Accordingly, we do not separately identify individual residential mortgage loans with outstanding principal balances less than $300,000, home equity and other consumer loans for impairment disclosures. We make exceptions to this general rule when such loans are (1) rated substandard or worse, on nonaccrual status and are related to borrowers with total related credit exposure in excess of our threshold balance of $300,000; or (2) the loans are modified due to borrowers experiencing financial difficulties. The projected credit losses related to purchased loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at least monthly. Over the life of the purchased loan pools, the allowance for credit losses is adjusted, through the provision for credit losses, for expected loss experience, over the projected life of the loans. The expected credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of the purchased loan pools. The Bank does not initially increase the allowance for credit losses on the purchase date of the loan pools. The second component of the ACL estimation is based on quantitative factors, which cover discrete pools of loans, by loan class, not considered specifically-identified, smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based on historical loss rates for each of these categories of loans. Under the CECL methodology, quantitative analysis is used to predict future life-of loan charge-offs based on historical charge-off patterns correlated to a range of specific econometric factors, such as the national unemployment rate. The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default with loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to future cash flows that are adjusted to present value and these discounted expected losses become the quantitatively-derived portion of the ACL. Within the third component of the ACL, management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions, levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration, and changes in regulatory environment, management, markets and product offerings. The Company assesses quarterly the magnitude of QF adjustments necessary to be applied to the quantitatively-derived ACL in order to incorporate forward-looking projections in its final evaluation of current expected credit losses. In addition, the FDIC and NYSDFS, as an integral part of their examination process, periodically review our allowance for credit losses and may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, we believe the current level of the allowance for credit losses is adequate. ### INVESTMENT ACTIVITIES Our investment policy is established by the Board of Directors. Our investment policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management objectives. The Asset Liability Management Committee (the “ALCO”) of the Board of Directors acts in the capacity of an investment committee and is responsible for overseeing our investment program and evaluating on an ongoing basis our investment policy and objectives. Our President and Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have the authority to purchase and sell securities within specific guidelines established by the investment policy. All transactions are reviewed by the Board of Directors at its regular meetings. The general objectives of the investment securities portfolio are to assist in the overall interest rate risk management of the Bank, while generating a reasonable rate of return consistent with the risk of purchased principal, provide a source of liquidity, and reduce our overall credit risk profile. We also purchase securities to provide necessary liquidity for day-to-day operations and when investable funds exceed loan demand, as well as to provide highly liquid assets under collateralization arrangements related to municipal deposits. The effect that the proposed security purchase would have on our overall credit and interest rate risk profile and our risk-based equity ratios is also considered in evaluating the timing, mix and characteristics of investment security purchases. All investment securities purchased/held must meet regulatory guidelines and be permissible bank investments. Our investment securities include a broad range of debt securities issued by the United States Government and its agencies and sponsored enterprises, state and municipal governments and agencies, and corporations. The Company also invests in mortgage‑backed securities issued or guaranteed by United States Government sponsored enterprises, collateralized mortgage obligations and similar debt securities issued by both government sponsored entities and private (non-governmental) issuers, and asset-backed securities that are generally issued by private entities. The Company invests primarily in debt securities but will from time to time also invest, within certain regulatory limits, in mutual funds and equity securities. All securities purchased are classified at the time of purchase as either held-to-maturity (HTM) or available-for-sale (AFS). We do not maintain a trading account. Securities purchased with the intent and ability to hold until maturity will be classified as HTM. Securities placed in the HTM category will be accounted for at amortized cost. Securities that do not qualify or are not categorized as HTM are classified as AFS. This classification includes securities that may be sold in response to changes in interest rates, the security's prepayment risk, liquidity needs, the availability of and the yield on alternative investments, and funding sources and terms. These securities are reported at fair value, which is determined on a monthly basis. Unrealized gains and losses are reported as a separate component of capital, net of tax. The aggregate change in value of the portfolio is reported to the Board of Directors monthly. The composition of the investment portfolio is substantially the same for securities classified as both HTM and AFS, although the portion of the securities portfolio classified as AFS generally has a higher concentration of shorter-term, and/or more liquid assets. Such securities are held as part of the Bank’s liquidity management programs. The Bank holds a significant portion of its investment securities in mortgage-backed securities and collateralized mortgage obligations (many, but not all of which are issued by government-sponsored enterprises) and direct federal government and federal agency obligations. Federal agency issuers include the Federal Farm Credit Bank, Federal Home Loan Bank, Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), among others. For a discussion on mortgage backed securities, see “Mortgage-Backed Securities and Collateralized Mortgage Obligations.” As part of our membership in the FHLBNY, we are required to maintain a dividend-earning investment in FHLBNY stock. This investment is classified separately from securities due to significant restrictions on sale or transfer of the stock. For further information regarding our securities portfolio, see Note 4 to the consolidated financial statements. More specifically, we purchase mortgage-backed and asset-backed securities, as well as collateralized mortgage obligations guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as a number of private issuers. Mortgage-backed and asset-backed securities and collateralized mortgage obligations are created by pooling loan assets (mortgages or other loan types) and issuing a security with an interest rate which is less than the interest rate on the underlying loans. These securities typically represent a participation interest in a pool of mortgages or other loans The issuers of such securities pool and resell the participation interests in the form of securities to investors such as the Bank, and in the case of government agency sponsored issues, guarantee the payment of principal and interest to investors. The securities issued by private entities are generally senior tranches, and most often the most senior tranche of multi-class issuances that provide substantial credit enhancements to their senior tranches and therefore reasonable, but not absolute, protection for the Bank from the risks of default. We invest in mortgage-backed and asset-backed securities and collateralized mortgage obligations to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk through geographic diversification. These securities are generally relatively short in duration and therefore reduce the Bank’s sensitivity to changes in interest rates. All privately issued mortgage-backed securities held by the Bank at December 31, 2023 were either rated at or above the lowest investment grade for credit quality by a nationally-recognized statistical rating organization (a “NRSRO”) or were the most senior tranches of securitizations that were not rated by a NRSRO at the time of the securities’ issuance. We regularly monitor the credit quality of this portfolio. At December 31, 2023, no securities held by the Bank in this category had been downgraded by a NRSRO. ### HEDGING ACTIVITIES The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at December 31, 2023. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no material derivative contracts not designated as hedging agreements at December 31, 2023 or December 31, 2022. See Note 21 within the Notes to consolidated financial statements contained herein. ### SOURCES OF FUNDS ### General Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also rely on advances from the FHLBNY, the Certificates of Deposit Account Registry Service (“CDARS”) provided by an independent third-party, IntraFi Network, and other deposits acquired through unaffiliated third-party financial institutions as forms of brokered deposits. In addition to deposits and borrowings, we derive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, economic conditions and competition from other financial institutions. ### Deposits A majority of our depositors are persons or businesses who work, reside or operate in Oswego and Onondaga Counties. We offer a variety of deposits, including checking, savings, money market deposit accounts, and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We establish interest rates, maturity terms, service fees and withdrawal penalties on a periodic basis. Management determines the rates and terms based on rates paid by competitors, our need for funds or liquidity, overall growth goals and federal and state regulations. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates. The Bank participates in a number of programs collectively designed to allow it to supplement deposit funding from its core customers with brokered deposits garnered from outside the Bank's primary locations. These programs, which include certain facilities for which we have participated in since 2009, are employed by the Bank’s management to supplement the funding that the Bank obtains from customer deposits and other borrowings, principally from the FHLBNY, and are used to increase the overall efficiency of the Bank’s funding mix. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Services (“CDARS”) and Insured Cash Sweep (“ICS”) networks. Management intends to continue to use brokered deposits in the future as an integral part of its overall funding strategies. See Note 11 to the consolidated financial statements for further details on our brokered deposits. As noted above, we participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal deposits totaled $74.0 million at December 31, 2023, compared to $69.2 million at December 31, 2022, and represented 8.4% and 7.9% of total deposits as of the end of each year, respectively. As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market. Public deposits generally range from 16.1% to 22.9% of our total deposits. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were $149.0 million and $166.6 million at December 31, 2023 and December 31, 2022, respectively, and represented 17.0% and 19.0% of total deposits as of the end of each year, respectively. ### Borrowings The Bank has a number of existing credit facilities available to it. At December 31, 2023, the Bank had existing lines of credit at FHLBNY, the Federal Reserve Bank (“FRB”), and two other correspondent banks. We obtain advances primarily from the FHLBNY utilizing the common stock we own in the FHLBNY, qualifying residential mortgage loans held in portfolio, and certain investment securities as collateral provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLBNY advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. ### Subordinated Debt The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the FDIC and the Federal Reserve. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd., with interest rates that reset quarterly, and are indexed to the 3-month the Secured Overnight Financing Rate ("SOFR") which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, plus 1.91%. These securities have a five-year call provision. The Company guarantees all of these securities. The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2023 and 2022. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them. On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Debt (the “2020 Subordinated Debt”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Debt has a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month SOFR plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Debt at par, in whole or in part, at its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this transaction of $1.6 million was recorded in both the years ended December 31, 2023 and 2022. ### SUPERVISION AND REGULATION ### General Pathfinder Bank is a New York-chartered commercial bank and the Company is a Maryland corporation and a registered bank holding company. The Bank’s deposits are insured up to applicable limits by the FDIC. The Bank is subject to extensive regulation by NYSDFS, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. The Bank is required to file reports with, and is periodically examined by, the FDIC and the NYSDFS concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, the Company is regulated by the Federal Reserve Board. The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of shareholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate credit loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the New York State legislature, the NYSDFS, the FDIC, the Federal Reserve Board or the United States Congress, could have a material adverse impact on the financial condition and results of operations of the Company and the Bank. Set forth below is a summary of certain material statutory and regulatory requirements applicable to the Company and the Bank. The summary is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank. ### The Dodd-Frank Act The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act created the Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Banks and savings institutions with $10 billion or less in assets, such as Pathfinder Bank, continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws. ### The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) On May 24, 2018, the EGRRCPA was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all financial institutions with the exception of the largest banks. The EGRRCPA’s provisions include, among other items: (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from HMDA’s expanded data disclosures; (iv) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (v) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio at a percentage not less than 8% and not greater than 10%; that such institutions may elect to replace the general applicable risk-based capital requirements for determining well-capitalized status. In addition, the law required the Federal Reserve Board to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities. ### New York Bank Regulation Pathfinder Bank derives its lending, investment, branching and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the NYSDFS, as limited by federal laws and regulations. Under these laws and regulations, commercial banks, including Pathfinder Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a bank may invest up to 2% of its assets or 20% of its capital, whichever is less in exchange-registered corporate stock. Investment in the stock of a single corporation is limited to the lesser of 1% of the bank’s assets or 15% of the Bank’s capital. The Bank’s authority to invest in equity securities is constrained by federal law, as explained later. Such equity securities must meet certain earnings ratios and other tests of financial performance. A bank may also exercise trust powers upon approval of the NYSDFS. Pathfinder Bank does not presently have trust powers. New York State chartered banks may also invest in subsidiaries. A bank may use this power to invest in corporations that engage in various activities authorized for banks, plus any additional activities that may be authorized by the NYSDFS. Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive officers and directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include that (i) certain loans must be approved in advance by a majority of the entire Board of Directors and the interested party must abstain from participating directly or indirectly in voting on such loan, (ii) the loan must be on terms that are not more favorable than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or present other unfavorable features. Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the NYSDFS that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an opportunity to be heard. The Bank does not know of any past or current practice, condition or violation that may lead to any proceeding by the Superintendent or the NYSDFS against the Bank or any of its directors or officers. The NYSDFS requires New York State-chartered or licensed banks regulated by the NYSDFS, such as the Bank, to adopt broad cybersecurity protections. In particular, the Bank has established a program designed to ensure the safety of its information systems, adopted a written cybersecurity policy, and designated an information security officer. The Bank is subject to ongoing compliance and reporting requirements of the NYSDFS. In November 2023, the NYSDFS amended its cybersecurity regulations to include heightened governance requirements and an expansion of the breadth and depth of required policies and procedures, among other things. ### New York State Community Reinvestment Regulation Pathfinder Bank is also subject to provisions of the New York State Banking Law which imposes continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”) which are substantially similar to those imposed by the Federal Community Reinvestment Act (“CRA”). Pursuant to the NYCRA, a bank must file copies of all federal CRA reports with the NYSDFS. The NYCRA requires the NYSDFS to make a written assessment of a bank’s compliance with the NYCRA every 24 to 36 months, utilizing a four-tiered rating system and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank’s NYCRA rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. Pathfinder Bank’s NYCRA most recent rating, dated September 30, 2021, was “satisfactory.” ### Federal Regulations ***Capital Requirements.*** Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Pathfinder Bank exercised the opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, regulators take into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when and where deemed necessary. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management personnel if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. Notwithstanding the foregoing, pursuant to the EGRRCPA, the FDIC finalized a rule that established a community bank leverage ratio (“CBLR”). The CBLR (Tier 1 capital to average consolidated assets) was established at 9% for institutions under $10 billion in assets and such institutions may elect to utilize the CBLR threshold level of capital in lieu of the generally-applicable risk-based capital requirements under Basel III. Such institutions that meet the CBLR threshold and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. A financial institution can elect to be subject to this new definition. The Bank did not elect to become subject to the CBLR. ***Standards for Safety and Soundness.*** As required by statute, the federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. ***Business and Investment Activities.*** Under federal law, all state-chartered FDIC-insured banks, including commercial banks, have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits certain exceptions to these limitations. The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes. ***Prompt Corrective Regulatory Action.*** Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. “Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after being designated “critically undercapitalized.” At December 31, 2023, Pathfinder Bank was well-capitalized. ***Transactions with Related Parties.*** Transactions between a bank (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company (“BHC”) and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates. Pathfinder Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders: - be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and - not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Pathfinder Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by Pathfinder Bank’s Board of Directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved. ***Enforcement.*** The FDIC has extensive enforcement authority over insured state banks, including Pathfinder Bank. That enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if the bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” ***Federal Insurance of Deposit Accounts.*** The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The FDIC assesses insured depository institutions to maintain its Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure of an institution’s failure within three years. The FDIC has authority to increase insurance assessments and adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by two basis points beginning in the first quarterly assessment period of 2023. As a result, effective January 1, 2023, assessment rates for institutions of the Bank’s size ranged from 3.5 to 32 basis points. The FDIC may also issue special assessments. In 2023, the FDIC issued a special assessment for banks with total consolidated assets of $5 billion or more in order to recover losses sustained by the Deposit Insurance Fund as a result of the March 2023 failures of Silicon Valley Bank and Signature Bank. Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance. ***Community Reinvestment Act.*** Under the CRA, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and merger with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Pathfinder Bank’s latest FDIC CRA rating, dated May 13, 2019, was “satisfactory.” On October 24, 2023, the FDIC and the other federal banking agencies issued a final rule to strengthen and modernize the CRA regulations. Under the final rule, banks with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years will be an “intermediate bank.” The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the Bank’s option, the Community Development Financing Test. The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. ***Federal Reserve System.*** The Federal Reserve Board regulations require banks to maintain non-interest-earning reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts). In March 2020, due to a change in its approach to monetary policy due to COVID-19, the Federal Reserve Board announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant. ***Federal Home Loan Bank System.*** Pathfinder Bank is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLBNY, Pathfinder Bank is required to acquire and hold a specified amount of shares of capital stock in the FHLBNY. As of December 31, 2023, Pathfinder Bank was in compliance with this requirement. ### Other Regulations Interest and other charges collected or contracted for by Pathfinder Bank are subject to state usury laws and federal laws concerning interest rates. Pathfinder Bank’s operations are also subject to federal laws applicable to credit transactions, such as the: - Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; - Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services; - The TILA-RESPA Integrated Disclosure Rule, commonly known as the TRID rule. This rule amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to integrate several consumer disclosures for mortgage loans; - Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; - Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; - Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; - Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; - Truth in Savings Act; - Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws; - Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; - Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; - Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; - USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and - Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. ### Holding Company Regulation The Company, as a BHC, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or BHC if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company. A BHC is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association. The Gramm-Leach-Bliley Act of 1999 authorizes a BHC that meets specified conditions, including depository institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. The Company has elected to be a “financial holding company.” In December 2014, legislation was passed by Congress that required the Federal Reserve Board to revise its “Small Bank Holding Company Policy Statement” to exempt bank and savings and loan holding companies with less than $1.0 billion of consolidated assets from the consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities. The Federal Reserve Board maintains authority to apply the consolidated capital requirements to any bank or savings and loan holding company as warranted for supervisory purposes. Regulations implementing the exemption were effective in May 2015. On August 28, 2018, pursuant to EGRRCPA, the Federal Reserve Board issued an interim final rule revising the Policy Statement increasing the consolidated asset limit to $3 billion. Under the Policy Statement, a BHC that meets certain Qualitative Requirements: - is exempt from the FRB's risk-based capital and leverage rules (Appendixes A and D of Regulation Y); and - may use debt to finance up to 75% of the purchase price of an acquisition allowing a BHC to have a debt-to-equity ratio of up to 3:1. The Policy Statement now applies to a BHC with consolidated assets of less than $3 billion that meets the following Qualitative Requirements: (i) it is not engaged in significant non-banking activities either directly or through a non-bank subsidiary; (ii) it does not conduct significant off-balance sheet activities, including securitizations or asset management or administration, either directly or through a non-bank subsidiary; or (iii) it does not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. BHCs that meet these Qualitative Requirements are determined to be "Qualifying BHCs". A Qualifying BHC is exempt from the FRB's risk-based capital and leverage rules. As a consequence, it does not have to comply with the Basel III Capital Adequacy rules. Each subsidiary bank of a Qualifying BHC must comply with the Basel III Capital Adequacy rules (or the Community Bank Leverage Ratio) and must be well-capitalized. If any subsidiary bank is not, the Federal Reserve Board expects it to become well-capitalized within a brief period of time. This Policy Statement applies to the Company. A BHC is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions. The Federal Reserve Board has issued guidance which requires consultation with the Federal Reserve Board prior to a redemption or repurchase in certain circumstances. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by BHCs. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the BHC appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a BHC serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy. Under the prompt corrective action laws, the ability of a BHC to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. The Company and the Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company or the Bank. The Company’s status as a registered BHC under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. ### Federal Securities Laws The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934. The registration under the Securities Act of 1933 of the Company’s shares of common stock issued in the Company’s initial stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933. ### Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with these regulations. ### FEDERAL AND STATE TAXATION ***Deferred Income Tax Assets and Liabilities.*** Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. ### Federal Taxation ***General.*** The Bank and the Company are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank. The Company’s federal tax returns are statutorily subject to potential audit for the years 2020 through 2023. No federal income tax returns are under audit as of the date of this report. ***Method of Accounting.*** For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns. ***Bad Debt Reserves.*** Prior to 1996, Pathfinder Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of tax law changes in 1996, Pathfinder Bank was required to use the specific charge-off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2023, Pathfinder Bank had no reserves subject to recapture in excess of its base year reserves. The Bank continues to be required to use the specific charge-off method to account for tax bad debt deductions. ***Taxable Distributions and Recapture.*** Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if Pathfinder Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if Pathfinder Bank makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a “bank” for tax purposes. At December 31, 2023, our total federal pre-base year bad debt reserve was approximately $1.3 million. ***Net Operating Loss Carryovers.*** Federal tax law allows net operating losses to be carried forward indefinitely with the net operating loss deduction limited to 80% of taxable income in any carryforward year. ***Corporate Dividends Received Deduction.*** The Company may exclude from its federal taxable income 100% of dividends received from Pathfinder Bank as a wholly-owned subsidiary by filing consolidated tax returns. The corporate dividends received deduction is 65% when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation. The dividends-received deduction is 50% when the corporation receiving the dividend owns less than 20% of the distributing corporation. ***Employee Compensation.*** A publicly held corporation is not permitted to deduct compensation in excess of $1 million per year paid to certain employees. Federal tax law eliminates certain exceptions to the $1 million limit applicable under prior law related to performance-based compensation, such as equity grants and cash bonuses that are paid only on the attainment of performance goals. ***Business Asset Expensing.*** Federal tax law allows taxpayers to immediately expense the entire cost of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% bonus depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain property). ### State Taxation Pathfinder Bancorp, Inc., Pathfinder Bank, Whispering Oaks, and Pathfinder Risk Management Corporation report income on a combined basis to New York State. The New York State franchise tax is imposed in an amount equal to the greater of 6.5% of Business Income for companies with a Business Income Base up to $5 million, or 7.25% for companies with a Business Income Base greater than $5 million, 0.025% and 0.1875% of average Business Capital for 2022 and 2023, respectively, or a fixed dollar amount based on New York sourced gross receipts. As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland. ### HUMAN CAPITAL RESOURCES ### Our Mission Our Mission, which is thoroughly communicated to all of our team members, is “To foster relationships with individuals and businesses within our communities to be the financial provider of choice. Our goal is to continually enhance the value of the Bank for the benefit of our shareholders, customers, employees and communities.” ### Our Values Our workplace culture is grounded in our customer and employee value proposition. We have adopted a formally-stated set of Values, which are also ingrained in our human capital resource management programs. These Values state that we are: - Competent Professionals - Service-Driven - A Family - Respectful - Compassionate - Proud - Honest Each of the Values, outlined above, are further defined in our internal communications, recognition programs, training programs and team-oriented activities. ### Human Capital The success of our business is highly dependent on our team members, who provide value to our customers and communities through their dedication to our mission and values. We define, exemplify and foster our culture by the Values listed above. We value our team members by investing in a healthy work-life balance, competitive compensation and benefit packages, and a vibrant, team-oriented environment centered on professional service and open communication among team members. We strive to build and maintain a high-performing culture by creating a work environment that attracts and retains outstanding, engaged team members who embody our company mantra of "*Local. Community. Trust.”* ### Demographics At December 31, 2023, we employed 174 team members, of which 161 were full-time, 12 were part-time, and one was an intern. Our staff is comprised of approximately 78% women. We continue to grow and employ team members respectively across our three-county footprint as follows: | Date | Headcount | | --- | ---: | | 12/31/2023 | 174 | | 12/31/2022 | 174 | | 12/31/2021 | 173 | | 12/31/2020 | 183 | | 12/31/2019 | 162 | At December 31, 2023, approximately 60% of our staff was employed at our bank branch and loan production offices, with the remainder of our team employed within all other functional areas, including our customer-facing electronic commerce and call center units. None of these employees are represented by a collective bargaining agreement and management considers its relationship with employees to be good. During fiscal year 2023, we hired 44 employees, of which 34 were full-time, six were part-time, one was temporary, and three were interns. Our voluntary turnover rates for the previous five years are as follows: | Year | Voluntary Turnover % | | --- | ---: | | 2023 | 23.4% | | 2022 | 25.0% | | 2021 | 24.2% | | 2020 | 13.2% | | 2019 | 18.8% | ### Diversity and Inclusion An inclusive open-minded community that engages excellence and embraces diversity is fundamental to supporting the Pathfinder Bank vision to be a local bank that the community trusts. The communities in which we serve include persons of various race, ethnicity, gender, sexual orientation, socio-economic status, age, physical and cognitive ability, religion and political belief. We are committed to valuing and sharing the strength of our differences in a safe and positive environment. Our primary goal is to attract and cultivate a dynamic and cultural sensitivity that exemplifies, promotes and celebrates diversity. This definition of diversity includes recognition and appreciation of the uniqueness of each individual. We seek to hire well-qualified team members who are, at least as importantly, a good fit for our value system. Our selection and promotion processes are without bias and include the active recruitment of minorities and women. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the differences between people. To accomplish this, we continue our efforts through our Diversity, Equity and Inclusion Committee made up of several employee representatives from areas located throughout our market footprint. We collaborate with local business partners to better our understanding and position ourselves to improve and fulfill our commitment to diversity and inclusion. Our goal is to build and leverage a diverse and inclusive workforce and workplace by building leadership capability and organizational capacity. This requires all team members to do their part. Management must possess diversity and inclusion competencies to lead and manage an engaged workforce. All team members must treat their colleagues with respect by listening to different viewpoints, opinions, thoughts and ideas and embracing a culture of inclusion. A commitment to diversity and inclusion is essential to reflecting the values of our team members and the society we serve today. It makes business sense because it helps us to attract and retain the best talent, it enables us to understand and meet clients' needs more effectively and thus provide a better quality service. We continue our commitment to equal employment opportunity through a robust anti-discrimination plan, which includes annual compensation analyses and ongoing reviews of our selection and hiring practices, alongside a continued focus on building and maintaining a diverse workforce. For the year 2023, the population of our workforce was as follows: | Ethnicity% | | | --- | ---: | | American Indian or Alaska Native | 0.6% | | Asian | 2.2% | | Black or African American | 2.2% | | Hispanic or Latino | 3.4% | | Two or more races (Not Hispanic or Latino) | 1.1% | | White | 90.5% | | Age Range | Total | | --- | ---: | | 18-25 | 21 | | 26-35 | 56 | | 36-45 | 44 | | 46-55 | 16 | | 56-65 | 34 | | Over 65 | 3 | | Grand Total | 174 | ### Compensation and Benefits We provide a competitive compensation and benefits program to help meet the needs of our team members. In addition to salaries, these programs include annual bonuses, stock awards, a 401(k) Plan with an employer matching contribution in addition to an employer-paid annual contribution, healthcare and other insurance benefits, health savings, flexible spending accounts, paid time off, family leave, identity theft protection, telemedicine service, and an employee assistance program, including mental health services. A survey was conducted to determine employee preferences and changes were made accordingly. ### Learning and Development We invest in the growth and development of our team members by providing a multi-dimensional approach to learning that empowers, intellectually grows, and professionally develops our colleagues. We encourage and support the growth and development of our team members and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through performance and development conversations between team members and their managers, internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is available to team members enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to our business, in compliance with Section 127 of the Internal Revenue Code, and for seminars, conferences, and other training events team members attend in connection with their job duties. ### Retention Efforts Employee retention helps us operate efficiently and achieve one of our business objectives. We believe our commitment to living out our core values, actively prioritizing concern for our team members’ well-being, supporting our team members’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing team members. In addition, nearly all of our team members are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our employees. At December 31, 2023, over 27% of our current staff had been with us for ten years or more. There is a team assigned to retention efforts as a strategic initiative for 2024 and forward. ## Cybersecurity As filed, 5,172 characters. The Company considers cybersecurity a subset of information security, and as such, cybersecurity risks and controls are assessed in our information security risk assessment and managed in our Information & Cybersecurity Program & Policy ("ICPP"). The ICPP is developed and maintained utilizing the Federal Financial Institutions Examination Council ("FFIEC") Information Technology Examination Handbook, FDIC, NYSDFS, and Gramm-Leach–Bliley Act, and represents the standards, policies, procedures, and guidelines defining the Company’s security requirements and related activities, which includes risk management and risk assessment practices. Management has designated the Information Security Officer ("ISO"), who has over 14 years of experience, along with the Technology Steering Committee, with implementing and monitoring the ICPP. The Company’s Information Technology ("IT") department consists of the Chief Information Officer ("CIO"), who has over 35 years of experience in the IT field, including 25 years with the Company, and other key personnel who have years of experience and various certifications related to assessing and managing cybersecurity risk. Additionally, the Company has developed a comprehensive enterprise risk management program to monitor risks related to its operations, including cybersecurity risk, and the Company’s Chief Risk Officer has primary responsibility for the enterprise risk management program. Management also engages the services of third parties to assist the ISO with their tasks. The Company believes that risk management is a component of overall governance and that IT risk management is a component of overall risk management. The Company recognizes that our overall security culture contributes to the effectiveness of our ICPP. The Company has developed an enterprise risk management program that identifies, prioritizes and provides a formal structure for the internal and external risks that impact the organization. The Board of Directors sets the tone and direction for the Company’s use of IT and has identified the Technology Steering Committee as having primary responsibility for oversight of the Company’s risk exposures and risk assessments and policies, including risks related to cybersecurity. The Board of Directors and Technology Steering Committee approve and periodically review and re-approve the policy and other IT related policies. While the Board of Directors may delegate the design, implementation, and monitoring of certain IT activities to the CIO or designee, the full Board of Directors remains responsible for overseeing IT strategies and policies, including cybersecurity. To help carry out their responsibilities, Directors, management, and all employees are periodically trained to understand IT activities and risks, including cybersecurity risks. Management, via the Technology Steering Committee and ISO, or combination, provides a status report to the Board of Directors at least annually, with more frequent communications as necessary. The report describes the overall status of the ICPP and material matters related to the program, including security breaches, cybersecurity assessments, cybersecurity awareness training for employees and the Board of Directors. The Company utilizes third-party threat analysis tools such as penetration testing and vulnerability scanning to assist in understanding and supporting the measurement of information security related risks. Additionally, the Company uses a third-party tool to help management identify current cybersecurity risks and control maturity levels, and to evaluate overall cybersecurity preparedness. The Company conducts gap analysis and action plans designed to identify potential actions that improve our overall cybersecurity posture, and periodically reevaluates both cybersecurity risks and controls to assure they are commensurate with our size and complexity and are keeping pace with the overall cybersecurity threat environment. Management also obtains, analyzes, and responds to information from various sources on cybersecurity threats and vulnerabilities that may affect the Company, while incorporating available information on cybersecurity events into our risk assessment. Additionally, management develops, maintains, and updates a repository of cybersecurity threat and vulnerability information that may be used in conducting risk assessments, and ultimately provide updates to the Board of Directors on cybersecurity risk trends. The Company has not experienced any cybersecurity incidents in the past that have individually or in the aggregate had a materially adverse effect on our business, financial condition or results of operations. Additionally, the Company conducts due diligence in the selection and on-going monitoring of third-party service providers. Management is responsible for ensuring that such third parties use suitable information security controls when providing services to us. As part of the oversight of third-party service providers, management will determine whether cybersecurity risks are identified, measured, mitigated, monitored, and reported by such third parties. ## Properties As filed, 2,334 characters. The Company has seven offices located in Oswego County, four offices located in Onondaga County and one limited purpose office located in Oneida County. Management believes that the Bank’s facilities are adequate for the business conducted. The following table sets forth certain information concerning the main office and each branch office of the Bank at December 31, 2023. The aggregate net book value of the Bank's premises and equipment was $18.4 million at December 31, 2023. For additional information regarding the Bank's properties, see Notes 8 and 28 to the consolidated financial statements. | Location | Opening Date | Owned/Leased | | --- | --- | --- | | Main Office | 1874 | Owned | | 214 West First Street | | | | Oswego, New York 13126 | | | | Plaza Branch | 1989 | Owned (1) | | 291 State Route 104 East | | | | Oswego, New York 13126 | | | | Mexico Branch | 1978 | Owned | | 3361 Main Street | | | | Mexico, New York 13114 | | | | Oswego East Branch | 1994 | Owned | | 34 East Bridge Street | | | | Oswego, New York 13126 | | | | Lacona Branch | 2002 | Owned | | 1897 Harwood Drive | | | | Lacona, New York 13083 | | | | Fulton Branch | 2003 | Owned (2) | | 5 West First Street South | | | | Fulton, New York 13069 | | | | Central Square Branch | 2005 | Owned | | 3025 East Ave | | | | Central Square, New York 13036 | | | | Cicero Branch | 2011 | Owned | | 6194 State Route 31 | | | | Cicero, New York 13039 | | | | Pike Block Branch | 2014 | Leased (3) | | 109 West Fayette Street | | | | Syracuse, New York 13202 | | | | Clay Branch | 2018 | Leased (4) | | 3775 State Route 31 | | | | Liverpool, NY 13090 | | | | Southwest Corridor Branch | 2022 | Leased (5) | | 506 West Onondaga Street | | | | Syracuse, NY 13204 | | | | Utica Loan Production Office | 2017 | Leased (6) | | 258 Genesee Street | | | | Utica, New York 13502 | | | (1) The building is owned; the underlying land is leased with an annual rent of $39,000. (2) Both building and land are owned as of July 2023; the land lease expense in 2023 was $23,000. (3) The premises are leased with an annual rent of $91,000. (4) The premises are leased with an annual rent of $75,000. (5) The premises are leased with an annual rent of $262,000. (6) The premises are leased with an annual rent of $17,000. ## Legal proceedings As filed, 378 characters. There are various claims and lawsuits to which the Company is periodically involved that are incidental to the Company's business, most notably foreclosures. In the opinion of management, such claims and lawsuits in the aggregate are not expected to have a material adverse impact on the Company's consolidated financial condition and results of operations at December 31, 2023. ## Management's discussion and analysis As filed, 130,503 characters. ### INTRODUCTION Throughout Management’s Discussion and Analysis (“MD&A”) the term, the “Company”, refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank (the “Bank”) and Pathfinder Statutory Trust II are wholly owned subsidiaries of Pathfinder Bancorp, Inc.; however, Pathfinder Statutory Trust II is not consolidated for reporting purposes (see Note 13 of the consolidated financial statements). Pathfinder Risk Management Company, Inc., and Whispering Oaks Development Corp. are wholly owned subsidiaries of Pathfinder Bank. On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual holding company form of organization to the stock holding company form of organization (the “Conversion”). Following the completion of the Conversion, the Company was created substantially in its current form and Pathfinder Bancorp, MHC ceased to exist. The Company had 6,099,571 and 6,032,112 shares of voting and non-voting common stock in aggregate outstanding at December 31, 2023 and December 31, 2022, respectively. Since the Conversion, we have substantially transformed our business activities from those of a traditional savings bank to those of a commercial bank. This transformation of activities has significantly affected the overall composition of our balance sheet. While not reducing our role as a leading originator of one-to-four family residential real estate loans within our marketplace, which had been our primary focus as a savings bank, we have substantially grown our commercial business and commercial real estate loan portfolios since the Conversion. As a commercial bank, we have been able to offer customized products and services to meet individual commercial customer needs and thereby more definitively differentiate our services from those offered by our competitors. As a result, we have been able to create a substantially more diversified loan portfolio than the one that was in place before the completion of the Conversion. When compared to the Bank’s loan portfolio composition prior to the Conversion, it is our view that our current asset portfolio (1) significantly improves upon the distribution of credit risk across a broader range of borrowers, industries and collateral types, and (2) is more likely to generate consistent net interest margin in a broader range of interest rate environments due to the portfolio’s increased percentage of shorter-term and/or adjustable-rate assets. In a concurrent effort, the Bank has been able to fund the majority of the high level of growth in our loan portfolios primarily with deposits gathered from our local community. We believe that we have gathered these deposits at a reasonable overall cost in terms of deposit interest rates, as well as at a reasonable overall level of related infrastructure and customer support service expenses. On May 8, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Castle Creek Capital Partners VII, L.P. (“Castle Creek”), pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Common Stock”); (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Series B Preferred Stock”); and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of Common Stock at an exercise price equal to $14.25 per share (the “Warrant”), in a private placement transaction (the “Private Placement”) for gross proceeds of approximately $17.0 million. The Securities Purchase Agreement contains significant representations, warranties, and covenants of the Company and Castle Creek. On May 8, 2019, the Company filed Articles Supplementary with the Maryland Department of Assessments and Taxation to issue 1,155,283 shares of Series B Preferred Stock to Castle Creek. Each share of the Series B Preferred Stock was convertible on a one-for-one basis into either (i) Common Stock under certain circumstances or (ii) non-voting common stock, par value $0.01 per share (which will also be convertible into Common Stock), subject to approval of the creation of such class of non-voting common stock by the Company’s stockholders. The Company also entered into subscription agreements dated as of May 8, 2019 (the “Subscription Agreements”) with certain directors and executive officers of the Company as well as other accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of Common Stock at $14.25 per share for gross proceeds of approximately $3.8 million, before payment of placement fees and related costs and expenses. The Subscription Agreements contain representations, warranties, and covenants of the purchasers and the Company that are customary in private placement transactions. The subscription agreements were also part of the Private Placement, and the term “Private Placement” includes both transactions. In total, therefore, the Company issued 306,977 shares of Common Stock, 1,155,283 shares of Series B Preferred Stock and the Warrant at the conclusion of the Private Placement. The transaction raised $20.8 million in gross proceeds and the final net cash received from the Private Placement, after all issuance expenses, including placement fees and all other issuance/due diligence costs of $927,000 and $342,000, respectively, was $19.6 million. The fair value of the Warrant at the time of issuance was $373,000. Pursuant to NASDAQ rules, Castle Creek could not convert the Series B Preferred Stock or, in the future, the non-voting common stock into Common Stock, or exercise the Warrant if doing so would cause Castle Creek, when combined with the purchases of certain directors and executive officers of the Company as well as other accredited investors in the Private Placement, to own more than 19.99% of the Common Stock outstanding immediately prior to the execution of the Securities Purchase Agreement (the “Exchange Cap”). The Company was required to request stockholder approval to eliminate the Exchange Cap no later than at the 2021 annual meeting of Company shareholders. In addition, at the same meeting, the Company was required to seek shareholder approval to create a class of non-voting convertible common stock. Castle Creek will need the approval or non-objection of the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services if it seeks to increase its ownership of shares of Common Stock in excess of 9.9% of the outstanding shares of Common Stock. Holders of the Series B Preferred Stock were entitled to receive dividends if declared by the Company’s Board of Directors, in the same per share amount as paid on the Common Stock. No dividends would be payable on the Common Stock unless a dividend identical to that paid on the Common Stock was payable at the same time on the Series B Preferred Stock. The Series B Preferred Stock would rank, as to payments of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, *pari passu* with the Common Stock pro rata. Holders of Series B Preferred Stock had no voting rights except as was required by law. The Series B Preferred Stock was not redeemable by either the Company or by the holder. As discussed above, pursuant to the Securities Purchase Agreement, on May 8, 2019, the Company issued a Warrant to Castle Creek to purchase 125,000 shares of non-voting common stock at an exercise price equal to $14.25 per share. At the same time, the Company entered into a Warrant Agreement with Castle Creek, to, among other things, authorize and establish the terms of the Warrant. The Warrant is exercisable at any time after May 8, 2019, and from time to time, in whole or in part, until May 8, 2026. However, the exercise of such Warrant remains subject to certain contractual provisions, and regulatory approval if Castle Creek’s ownership of Common Stock would exceed 9.9%. At December 31, 2023, Castle Creek owned approximately 8.8% of the Company’s common voting stock. The Warrant will receive dividends equal to the amount paid on the Company’s common stock. The dividend payment shall be calculated on (1) the unexercised portion of the 125,000 notional shares encompassed within the terms of the Warrant, less (2) any exercised portion of the 125,000 shares, times (3) the amount of the quarterly dividend paid to common shareholders. Dividend payments, if declared on the Company’s common stock, will be made on the Warrant until its expiration date. Following the Private Placement, the Company used the net cash received from the transaction to strengthen the Company’s general capital and liquidity positions, fund growth within our marketplace, purchase certain loan assets, and increase the regulatory capital position of the Bank. The Company will continue to use the additional capital raised through the Private Placement primarily to support the realization of continued growth opportunities within our marketplace and, to a lesser extent, for general corporate purposes. Pursuant to the terms of the Securities Purchase Agreement, Castle Creek is entitled to have one representative appointed to the Company’s Board of Directors for so long as Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Voting Stock. If Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Voting Stock and does not have a board representative appointed to the Company’s Board of Directors, the Company will invite a person designated by Castle Creek to attend meetings of the Company’s Board of Directors as an observer. On June 30, 2023, the Company’s Board of Directors appointed Anthony R. Scavuzzo, a representative of Castle Creek, to the Board of Directors. On November 13, 2020, the Company entered into an agreement (the “Exchange Agreement”) with Castle Creek providing for the exchange of 225,000 shares of the Company’s Common stock owned by Castle Creek for 225,000 shares of the Company’s Series B Preferred Stock. The exchange was consummated simultaneously with the execution and delivery of the Exchange Agreement. The Company and Castle Creek entered into the Exchange Agreement to enable the equity ownership of Castle Creek to comply with applicable banking laws and regulations. As a result of the Exchange Agreement, on November 13, 2020, the Company issued to Castle Creek 225,000 shares of its Series B Preferred Stock in exchange for an equivalent number of shares of Company Common Stock held by Castle Creek in a transaction exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. Castle Creek was the only stockholder of the Series B Preferred Stock. The Company received no cash proceeds as a result of the exchange. In addition, the Company did not pay any commission or remuneration for the solicitation of the exchange. On November 13, 2020, the Company filed an amendment to the Articles Supplementary to the Articles of Incorporation of the Company designating the Series B Preferred Stock with the Maryland Department of Assessments and Taxation to increase the classified number of shares of the Series B Preferred Stock from 1,155,283 to 1,506,000 to allow for the additional issuance of Series B Preferred Stock to Castle Creek. There were no other changes made to the preferences, limitations, powers and relative rights of the Series B Preferred Stock. On June 4, 2021, shareholders of the Company approved an amendment to the Company’s Articles of Incorporation to authorize Non-Voting Common Stock, and to eliminate the Exchange Cap. On June 9, 2021, the Company filed Articles Supplementary to the Articles of Incorporation of the Company (the “Articles Supplementary”) with the Maryland State Department of Assessments and Taxation creating a Class A Non-Voting Common Stock, par value $0.01 per share (“Non-Voting Common Stock”). The Articles Supplementary authorized 1,505,283 shares of the Non-Voting Common Stock which Castle Creek received in exchange for the Company’s outstanding Series B Preferred Stock on a one for one basis and allowed for the issuance of 125,000 shares of Non-Voting Common Stock that may be issued upon the exercise of the Warrant. The preferences, limitations, powers and relative rights of the Non-Voting Common Stock are set forth in the Articles Supplementary, a summary of which follows: Ranking: The Non-Voting Common Stock will rank, as to the payment of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, (i) *pari passu* with the Company’s Common Stock, and (ii) subordinate and junior to all other securities of the Company which, by their respective terms, are senior to the Non-Voting Common Stock or the Company’s Common Stock. Dividend Rights: Holders of the Non-Voting Common Stock will be entitled to receive dividends when, as and if declared by the Company’s Board of Directors, in the same per share amount as paid on Company’s Common Stock. No dividends will be payable on the Company’s Common Stock unless a dividend identical to that paid on the Company’s Common Stock is payable at the same time on the Non-Voting Common Stock in an amount per share equal to the product of (i) the per share dividend declared and paid in respect of each share of the Company’s Common Stock and (ii) the number of shares of the Company’s Common Stock into which such share of Non-Voting Common Stock is then convertible (without regard to limitations on conversion of such Non-Voting Common Stock); provided that if any stock dividend is declared on the Company’s Common Stock, the holders of Non-Voting Common Stock will be entitled to receive such dividend payable in shares of Non-Voting Common Stock. Voting: The holders of shares of Non-Voting Common Stock have no voting rights, except as may be required by Maryland law and as set forth in the Articles Supplementary. So long as any shares of Non-Voting Common Stock are issued and outstanding, the Company will not (including by means of merger, consolidation or otherwise) without obtaining the approval of the holders of a majority of the issued and outstanding shares of Non-Voting Common Stock: - alter or change the rights, preferences, privileges or restrictions provided for the benefit of the holders of the Non-Voting Common Stock so as to affect them adversely; - increase or decrease the authorized number of shares of Non-Voting Common Stock; or - enter into any agreement, merger or business combination, or engage in any other transaction, or take any action that would have the effect of adversely changing any preference or any relative or other right provided for the benefit of the holders of the Non-Voting Common Stock. Redemption and Repurchase: The Non-Voting Common Stock is not redeemable by the Company or the holder. However, in the event that the Company offers to repurchase shares of the Company’s Common Stock, the Company must offer to repurchase shares of the Non-Voting Common Stock pro rata based upon the number of shares of the Company’s Common Stock such holders would be entitled to receive if such shares were converted into shares of the Company’s Common Stock immediately prior to such repurchase. Conversion: Each share of Non-Voting Common Stock will be convertible into one share of the Company’s Common Stock (i) at any time and from time to time at the request of the holder thereof or at the written request of the Company; provided that upon such conversion, the holder, together with all affiliates of the holder, will not own or control in the aggregate more than 9.9% of the Company’s Common Stock (or of any class of the Company’s voting securities), excluding for the purpose of this calculation any reduction in the ownership resulting from transfers by such holder of voting securities (which, for the avoidance of doubt, does not included the Non-Voting Common Stock); or (ii) automatically, without any further action of the part of the holder, on the date that the holder transfers such share of Non-Voting Common Stock to a non-affiliate of the holder in a permissible transfer. ### SELECTED FINANCIAL DATA The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the consolidated financial statements and related notes: *(In thousands, except per share amounts)* | Year End | At or for the year ended December 31, 2023 | 2022 | 2021 | 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | ---: | | Total assets | $1,465,798 | $1,399,921 | $1,285,177 | $1,227,443 | $1,093,807 | | Investment securities available-for-sale | 258,716 | 191,726 | 190,598 | 128,261 | 111,134 | | Investment securities held-to-maturity | 179,286 | 194,402 | 160,923 | 171,224 | 122,988 | | Loans receivable, net | 881,232 | 882,435 | 819,524 | 812,718 | 772,782 | | Deposits | 1,120,067 | 1,125,430 | 1,055,346 | 995,907 | 881,893 | | Borrowings and subordinated debt | 205,513 | 145,730 | 106,661 | 121,450 | 108,253 | | Shareholders' equity | 120,256 | 111,582 | 110,633 | 97,722 | 90,669 | | **For the Year** | | | | | | | Total interest income | $67,663 | $51,098 | $45,827 | $42,507 | $41,758 | | Total interest expense | 28,744 | 9,695 | 7,532 | 10,864 | 13,528 | | Net interest income | 38,919 | 41,403 | 38,295 | 31,643 | 28,230 | | Provision for credit losses | 2,930 | 2,754 | 1,022 | 4,707 | 1,966 | | Net interest income after provision for credit losses | 35,989 | 38,649 | 37,273 | 26,936 | 26,264 | | Total noninterest income | 5,190 | 5,914 | 6,231 | 6,485 | 4,917 | | Total noninterest expense | 29,395 | 28,874 | 27,495 | 25,080 | 25,730 | | Income before income taxes | 11,784 | 15,689 | 16,009 | 8,341 | 5,451 | | Income tax expense | 2,362 | 2,656 | 3,499 | 1,295 | 1,165 | | Net income attributable to noncontrolling interest | 129 | 101 | 103 | 96 | 10 | | Net income attributable to Pathfinder Bancorp, Inc. | $9,293 | $12,932 | $12,407 | $6,950 | $4,276 | | Convertible preferred stock dividends | - | - | 97 | 291 | 208 | | Warrant dividends | 45 | 45 | 35 | 30 | 23 | | Undistributed earnings allocated to participating securities | 1,729 | 2,666 | 2,699 | 1,224 | 467 | | Net income available to common shareholders | $7,519 | $10,221 | $9,576 | $5,405 | $3,578 | | **Per Share** | | | | | | | Income per share - basic | $1.51 | $2.13 | $2.07 | $1.17 | $0.80 | | Income per share - diluted | 1.51 | 2.13 | 2.07 | 1.17 | 0.80 | | Book value per common share | 19.59 | 18.40 | 18.43 | 17.56 | 15.94 | | Tangible book value per common share (a) | 18.83 | 17.63 | 17.66 | 16.53 | 14.95 | | Cash dividends declared | 0.36 | 0.36 | 0.28 | 0.24 | 0.24 | | **Performance Ratios** | | | | | | | Return on average assets | 0.67% | 0.96% | 0.98% | 0.60% | 0.43% | | Return on average equity | 8.09 | 11.77 | 11.91 | 7.43 | 5.34 | | Average equity to average assets | 8.26 | 8.17 | 8.26 | 8.02 | 7.97 | | Shareholders' Equity to total assets at end of year | 8.15 | 7.93 | 8.58 | 7.94 | 8.27 | | Net interest rate spread | 2.47 | 3.05 | 3.06 | 2.68 | 2.73 | | Net interest margin | 2.95 | 3.24 | 3.21 | 2.88 | 2.98 | | Average interest-earning assets to average interest-bearing liabilities | 121.63 | 124.03 | 124.61 | 120.49 | 116.84 | | Noninterest expense to average assets | 2.11 | 2.15 | 2.18 | 2.15 | 2.56 | | Efficiency ratio (a) (b) | 66.62 | 61.11 | 63.07 | 68.71 | 78.75 | | Dividend payout ratio | 28.95 | 20.87 | 16.17 | 20.39 | 30.21 | | Return on average common equity | 8.09 | 11.77 | 11.91 | 8.92 | 6.02 | - 31 - | Asset Quality Ratios | At December 31, 2023 | 2022 | 2021 | 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | ---: | | Nonperforming loans to year end loans | 1.92% | 1.00% | 1.00% | 2.58% | 0.67% | | Nonperforming assets to total assets | 1.19 | 0.66 | 0.65 | 1.74 | 0.49 | | Allowance for credit losses to year end loans | 1.78 | 1.71 | 1.57 | 1.55 | 1.11 | | Allowance for credit losses to nonperforming loans | 92.73 | 169.93 | 155.99 | 59.89 | 165.25 | | **Regulatory Capital Ratios (Bank Only)** | | | | | | | Total capital (to risk-weighted assets) | 15.05% | 15.14% | 15.19% | 13.13% | 12.28% | | Tier 1 capital (to risk-weighted assets) | 13.80 | 13.88 | 13.94 | 11.87 | 11.16 | | Tier 1 capital (to adjusted assets) | 10.11 | 9.67 | 9.52 | 8.63 | 8.20 | | Tier 1 Common Equity (to risk-weighted assets) | 13.80 | 13.88 | 13.94 | 11.87 | 11.16 | | **Number of:** | | | | | | | Banking offices | 12 | 12 | 11 | 11 | 11 | | Fulltime equivalent employees | 164 | 160 | 161 | 176 | 157 | (a) See table below for reconciliation of the non-GAAP financial measures. (b) The efficiency ratio is calculated as noninterest expense divided by the sum of net interest income and noninterest income, excluding net gains on sales, redemptions and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate. ### NON-GAAP FINANCIAL INFORMATION Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions, like the Company and its subsidiary bank, are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC, and does so without compliance with Regulation G, on the widely-shared assumption that the SEC regards such non-GAAP measures to be exempt from Regulation G. The Company uses in this regulatory filing additional non-GAAP financial measures that are commonly utilized by financial institutions and have not been specifically exempted by the SEC from Regulation G. The Company provides, as supplemental information, such non-GAAP measures included in this document as described immediately below. *(In thousands, except per share amounts)* | Per Share Book value per common share | At or for the year ended December 31, 2023 | 2022 | 2021 | 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | ---: | | Total Pathfinder Bancorp, Inc. shareholders' equity (book value) (GAAP) | $119,495 | $110,997 | $110,287 | $97,456 | $90,434 | | Preferred stock | - | - | - | 17,901 | 15,370 | | Total shares outstanding | 6,100 | 6,032 | 5,983 | 4,531 | 4,709 | | Book value per common share | $19.59 | $18.40 | $18.43 | $17.56 | $15.94 | | **Total common equity** | | | | | | | **Total equity (GAAP)** | $119,495 | $110,997 | $110,287 | $79,555 | $75,064 | | Goodwill | 4,536 | 4,536 | 4,536 | 4,536 | 4,536 | | Intangible assets | 85 | 101 | 117 | 133 | 149 | | Tangible common equity | $114,874 | $106,360 | $105,634 | $74,886 | $70,379 | | **Tangible book value per common share** | | | | | | | Tangible common equity | $114,874 | $106,360 | $105,634 | $74,886 | $70,379 | | Total shares outstanding | 6,100 | 6,032 | 5,983 | 4,531 | 4,709 | | Tangible book value per common share | $18.83 | $17.63 | $17.66 | $16.53 | $14.95 | | **Performance Ratios** | | | | | | | **Efficiency ratio** | | | | | | | Operating expenses (numerator) | $29,395 | $28,874 | $27,495 | $25,080 | $25,730 | | Net interest income | 38,919 | 41,403 | 38,295 | 31,643 | 28,230 | | Noninterest income | 5,190 | 5,914 | 6,231 | 6,485 | 4,917 | | Less: Gains/(Losses) on the sale/redemption of investment securities, fixed assets, loans, and foreclosed real estate | 243 | (282) | 551 | 2,255 | 393 | | Less : (Losses)/Gains on marketable securities | (255) | 352 | 382 | (629) | 81 | | Denominator | $44,121 | $47,247 | $43,593 | $36,502 | $32,673 | | Efficiency ratio | 66.62% | 61.11% | 63.07% | 68.71% | 78.75% | | **Dividend payout ratio** | | | | | | | Dividends declared (numerator) | $2,177 | $2,143 | $1,548 | $1,102 | $1,081 | | Net income available to common shareholders (denominator) | 7,519 | 10,221 | 9,576 | 5,405 | 3,578 | | Dividend payout ratio | 28.95% | 20.97% | 16.17% | 20.39% | 30.21% | | **Return on average common equity** | | | | | | | Net income attributable to Pathfinder Bancorp Inc. (GAAP) (numerator) | $9,293 | $12,932 | $12,407 | $6,950 | $4,276 | | Average equity | 114,824 | 109,898 | 104,131 | 93,586 | 80,136 | | Average preferred stock | - | - | - | 15,709 | 9,074 | | Denominator | $114,824 | $109,898 | $104,131 | $77,877 | $71,062 | | Return on average common equity | 8.09% | 11.77% | 11.91% | 8.92% | 6.02% | - 33 - *(In thousands, except per share amounts)* | Regulatory Capital Ratios (Bank Only) Total capital (to risk-weighted assets) | At or for the year ended December 31, 2023 | 2022 | 2021 | 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | ---: | | Total equity (GAAP) | $137,943 | $126,148 | $121,896 | $106,720 | $88,138 | | Goodwill | (4,536) | (4,536) | (4,536) | (4,536) | (4,536) | | Intangible assets | (85) | (101) | (117) | (133) | (149) | | Addback: Accumulated other comprehensive income | 9,605 | 12,172 | 1,268 | 2,236 | 2,971 | | Total Tier 1 Capital | $142,927 | $133,683 | $118,511 | $104,287 | $86,424 | | Allowance for loan and lease losses | 12,995 | 12,076 | 10,655 | 11,002 | 8,669 | | Total Tier 2 Capital | $12,995 | $12,076 | $10,655 | $11,002 | $8,669 | | Total Tier 1 plus Tier 2 Capital (numerator) | $155,922 | $145,759 | $129,166 | $115,289 | $95,093 | | Risk-weighted assets (denominator) | 1,035,747 | 962,861 | 850,157 | 878,380 | 774,177 | | Total core capital to risk-weighted assets | 15.05% | 15.14% | 15.19% | 13.13% | 12.28% | | **Tier 1 capital (to risk-weighted assets)** | | | | | | | Total Tier 1 capital (numerator) | $142,927 | $133,683 | $118,511 | $104,287 | $86,424 | | Risk-weighted assets (denominator) | 1,035,747 | 962,861 | 850,157 | 878,380 | 774,177 | | Total capital to risk-weighted assets | 13.80% | 13.88% | 13.94% | 11.87% | 11.16% | | **Tier 1 capital (to adjusted assets)** | | | | | | | Total Tier 1 capital (numerator) | $142,927 | $133,683 | $118,511 | $104,287 | $86,424 | | Total average assets | 1,418,313 | 1,387,480 | 1,249,752 | 1,212,512 | 1,059,060 | | Goodwill | (4,536) | (4,536) | (4,536) | (4,536) | (4,536) | | Intangible assets | (85) | (101) | (117) | (133) | (149) | | Adjusted assets (denominator) | $1,413,692 | $1,382,843 | $1,245,099 | $1,207,843 | $1,054,375 | | Total capital to adjusted assets | 10.11% | 9.67% | 9.52% | 8.63% | 8.20% | | **Tier 1 Common Equity (to risk-weighted assets)** | | | | | | | Total Tier 1 capital (numerator) | $142,927 | $133,683 | $118,511 | $104,287 | $86,424 | | Risk-weighted assets (denominator) | 1,035,747 | 962,861 | 850,157 | 878,380 | 774,177 | | Total Tier 1 Common Equity to risk-weighted assets | 13.80% | 13.88% | 13.94% | 11.87% | 11.16% | ### CRITICAL ACCOUNTING ESTIMATES The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values, and information used to record valuation adjustments for certain assets and liabilities, are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management. The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for credit losses, deferred income tax assets and liabilities, pension obligations, the annual evaluation of the Company’s goodwill for possible impairment, and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available. ***Allowance for Credit Losses.*** On January 1, 2023 the Company adopted the Current Expected Credit Loss ("CECL") model, as required under Accounting Standards Update (ASU) 2016-13, *Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments*. The Company adopted the standard, which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses on loans and unfunded commitments is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio and commitments to extend credit. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, and environmental factors, all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being individually evaluated which are on nonaccrual and have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The Company also establishes a specific allowance, regardless of the size of the loan, modified due to borrowers experiencing financial difficulties. In addition, an accruing substandard loan could be identified as being individually evaluated. The measurement of individually evaluated loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured based on the fair value of the collateral, less costs to sell. At December 31, 2023, the Bank’s position in individually evaluated loans consisted of 69 loans totaling $22.6 million. Of these loans, 17 loans, totaling $1.6 million, were valued using the present value of future cash flows method; and 66 loans, totaling $20.9 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime loss for each risk-rating category. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in this report. As noted above, the allowance for credit losses (“ACL”) represents management’s estimate of lifetime losses in the Bank’s loan portfolio. Determining the amount of the ACL requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, as correlated to historical economic metrics and in consideration of current economic trends and conditions, and other qualitative factors, all of which may be susceptible to significant change. The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default with loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to future cash flows that are adjusted to present value and these discounted expected losses become the Allowance for Credit Losses. Management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions, levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration, and changes in regulatory environment, management, markets and product offerings. The Company quarterly assesses the magnitude of QF adjustments necessary to be applied to the quantitatively-derived ACL in order to incorporate forward-looking projections in its final evaluation of current expected credit losses. In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. At December 31, 2023, the Bank held $520.6 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 57.9% of the Bank’s entire loan portfolio. The Bank allocated $10.7 million to the ACL for these loans, including $3.4 million derived from the use of qualitative factors in the calculation. Given the concentration of ACL allocation to the total commercial loan portfolio and the significant judgments made by management in deriving the qualitative loss factors, management considers the impact that changes in judgments could have on the ACL. The ACL could increase (or decrease) by approximately $891,000, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2023 in the final recorded estimation of the ACL on loans recognized on the Statement of Financial Condition. If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual credit losses and an increase to the ACL may be necessary in future periods to allow for different assumptions or adverse developments. In addition, future problems with one or more specifically-identified loans or one or more specifically-identified borrower relationships could require a significant increase to the ACL. Management’s methodology and policy in determining the allowance for credit losses can be found in Note 1 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The activity in the allowance for credit losses is depicted in supporting tables in Note 6 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. At December 31, 2022 the Company calculated its ALLL utilizing the Incurred Loss Model ("ILM") methodology, as required under GAAP on that date. As noted above, on January 1, 2023, the Company adopted the Current Expected Credit Loss ("CECL") model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total allowance for loan and lease losses ("ALLL") of $15.3 million, of which $4.8 million was related to impaired loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis. As a consequence of the adoption of the CECL model, the Company recorded a one-time transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million related to its aggregate loan portfolio that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans evaluated in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to specifically-identified loans at December 31, 2022 was not affected by the transition to the CECL methodology on January 1, 2023. The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment, recorded to retained earnings, was $2.9 million on January 1, 2023. This transition adjustment, which had no effect on reported earnings in 2023, was booked to retained earnings in the first quarter of 2023 and was therefore a nonrecurring subtraction from tangible book value, after tax effects of approximately $2.1 million. ***Deferred Income Tax Assets and Liabilities.*** Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. For additional information regarding the Company's deferred income taxes, see Note 17 to the consolidated financial statements. ***Pension Obligations.*** Pension and postretirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated financial statements contained herein. ***Evaluation of Goodwill***. Management performs an annual evaluation of the Company’s goodwill for possible impairment. Based on the results of the 2023 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2023. The evaluation approach is described in Note 10 of the consolidated financial statements contained herein. ***Estimation of Fair Value.*** The estimation of fair value is significant to several of our assets; including investment securities available-for-sale, interest rate derivative (discussed in detail in Note 22 of the consolidated financial statements), intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves. Fair values for securities available-for-sale are obtained from an independent third party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of individually analyzed loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions. ### RECENT EVENTS On December 22, 2023, the Company announced that its Board of Directors had declared a cash dividend of $0.09 per share on the Company’s voting common and non-voting common stock, and a cash dividend of $0.09 per notional share for the issued Warrant relating to the fiscal quarter ended December 31, 2023. The dividend was paid on February 2, 2024 to shareholders of record on January 12, 2024. On March 4, 2024 Pathfinder Bank entered into a purchase and assumption agreement (the “Purchase Agreement”) with Berkshire Bank, the banking subsidiary of Berkshire Hills Bancorp, Inc. (“Berkshire Bank”). Under the Purchase Agreement, Pathfinder Bank will acquire approximately $32 million in loans and one branch location (along with associated personal property and fixtures), and will assume approximately $198 million in deposits. With respect to loans, Pathfinder Bank will pay an amount equal to the sum of 95% of the aggregate unpaid principal balances, measured as of the closing date, plus any accrued interest through closing on the loans. Pathfinder Bank will pay a 5.8% premium on the aggregate amount of non-time deposits associated with the branch, measured as of the closing date (the “Core Deposits”), and will assume all non-Core Deposits associated with the branch, measured as of the closing date, at par value. The total deposit premium to be paid by Pathfinder Bank equates to approximately 4.0% when applied to the aggregated Core Deposits and non-Core Deposits. Pathfinder Bank will assume Berkshire Bank’s existing commercial lease for the real property associated with the branch (including anticipated annual lease payment costs of approximately $946,000). The transaction is expected to close by the end of the third quarter of 2024 and is subject to receipt of regulatory approvals and certain other customary closing conditions. ### EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS The Company reported net income of $9.3 million for 2023, a decrease of $3.6 million as compared to net income of $12.9 million in 2022. Net income decreased during 2023, as compared to the previous year, due to a decrease in net interest income after provision for credit losses of $2.7 million, a decrease in total noninterest income of $724,000, and an increase in noninterest expense of $521,000. These decreases in net income were partially offset by a $294,000 decrease in the provision for income taxes, and a $28,000 increase in net income attributable to noncontrolling interest. Basic and diluted earnings per share in 2023 were both $1.51 per share, as compared to $2.13 per share in 2022. Return on average assets decreased 29 basis points to 0.67% in 2023 from 0.96% in 2022. Return on average equity decreased 368 basis points to 8.09% in 2023 as compared to 11.77% in 2022. The decreases in return on average assets and return on average equity in 2023, as compared to the previous year, were both primarily due to the aforementioned decrease in net income. Average assets increased in 2023 by $44.4 million, or 3.3%, as the Company grew its total assets from $1.40 billion for the year ended December 31, 2022 to $1.47 billion for the year ended December 31, 2023. Net interest income, before provision for credit losses, decreased $2.5 million, or 6.0%, to $38.9 million in 2023 on average interest earning assets of $1.32 billion, as compared to net interest income before provision for loan losses of $41.4 million in 2022 on average interest earning assets of $1.28 billion. Interest and dividend income increased $16.6 million in 2023 to $67.7 million, as compared to $51.1 million in 2022. The income effects of the aggregate increase in the average balance of interest-earning assets of $42.2 million were enhanced by an increase of 113 basis points in the overall average yield earned on those assets. These increases in interest income were more than offset by increases in interest expense, as interest expense increased $19.0 million due to an increase in the average rate paid on interest-bearing liabilities of 171 basis points in 2023 as compared to 2022, enhanced by an increase in the average balance of interest-bearing liabilities of $55.0 million during the same time period. The Company recorded a provision for credit losses of $2.9 million in 2023 as compared to $2.8 million in the prior year. The $176,000 year-over-year increase in provision for credit losses was primarily due to the downgrading of a limited number of relatively large commercial real estate and commercial loan relationships. Additionally, the provision for credit losses in 2023 reflected an increase in nonperforming loans of $8.2 million at December 31, 2023, as compared to December 31, 2022. The Company recorded $4.2 million in net charge-offs in 2023 as compared to $370,000 in 2022. The increase in charge-off activity in 2023, as compared to the previous year, was primarily related to the aforementioned limited number of large commercial real estate and commercial loan relationships. The charge-offs in 2023 involved loans for which the charged-off amounts had been fully reserved for in prior periods. Total noninterest income was $5.2 million in 2023, a decrease of $724,000, or 12.2%, from $5.9 million in 2022. This decrease was due in part to the receipt of one-time Federal and New York State historical tax credits, totaling $521,000, granted in 2022 in connection with the restoration of our Southwest Corridor branch. The decrease was also in part due to a $607,000 increase in net losses on marketable equity securities. Fluctuations in the market value of equity securities are recorded as periodic net gain or loss, and the net losses recorded in 2023 are considered to be transitory. Partially offsetting these decreases in noninterest income were a $525,000 increase in gains on sales of securities, fixed assets, loans, and foreclosed real estate, as well as a $123,000 increase in service charges on deposit accounts, and a $41,000 increase in bank-owned life insurance revenues. Noninterest expenses totaled $29.4 million for 2023, which was an increase of $521,000, or 1.8%, from the $28.9 million reported for the previous year. This modest increase can be primarily attributed to the incremental expenses associated with the Company's growth activities, including the opening of the Southwest Corridor branch in late 2022, and investments in technology to enhance digital banking services, which align with Pathfinder Bancorp’s long-term strategic plans. Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a moderate year-over-year decrease of $102,000, indicative of the Company’s commitment to cost saving measures even in a competitive labor market. An increase of $183,000 in occupancy and equipment expenses contributed to the annual increase in overall noninterest expenses, reflecting the Bank's investment in physical infrastructure and branch network expansion. Professional and other services expense increased $491,000 in 2023, as compared to 2022. This increase was primarily due to a $390,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, and a $136,000 increase in non-recurring legal fees. FDIC assessments expense increased $279,000 during 2023, primarily attributable to an increase in fees calculated on total liabilities and insured deposits, as well as certain nonrecurring adjustments made in 2022. Net loan charge-offs to average loans were 0.47% for 2023, as compared to 0.04% for 2022. Nonperforming loans to total loans increased to 1.92% at December 31, 2023, compared to 1.00% at December 31, 2022. The allowance for credit losses to non-performing loans at December 31, 2023 was 92.73%, compared with 169.93% at December 31, 2022. Total nonperforming assets increased $8.1 million, or 88.2%, between December 31, 2022 and December 31, 2023, largely driven by an increase of $6.6 million in commercial and commercial real estate loans, and increases of $957,000 and $658,000 in nonperforming consumer and residential real estate loans respectively. Management monitors its loan portfolio closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2023. Overall, the ratio of the allowance for credit losses to year end loans increased to 1.78% at December 31, 2023 from 1.71% at December 31, 2022. Total past due loans measured as a percent of total loans, increased from 2.89% at December 31, 2022 to 3.79% at December 31, 2023, primarily due to an increase of $3.8 million in past due commercial loans, a $2.3 million increase in past due residential loans, and a $1.9 million increase in past due consumer loans. The level of nonperforming loans increased in aggregate by $8.2 million led by an increase of $6.6 million in commercial and commercial real estate loans, a $957,000 increase in consumer loans, and a $658,000 increase in residential mortgage loans. Commensurate with the increase in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets increased to 1.19% at December 31, 2023 from 0.66% at December 31, 2022. The Company’s shareholders’ equity increased $8.5 million, or 7.7%, to $119.5 million at December 31, 2023 from $111.0 million at December 31, 2022. This increase was primarily due to a $4.7 million increase in retained earnings, a $2.6 million decrease in accumulated other comprehensive loss, a $1.0 million increase in additional paid in capital, and a $180,000 increase in ESOP shares earned. The increase in retained earnings resulted from $9.3 million in net income recorded in 2023. Partially offsetting these increases in retained earnings during 2023 were a one-time $2.1 million CECL transition adjustment, as well as $1.7 million for cash dividends declared on voting common stock, $497,000 for cash dividends declared on non-voting common stock, $45,000 for cash dividends declared on issued warrants, and $199,000 for cumulative effect of affiliate capital allocation. ### Net Interest Income Net interest income is the Company's primary source of operating income. It is the amount by which interest earned on interest-earning deposits, loans and investment securities exceeds the interest paid on deposits and borrowed money. Changes in net interest income and the net interest margin ratio resulted from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, and their respective yields and funding costs. The following comments refer to the table of Average Balances and Rates and the Rate/Volume Analysis, both of which follow below. Net interest income, before provision for credit losses, decreased $2.5 million, or 6.0%, to $38.9 million in 2023 as compared to $41.4 million in the previous year. Our net interest margin for the year ended December 31, 2023 decreased to 2.95% from 3.24% for the comparable prior year. The decrease in net interest income was primarily due to an increase in interest expense of $19.0 million, or 196.5%, offset by a lesser increase in interest and dividend income of $16.6 million, or 32.4%. The increase in interest expense was primarily a result of the increase in average cost of deposits resulting from the rapidly rising interest rate environment and increased competition. ### Average Balances and Rates The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the table has not been adjusted for tax equivalency. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations. *Unaudited* *(In thousands)* | Interest-earning assets: | For the year ended December 31, 2023 Average Balance | Interest | Average Yield / Cost | 2022 Average Balance | Interest | Average Yield / Cost | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Loans | $899,605 | $47,348 | 5.26% | $869,591 | $38,322 | 4.41% | | Taxable investment securities | 379,600 | 18,073 | 4.76% | 351,898 | 11,454 | 3.25% | | Tax-exempt investment securities | 30,318 | 1,947 | 6.42% | 38,456 | 1,173 | 3.05% | | Fed funds sold and interest-earning deposits | 11,730 | 295 | 2.51% | 19,134 | 149 | 0.78% | | Total interest-earning assets | 1,321,253 | 67,663 | 5.12% | 1,279,079 | 51,098 | 3.99% | | **Noninterest-earning assets:** | | | | | | | | Other assets | 100,319 | | | 89,391 | | | | Allowance for credit losses | (17,870) | | | (13,196) | | | | Net unrealized losses on available-for-sale securities | (13,600) | | | (9,580) | | | | Total assets | $1,390,102 | | | $1,345,694 | | | | **Interest-bearing liabilities:** | | | | | | | | NOW accounts | $92,223 | $538 | 0.58% | $102,223 | $319 | 0.31% | | Money management accounts | 14,116 | 15 | 0.11% | 16,201 | 18 | 0.11% | | MMDA accounts | 239,182 | 6,695 | 2.80% | 260,594 | 1,941 | 0.74% | | Savings and club accounts | 124,617 | 274 | 0.22% | 138,954 | 210 | 0.15% | | Time deposits | 480,867 | 15,743 | 3.27% | 412,536 | 4,584 | 1.11% | | Subordinated debt | 29,815 | 1,941 | 6.51% | 29,639 | 1,749 | 5.90% | | Borrowings | 105,471 | 3,538 | 3.35% | 71,152 | 874 | 1.23% | | Total interest-bearing liabilities | 1,086,291 | 28,744 | 2.65% | 1,031,299 | 9,695 | 0.94% | | **Noninterest-bearing liabilities:** | | | | | | | | Demand deposits | 172,950 | | | 192,106 | | | | Other liabilities | 16,037 | | | 12,391 | | | | Total liabilities | 1,275,278 | | | 1,235,796 | | | | Shareholders' equity | 114,824 | | | 109,898 | | | | Total liabilities & shareholders' equity | $1,390,102 | | | $1,345,694 | | | | Net interest income | | $38,919 | | | $41,403 | | | Net interest rate spread | | | 2.47% | | | 3.05% | | Net interest margin | | | 2.95% | | | 3.24% | | Ratio of average interest-earning assets to average interest-bearing liabilities | | | 121.63% | | | 124.03% | - 39 - ### Rate/Volume Analysis Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities, and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the years indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency. *(In thousands)* | Interest Income: | Years Ended December 31, 2023 vs 2022 Increase/(Decrease) Due to Volume | Rate | Total Increase (Decrease) | 2022 vs 2021 Increase/(Decrease) Due to Volume | Rate | Total Increase (Decrease) | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Loans | $1,361 | $7,665 | $9,026 | $1,601 | $(305) | $1,296 | | Taxable investment securities | 962 | 5,657 | 6,619 | 1,132 | 1,746 | 2,878 | | Tax-exempt investment securities | (292) | 1,066 | 774 | 494 | 463 | 957 | | Interest-earning deposits | (77) | 223 | 146 | (4) | 144 | 140 | | Total interest income | 1,954 | 14,611 | 16,565 | 3,223 | 2,048 | 5,271 | | **Interest Expense:** | | | | | | | | NOW accounts | (34) | 253 | 219 | 26 | 7 | 33 | | Money management accounts | (2) | (1) | (3) | - | 1 | 1 | | MMDA accounts | (172) | 4,926 | 4,754 | 65 | 886 | 951 | | Savings and club accounts | (23) | 87 | 64 | 23 | 28 | 51 | | Time deposits | 875 | 10,284 | 11,159 | 441 | 881 | 1,322 | | Subordinated debt | 10 | 182 | 192 | (177) | 136 | (41) | | Borrowings | 581 | 2,083 | 2,664 | (103) | (51) | (154) | | Total interest expense | 1,235 | 17,814 | 19,049 | 275 | 1,888 | 2,163 | | Net change in net interest income | $719 | $(3,203) | $(2,484) | $2,948 | $160 | $3,108 | ### Interest Income Changes in interest income result from changes in the average balances of loans, securities, and interest-earning deposits and the related average yields on those balances. Interest and dividend income increased $16.6 million, or 32.4%, to $67.7 million in 2023 as compared to $51.1 million in 2022 due principally to the $42.2 million, or 3.3%, increase in average interest-earning assets and a 113 basis points increase in the average yield on average interest-earning assets. The average yield earned on loans increased 85 basis points in 2023, when compared to 2022, as a result of rising interest rates associated with variable rate loans. The average balance of loans increased $30.0 million, or 3.4%, in 2023, as compared to the previous year due to the increase in average commercial real estate and commercial and industrial loans. The average yields earned on taxable investment securities increased 151 basis points to 4.76% in 2023 as compared to 3.25% in 2022, primarily as a result of the rising interest rate environment in 2023. In addition, the average balance of taxable investment securities increased $27.7 million, or 7.9%, when compared to the prior year primarily due to increased purchases of securities in the fourth quarter of 2023 intended to take advantage of certain dynamics in the interest rate environment present at that time. In combination, these factors resulted in a $6.6 million increase in interest income associated with taxable investment securities in 2023, as compared to 2022. ### Interest Expense Interest expense increased $19.0 million, or 196.5%, to $28.7 million in 2023, as compared to $9.7 million in the previous year. The year-over-year increase in interest expense was primarily driven by the rising interest rate environment in 2023 and lagged effects from the rising interest rate environment in 2022. The average rate paid on interest-bearing deposits increased by 225 basis points to 3.26% in 2023 as compared to 1.10% in the previous year. The average cost of all interest-bearing liabilities increased from 0.94% in 2022 to 2.65% in 2023. In addition, the year-over-year increase in interest expense resulted from increases in the average balances of deposits and borrowings. The average balance of total interest-bearing liabilities increased $55.0 million, or 5.3%, in 2023, as compared to 2022, and the average balance of all deposits increased by $20.5 million, or 2.2% in 2023, as compared to the previous year. ### Provision for Credit Losses We establish a provision for credit losses, which is recorded to operations, at a level management believes is appropriate to absorb lifetime credit losses in the loan portfolio. In evaluating the level of the allowance for credit losses, management considers historical loss experience, the types and amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses at an adequate level. The Company recorded a provision for credit losses of $2.9 million in 2023 as compared to $2.8 million in the prior year. The $176,000 year-over-year increase in provision for credit losses was primarily due to the downgrading of a limited number of relatively large commercial real estate and commercial loan relationships. The Company recorded $4.2 million in net charge-offs in 2023 as compared to $370,000 in net charge-offs in 2022. The ratio of net charge-offs to average loans therefore increased to 0.47% in 2023 from 0.04% in 2022. Further information on earnings per share can be found in Note 1 to the consolidated financial statements of this Form 10-K. Nonperforming loans to total loans increased to 1.92% at December 31, 2023 as compared to 1.00% at December 31, 2022. The allowance for credit losses to non-performing loans at December 31, 2023 was 92.7%, compared with 169.9% at December 31, 2022. ### Noninterest Income The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions and net gains or losses on sales of securities, loans, and foreclosed real estate. The following table sets forth certain information on noninterest income for the years indicated. *(In thousands)* | | For the year ended December 31, 2023 | 2022 | Change | | | --- | ---: | ---: | ---: | ---: | | Service charges on deposit accounts | $1,249 | $1,126 | $123 | 10.9% | | Earnings and gain on bank owned life insurance | 630 | 589 | 41 | 7.0% | | Loan servicing fees | 307 | 363 | (56) | -15.4% | | Debit card interchange fees | 616 | 867 | (251) | -29.0% | | Insurance agency revenue | 1,304 | 1,128 | 176 | 15.6% | | Historical tax credit | - | 521 | (521) | -100.0% | | Other charges, commissions and fees | 1,096 | 1,250 | (154) | -12.3% | | Noninterest income before gains | 5,202 | 5,844 | (642) | -11.0% | | Net gains (losses) on sales of securities, fixed assets, loans and foreclosed real estate | 243 | (282) | 525 | -186.2% | | (Losses) gains on marketable equity securities | (255) | 352 | (607) | -172.4% | | Total noninterest income | $5,190 | $5,914 | $(724) | -12.2% | Total noninterest income was $5.2 million in 2023, a decrease of $724,000, or 12.2%, from $5.9 million in 2022. The decrease was in part due to a $607,000 increase in net losses on marketable equity securities. Fluctuations in the market value of equity securities are recorded as periodic net gain or loss, and the net losses recorded in 2023 are considered to be transitory. Noninterest income before recorded gains and losses, decreased $642,000, or 11.0%, to $5.2 million in 2023 as compared to $5.8 million in 2022. The largest contributor to the year-over year decrease in noninterest income was due to the receipt of Federal and New York historical tax credits related to the restoration of the newly opened Southwest Corridor branch in 2022. The credits of $521,000 were received in 2022 concurrently with the opening of the branch facility and were not applicable in 2023. Also of note, debit card interchange fees decreased $251,000 year over year. This decrease is correlated to a decrease in transactional revenues volume and increases in rewards expense. The $154,000 year-over-year decrease in other charges, commissions and fees was the result of the 2022 sale of real estate held by our subsidiary, Whispering Oaks. ### Noninterest Expense The following table sets forth certain information on noninterest expense for the years indicated. *(In thousands)* | | For the year ended December 31, 2023 | 2022 | Change | | | --- | ---: | ---: | ---: | ---: | | Salaries and employee benefits | $15,920 | $16,022 | $(102) | -0.6% | | Building and occupancy | 3,563 | 3,380 | 183 | 5.4% | | Data processing | 2,018 | 2,042 | (24) | -1.2% | | Professional and other services | 2,019 | 1,528 | 491 | 32.1% | | Advertising | 671 | 905 | (234) | -25.9% | | FDIC assessments | 885 | 606 | 279 | 46.0% | | Audits and exams | 735 | 688 | 47 | 6.8% | | Insurance agency expense | 1,033 | 906 | 127 | 14.0% | | Community service activities | 200 | 267 | (67) | -25.1% | | Foreclosed real estate expenses | 111 | 78 | 33 | 42.3% | | Other expenses | 2,240 | 2,452 | (212) | -8.6% | | Total noninterest expenses | $29,395 | $28,874 | $521 | 1.8% | Noninterest expense increased $521,000, or 1.8%, to $29.4 million in 2023 from $28.9 million in 2022. The increase in noninterest expenses in 2023, as compared to 2022, was primarily due to increases in building and occupancy, professional and other services, audits and exams, and insurance agency expense totaling $848,000. Increased foreclosure activity in 2023 when compared to 2022 caused an increase in foreclosed real estate expenses of $33,000. An increase of $183,000 in occupancy and equipment expenses contributed to the annual increase, reflecting the Bank's increased investment in physical infrastructure and branch network expansion. Professional and other services expense increased $491,000 in 2023, as compared to 2022. This increase was primarily due to a $390,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, and a $136,000 increase in non-recurring legal fees. FDIC assessments expense increased $279,000 during 2023, primarily attributable to an increase in fees calculated on total liabilities and insured deposits, as well as certain nonrecurring adjustments made in 2022. Strategic decreases in advertising in combination with decreases in salaries and employee benefits, data processing, community service activities, and other operating expenses help to offset noninterest expense by $639,000. Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a moderate year-over-year decrease of $102,000, indicative of the Company’s commitment to cost saving measures even in a competitive labor market. ### Income Tax Expense The Company reported income tax expense of $2.4 million in 2023 and $2.7 million in 2022, a decrease of $300,000 when compared to the previous year. This decrease was primarily the result of a decrease in income before income taxes. The Company’s effective tax rate was 20.8% in 2023, as compared to 17.5% in 2022. The Company’s effective tax rate in 2023 increased 3.3% primarily due to fluctuations in permanent tax differences, including state taxes, the reversal of a deferred tax asset valuation allowance for the year ended December 31, 2022, and the benefit of Federal and New York State historical tax credits claimed for the year ended December 31, 2022. As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland. See Note 17 to the consolidated financial statements for the reconciliation of the statutory tax rate to the effective tax rate. ### Earnings Per Share Basic and diluted earnings per share for the year ended December 31, 2023 were both $1.51, as compared to basic and diluted earnings per share of $2.13 for the year ended December 31, 2022. The decrease in earnings per share between these two years was due to the decrease in net income available to common shareholders between these two time periods. Further information on earnings per share can be found in Note 3 to the consolidated financial statements of this Form 10-K. ### CHANGES IN FINANCIAL CONDITION The Company's total assets were $1.47 billion at December 31, 2023 as compared to $1.40 billion at December 31, 2022. The increase in total assets of $65.9 million, or 4.7%, was primarily the result of a $67.0 million increase in available-for-sale securities, a $13.5 million increase in interest-earning deposits, partially offset by a $15.1 million decrease in held-to-maturity securities. All other asset categories had a net increase of $500,000. ### Investment Securities The average investment portfolio represented 31.0% of the Company’s average interest-earning assets in 2023 and is designed to generate a favorable rate of return in consideration of all risk factors associated with debt securities while assisting the Company in meeting its liquidity needs and interest rate risk strategies. All of the Company’s investments, with the exception of marketable equity securities, are classified as either available-for-sale or held-to-maturity. The Company does not hold any trading securities. The Company invests in securities issued by United States Government agencies and sponsored enterprises (“GSE”), mortgage-backed securities, collateralized mortgage obligations, state and municipal obligations, mutual funds, equity securities, investment grade corporate debt instruments, and common stock issued by the FHLBNY. By investing in these types of assets, the Company reduces the credit risk of its asset base through geographical and collateral-type diversification but must accept lower yields than would typically be available on loan products. Our mortgage-backed securities and collateralized mortgage obligations portfolios include privately-issued but substantially collateralized pass-through securities as well as pass-through securities guaranteed by GSEs. At December 31, 2023, available-for-sale investment securities increased 34.9% to $258.7 million and held-to-maturity investment securities decreased 7.6% to $179.6 million as compared to December 31, 2022. There were no securities that exceeded 10% of consolidated shareholders’ equity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity investment securities are carried at amortized cost. The following table sets forth the carrying value of the Company's investment portfolio at December 31: *(In thousands)* | Investment Securities: | Available-for-Sale 2023 | 2022 | 2021 | Held-to-Maturity 2023 | 2022 | 2021 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | US treasury, agencies and GSEs | $80,083 | $29,364 | $32,273 | $3,760 | $3,852 | $- | | State and political subdivisions | 32,924 | 45,385 | 39,199 | 16,576 | 15,211 | 14,790 | | Corporate | 10,919 | 11,829 | 14,127 | 45,427 | 45,086 | 46,290 | | Asset backed securities | 19,892 | 15,400 | 13,613 | 16,860 | 19,158 | 14,636 | | Residential mortgage-backed - US agency | 24,418 | 16,400 | 22,164 | 6,974 | 7,489 | 9,740 | | Collateralized mortgage obligations - US agency | 12,179 | 11,708 | 12,285 | 13,221 | 15,109 | 11,362 | | Collateralized mortgage obligations - Private label | 78,095 | 61,434 | 56,731 | 76,819 | 88,497 | 64,105 | | Common stock - financial services industry | 206 | 206 | 206 | - | - | - | | Total investment securities | $258,716 | $191,726 | $190,598 | $179,637 | $194,402 | $160,923 | The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2023. Average yield is calculated on the amortized cost to maturity. Adjustable rate mortgage-backed securities are included in the period in which interest rates are next scheduled to be reset. ### AVAILABLE FOR SALE *(Dollars in thousands)* | Debt investment securities: | One Year or Less Amortized Cost | Annualized Weighted Avg Yield | More Than One to Five Years Amortized Cost | Annualized Weighted Avg Yield | More Than Five to Ten Years Amortized Cost | Annualized Weighted Avg Yield | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | US Treasury, agencies and GSEs | $6,004 | 4.67% | $3,463 | 2.21% | $30,584 | 2.28% | | State and political subdivisions | - | 0.00% | 513 | 1.82% | 3,103 | 2.15% | | Corporate | 4,096 | 5.45% | 5,221 | 5.65% | 756 | 1.80% | | Asset backed securities | - | 0.00% | - | 0.00% | 5,498 | 7.36% | | Total | $10,100 | 4.99% | $9,197 | 4.14% | $39,941 | 2.96% | | **Mortgage-backed securities:** | | | | | | | | Residential mortgage-backed - US agency | $5,055 | 5.81% | $2,495 | 0.99% | $- | 0.00% | | Collateralized mortgage obligations - US agency | - | 0.00% | 1,741 | 2.18% | 1,974 | 5.48% | | Collateralized mortgage obligations - Private label | 5,871 | 6.72% | 9,787 | 5.88% | 15,619 | 3.94% | | Total | $10,926 | 6.30% | $14,023 | 4.55% | $17,593 | 4.11% | | **Other non-maturity investments:** | | | | | | | | Equity securities | $206 | 0.53% | $- | 0.00% | $- | 0.00% | | Total | $206 | 0.53% | $- | 0.00% | $- | 0.00% | | Total investment securities | $21,232 | 5.62% | $23,220 | 4.39% | $57,534 | 3.31% | - 43 - *(Dollars in thousands)* | Debt investment securities: | More Than Ten Years Amortized Cost | Annualized Weighted Avg Yield | Total Investment Securities Amortized Cost | Fair Value | Annualized Weighted Avg Yield | | --- | ---: | ---: | ---: | ---: | ---: | | US Treasury, agencies and GSEs | $42,537 | 5.77% | $82,588 | $80,083 | 4.25% | | State and political subdivisions | 30,972 | 2.09% | 34,588 | 32,924 | 2.09% | | Corporate | 935 | 5.22% | 11,008 | 10,919 | 5.27% | | Asset backed securities | 14,753 | 5.23% | 20,251 | 19,892 | 5.81% | | Total | $89,197 | 4.40% | $148,435 | $143,818 | 4.05% | | **Mortgage-backed securities:** | | | | | | | Residential mortgage-backed - US agency | $17,896 | 4.22% | $25,446 | $24,418 | 4.22% | | Collateralized mortgage obligations - US agency | 9,343 | 3.54% | 13,058 | 12,179 | 3.65% | | Collateralized mortgage obligations - Private label | 50,535 | 6.29% | 81,812 | 78,095 | 5.82% | | Total | $77,774 | 5.48% | $120,316 | $114,692 | 5.25% | | **Other non-maturity investments:** | | | | | | | Equity securities | $- | 0.00% | 206 | $206 | 0.53% | | Total | $- | 0.00% | $206 | $206 | 0.53% | | Total investment securities | $166,971 | 4.90% | $268,957 | $258,716 | 4.58% | ### HELD-TO-MATURITY *(Dollars in thousands)* | Debt investment securities: | One Year or Less Amortized Cost | Annualized Weighted Avg Yield | More Than One to Five Years Amortized Cost | Annualized Weighted Avg Yield | More Than Five to Ten Years Amortized Cost | Annualized Weighted Avg Yield | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | US Treasury, agencies and GSEs | $- | 0.00% | $- | 0.00% | $1,497 | 3.18% | | State and political subdivisions | 666 | 3.14% | 2,614 | 3.15% | 7,987 | 2.36% | | Corporate | 1,754 | 4.10% | 11,695 | 4.82% | 31,978 | 4.85% | | Asset backed securities | - | 0.00% | 4,259 | 4.09% | 1,997 | 7.52% | | Total | $2,420 | 0.00% | $18,568 | 4.42% | $43,459 | 4.11% | | **Mortgage-backed securities:** | | | | | | | | Residential mortgage-backed - US agency | $- | 0.00% | $1,253 | 3.40% | $2,374 | 2.82% | | Collateralized mortgage obligations - US agency | - | 0.00% | 1,302 | 3.63% | 4,938 | 2.80% | | Collateralized mortgage obligations - Private label | 12,298 | 8.47% | 12,283 | 5.11% | 8,117 | 6.18% | | Total | $12,298 | 8.47% | $14,838 | 4.84% | $15,429 | 4.58% | | Total investment securities | $14,718 | 7.08% | $33,406 | 4.60% | $58,888 | 4.23% | *(Dollars in thousands)* | Debt investment securities: | More Than Ten Years Amortized Cost | Annualized Weighted Avg Yield | Total Investment Securities Amortized Cost | Fair Value | Annualized Weighted Avg Yield | | --- | ---: | ---: | ---: | ---: | ---: | | US Treasury, agencies and GSEs | $2,263 | 2.66% | $3,760 | $3,456 | 2.87% | | State and political subdivisions | 5,309 | 2.51% | 16,576 | 14,730 | 2.56% | | Corporate | - | 0.00% | 45,427 | 42,155 | 4.81% | | Asset backed securities | 10,604 | 4.55% | 16,860 | 15,680 | 4.79% | | Total | $18,176 | 3.72% | $82,623 | $76,021 | 4.28% | | **Mortgage-backed securities:** | | | | | | | Residential mortgage-backed - US agency | $3,347 | 2.79% | $6,974 | $6,324 | 2.91% | | Collateralized mortgage obligations - US agency | 6,981 | 2.93% | 13,221 | 11,928 | 2.95% | | Collateralized mortgage obligations - Private label | 44,121 | 4.33% | 76,819 | 73,761 | 5.31% | | Total | $54,449 | 4.06% | $97,014 | $92,013 | 4.84% | | Total investment securities | $72,625 | 3.89% | $179,637 | $168,034 | 4.59% | The yield information disclosed above does not give effect to changes in fair value that are reflected in accumulated other comprehensive loss in consolidated shareholders’ equity. ### Loans Receivable Average loans receivable represented 68.1% of the Company’s average interest earning assets in 2023 and account for the greatest portion of total interest income. At December 31, 2023, the Company had the largest portion of its loan portfolio in commercial loan products that represented 58.4% of total loans. These products include credits extended to businesses and political subdivisions within its marketplace that are typically secured by commercial real estate, equipment, inventories, and accounts receivable. The residential mortgage loans product segment represents 28.8% of total loans at December 31, 2023. The consumer loan products represented 12.8% of total loans at December 31, 2023. The Company has seen the proportion of commercial loan products to total loans increase in recent years and it will continue to emphasize these types of loans. Notwithstanding this emphasis, the Company also anticipates a continued commitment to financing the purchase or improvement of residential real estate in its market area. The following table sets forth the composition of our loan portfolio, including net deferred costs, in dollar amount and as a percentage of loans. *(Dollars in thousands)* | | December 31, 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Residential real estate | $258,198 | 28.8% | $262,008 | 29.2% | $246,344 | 29.6% | $233,094 | 28.2% | $212,663 | 27.2% | | Residential real estate held-for-sale | - | 0.0% | 19 | 0.0% | 513 | 0.1% | 1,526 | 0.2% | 35,936 | 4.6% | | Commercial real estate | 358,521 | 40.0% | 344,721 | 38.4% | 287,279 | 34.5% | 286,066 | 34.7% | 254,781 | 32.6% | | Commercial and tax exempt | 165,460 | 18.4% | 163,806 | 18.3% | 156,167 | 18.8% | 194,963 | 23.6% | 148,776 | 19.0% | | Home equity and junior liens | 35,231 | 3.9% | 34,349 | 3.8% | 32,048 | 3.8% | 38,941 | 4.7% | 46,688 | 6.0% | | Consumer loans | 79,797 | 8.9% | 92,851 | 10.3% | 110,108 | 13.2% | 70,905 | 8.6% | 82,607 | 10.6% | | Total loans receivable | $897,207 | 100.0% | $897,754 | 100.0% | $832,459 | 100.0% | $825,495 | 100.0% | $781,451 | 100.0% | The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2023 which, based on remaining scheduled repayments of principal, are due in the periods indicated. Demand loans having no stated schedule of repayments, no stated maturity, and overdrafts are reported as one year or less. Adjustable and floating rate loans are included in the period on which interest rates are next scheduled to adjust, rather than the period in which they contractually mature. Fixed rate loans are included in the period in which the final contractual repayment is due. *(In thousands)* | Real estate: | Due Under One Year | Due 1-5 Years | Due \> 5 Years to Fifteen Years | Due Over Fifteen Years | Total | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial real estate | $8,692 | $12,180 | $86,709 | $250,940 | $358,521 | | Residential real estate | 853 | 2,533 | 51,648 | 203,164 | 258,198 | | Total real estate loans | 9,545 | 14,713 | 138,357 | 454,104 | 616,719 | | Commercial and tax exempt | 74,433 | 40,765 | 43,983 | 6,279 | 165,460 | | Home Equity and junior liens | 18,599 | 1,240 | 12,064 | 3,328 | 35,231 | | Consumer | 2,784 | 6,854 | 8,846 | 61,313 | 79,797 | | Total loans | $105,361 | $63,572 | $203,250 | $525,024 | $897,207 | The following table sets forth fixed- and adjustable-rate loans at December 31, 2023 that are contractually due after December 31, 2024: *(In thousands)* | Interest rates: | Due After One Year | | --- | ---: | | Fixed | $408,149 | | Variable | 383,697 | | Total loans | $791,846 | Total loans receivable, including net deferred costs, decreased $547,000, to $897.2 million at December 31, 2023 when compared to $897.8 million at December 31, 2022, due to decreases in consumer loans and residential mortgage loans of $13.1 million and $3.8 million, respectively. These decreases in outstanding loan balances were partially offset by increases in commercial real estate loans, commercial and tax exempt loans, and home equity and junior liens of $13.8 million, $1.7 million, and $882,000, respectively. Although the Company maintained its previously established credit standards, the outstanding balances of commercial real estate and commercial loans increased as the Bank continued to benefit from the expanding relationship-derived business activity within the markets that the Bank serves. The decrease in residential mortgage loans was primarily the result of decreases in the percentage of originated loans allocated for addition to the Bank's portfolio as rates generally increased throughout 2023. The Company does not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential mortgages. ### Nonperforming Loans and Assets The following table represents information concerning the aggregate amount of nonperforming assets: *(Dollars In thousands)* | Nonaccrual loans: | December 31 2023 | 2022 | 2021 | 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial and commercial real estate loans | $12,317 | $5,720 | $6,297 | $17,978 | $3,002 | | Consumer | 3,140 | 2,183 | 1,104 | 747 | 631 | | Residential mortgage loans | 1,770 | 1,112 | 891 | 2,608 | 1,613 | | Total nonaccrual loans | 17,227 | 9,015 | 8,292 | 21,333 | 5,246 | | Total nonperforming loans | 17,227 | 9,015 | 8,292 | 21,333 | 5,246 | | Foreclosed real estate | 151 | 221 | - | - | 88 | | Total nonperforming assets | $17,378 | $9,236 | $8,292 | $21,333 | $5,334 | | Nonperforming loans to total loans | 1.92% | 1.00% | 1.00% | 2.58% | 0.67% | | Nonperforming assets to total assets | 1.19% | 0.66% | 0.65% | 1.74% | 0.49% | Nonperforming assets include nonaccrual loans, and foreclosed real estate (“FRE”). Management monitors its loan portfolios closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2023. The ratio of the allowance for credit losses to year end loans was 1.78% and 1.71% at December 31, 2023 and December 31, 2022, respectively. Total nonperforming assets increased $8.1 million, or 88.2%, between December 31, 2022 and December 31, 2023, driven by increases of $6.6 million, $957,000, and $658,000 in nonperforming commercial and commercial real estate loans, consumer loans, and residential real estate loans, respectively, partially offset by a decrease of $70,000 in foreclosed real estate. The increase in nonperforming commercial and commercial real estate loans in 2023 was primarily due to one loan relationship in the in the amount of $7.8 million that was placed on non-accrual status. The $957,000 increase in nonperforming consumer loans was primarily due to increases in purchased loans that are 90 days or greater past due. Management believes that the value of the collateral properties underlying the loans is sufficient to preclude any significant losses related to these loans. Management continues to monitor and react to national and local economic trends as well as general portfolio conditions which may impact the quality of the portfolio, and considers these environmental factors in support of the allowance for credit loss reserve. Management believes that the current level of the allowance for credit losses, at $16.0 million at December 31, 2023, adequately addresses the current level of risk within the loan portfolio, particularly considering the types and levels of collateralization supporting the substantial majority of the portfolio. The Company maintains strict loan underwriting standards and carefully monitors the performance of the loan portfolio. See Note 1: Summary of Significant Accounting Policies contained in the financial statements herein. Foreclosed Real Estate (“FRE”) balances decreased to $151,000 at December 31, 2023, compared to $221,000 from the prior year end. The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest. The Company considers a loan specifically-identified when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $989,000 and $476,000 would have been recorded for the years ended December 31, 2023 and December 31, 2022, respectively. The measurement of specifically-identified loans is based upon the fair value of the collateral or the present value of future cash flows discounted at the historical effective interest rate for specifically-identified loans when the receipt of contractual principal and interest is probable. At December 31, 2023 and December 31, 2022, the Company had $22.6 million and $20.2 million in loans, which were deemed to be specifically-identified, having specific reserves of $3.7 million and $4.8 million, respectively. The $2.4 million year-over-year increase in specifically-identified loans was principally due to increases of $4.4 million, $2.0 million, and $177,000 in specifically-identified commercial real estate, other commercial and industrial, and residential mortgages, respectively, offset by decreases of $4.1 million and $8,000 in commercial lines of credit and home equity and junior liens, respectively. The threshold for specifically-identified commercial real estate or commercial loans remains at $100,000 and for residential mortgage loans remains at $300,000 at December 31, 2023. The thresholds described above do not apply to loans that have been classified as modified due to borrowers experiencing financial difficulties, which are individually evaluated at the time that the restructuring is affected. Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years. Management has identified certain loans with potential credit profiles that may result in the borrowers not being able to comply with the current loan repayment terms and which may result in possible future identified loan reporting. Potential problem loans increased $6.3 million to $43.1 million at December 31, 2023, compared to $38.6 million at December 31, 2022. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered specifically-identified. The increase in potential problem loans was primarily due to a $7.8 million increase in potential problem commercial real estate loans and a $2.1 million increase in potential problem consumer loans. These increases were partially offset by a decrease of $3.3 million in potential problem commercial and industrial loans. The increase in potential problem commercial real estate loans in 2023 was a result of one loan relationship for $7.1 million, and one residential real estate loan relationship in the amount of $1.4 million. Total potential problem loans, including specifically-identified loans, were $43.1 million at December 31, 2023, and were comprised of special mention, substandard and doubtful loans of $20.7 million, $20.3 million and $2.1 million, respectively. Total potential problem loans, including impaired loans, were $38.6 million at December 31, 2022, and were comprised of special mention, substandard and doubtful loans of $20.0 million, $17.0 million and $2.1 million, respectively. The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of delinquent loans to total loans increased to 3.79% at December 31, 2023 as compared to 3.21% at December 31, 2022. This increase was due to an increase of $3.8 million in past due commercial loans, a $1.9 million increase in past due consumer loans, and a $2.3 million increase in past due residential loans. At December 31, 2023, there were $34.0 million in loans past due including $13.6 million, $3.2 million and $17.2 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively. At December 31, 2022, there were $28.9 million in loans past due including $13.0 million, $4.3 million and $8.7 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively. Loans purchased outside of the Bank’s general market area are subject to substantial pre-purchase due diligence. Homogenous pools of purchased loans are subject to pre-purchase analyses led by a team of the Bank’s senior executives and credit analysts. In each case, the Bank’s analytical processes consider the types of loans being evaluated, the underwriting criteria employed by the originating entity, the historical performance of such loans, especially in the most recent deeply recessionary period, the offered collateral enhancements and other credit loss mitigation factors offered by the seller and the capabilities and financial stability of the servicing entities involved. From a credit risk perspective, these loan pools also benefit from broad diversification, including wide geographic dispersion, the readily-verifiable historical performance of similar loans issued by the originators, as well as the overall experience and skill of the underwriters and servicing entities involved as counterparties to the Bank in these transactions. The performance of all purchased loan pools are monitored regularly from detailed reports and remittance reconciliations provided at least monthly by the external servicing entities. The projected credit losses related to purchased loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at least monthly. Over the life of the purchased loan pools, the allowance for credit losses is adjusted, through the provision for credit losses, for expected loss experience, over the projected life of the loans. The expected credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of the purchased loan pools. The Bank does not initially increase the allowance for credit losses on the purchase date of the loan pools. In the normal course of business, the Bank has, from time to time, sold residential mortgage loans and participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyer. Pathfinder Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal. ### Allowance for Credit Losses The allowance for credit losses (ACL) is established through provision for credit losses and reduced by loan charge-offs net of recoveries. The allowance for credit losses represents the amount available for probable credit losses in the Company’s loan portfolio as estimated by management. The Company establishes a specific allocation for all commercial loans identified as being specifically-identified with a balance in excess of $100,000 that are also on nonaccrual or have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The measurement of specifically-identified loans is based upon either the present value of future cash flows discounted at the historical effective interest rate or the fair value of the collateral, less costs to sell for collateral dependent loans. At December 31, 2023, the Bank’s position in specifically-identified loans consisted of 69 loans totaling $22.5 million. Of these loans, 17 loans, totaling $1.6 million, were valued using the present value of future cash flows method; and 52 loans, totaling $20.9 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the probable lifetime loss for each risk-rating category. The Company uses the fair value of collateral, less costs to sell to measure impairment on commercial and commercial real estate loans. Residential real estate loans in excess of $300,000 will also be included in this individual loan review. Residential real estate loans less than this amount will be included in specifically-identified loans if it is part of the total related credit to a previously identified commercial loan. The Company also establishes a specific allowance, regardless of the size of the loan, for all loans modified due to borrowers experiencing financial difficulties. At December 31, 2022 the Company calculated its ALLL utilizing the Incurred Loss Model ("ILM") methodology, as required under GAAP on that date. On January 1, 2023, the Company adopted the Current Expected Credit Loss ("CECL") model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total allowance for loan and lease losses ("ALLL") of $15.3 million, of which $4.8 million was related to impaired loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis. On January 1, 2023 the Company recorded a one-time CECL transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans, evaluated collectively in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to impaired loans at December 31, 2022 was not affected by the transition to the CECL methodology at January 1, 2023. The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.9 million on January 1, 2023, which was recorded to retained earnings on that date. Beginning on January 1, 2023, the Bank has had to account for all credit loss exposures using this CECL methodology. The resulting nonrecurring adjustment from ILM to CECL, was made on January 1, 2023, increasing the ACL at December 31, 2022 by $2.2 million in determining the beginning allowance for credit losses ("ACL") for the quarter ended March 31, 2023. This transition adjustment was booked to retained earnings in the first quarter of 2023 and was therefore a subtraction from tangible book value, after tax effects of approximately $2.1 million. The allowance for credit losses and the allowance for loan losses at December 31, 2023 and 2022 was $16.0 million and $15.3 million, respectively, or 1.78% and 1.71% of total year end loans on those dates, respectively. The Company recorded $4.2 million in net charge-offs in 2023, as compared to $370,000 in net charge-offs in 2022. The ratio of net charge-offs to average loans increased to 0.47% in 2023 from 0.04% in 2022. For further discussion of our allowance for credit losses procedures, please see “Business-Allowance for Credit Losses” and Note 6 to the consolidated financial statements contained in this Annual Report on Form 10-K. The following table sets forth the allocation of allowance for credit losses by loan category for the years indicated. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. *(Dollars in thousands)* | | 2023 Allocation of the Allowance | Percent of Loans to Total Loans | 2022 Allocation of the Allowance | Percent of Loans to Total Loans | 2021 Allocation of the Allowance | Percent of Loans to Total Loans | 2020 Allocation of the Allowance | Percent of Loans to Total Loans | 2019 Allocation of the Allowance | Percent of Loans to Total Loans | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Residential real estate | $2,466 | 28.8% | $714 | 29.2% | $872 | 29.6% | $931 | 28.2% | $580 | 27.2% | | Commercial real estate | 5,751 | 40.0% | 5,881 | 38.4% | 5,308 | 34.5% | 4,776 | 34.7% | 4,010 | 32.6% | | Commercial and tax exempt | 4,956 | 18.4% | 6,937 | 18.3% | 3,701 | 18.8% | 4,663 | 23.6% | 2,841 | 19.0% | | Home equity and junior liens | 657 | 3.9% | 741 | 3.8% | 774 | 3.8% | 739 | 4.7% | 553 | 6.0% | | Consumer loans | 2,145 | 8.9% | 1,046 | 10.3% | 1,297 | 13.2% | 1,123 | 8.6% | 413 | 10.6% | | Unallocated (1) | - | - | - | - | 983 | 0.1% | 545 | 0.2% | 272 | 4.6% | | Total | $15,975 | 100.0% | $15,319 | 100.0% | $12,935 | 100.0% | $12,777 | 100.0% | $8,669 | 100.0% | (1) Includes loans held-for-sale at December 31 for each of the indicated years. The following table sets forth the allowance for credit losses for the years indicated: *(Dollars In thousands)* | | 2023 | 2022 | 2021 | 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | ---: | | **Balance at beginning of year** | $15,319 | $12,935 | $12,777 | $8,669 | $7,306 | | Adoption of New Accounting Standards | 1,886 | | | | | | Provisions charged to operating expenses | 2,991 | 2,754 | 1,022 | 4,707 | 1,966 | | **Recoveries of loans previously charged-off:** | | | | | | | Commercial real estate and loans | 236 | 296 | 70 | 4 | 1 | | Consumer and home equity | 118 | 95 | 88 | 95 | 60 | | Residential real estate | 1 | - | - | 2 | 2 | | Total recoveries | 355 | 391 | 158 | 101 | 63 | | **Loans charged off:** | | | | | | | Commercial real estate and loans | (4,109) | (585) | (764) | (222) | (294) | | Consumer and home equity | (346) | (147) | (240) | (353) | (361) | | Residential real estate | (121) | (29) | (20) | (125) | (11) | | Total charged-off | (4,576) | (761) | (1,024) | (700) | (666) | | Net charge-offs | (4,221) | (370) | (866) | (599) | (603) | | **Balance at end of year** | $15,975 | $15,319 | $12,935 | $12,777 | $8,669 | | Net charge-offs to average loans outstanding | 0.48% | 0.04% | 0.10% | 0.08% | 0.09% | | Allowance for credit losses to year-end loans | 1.78% | 1.71% | 1.57% | 1.55% | 1.11% | The following table sets forth the loan net charge-off ratios for the years indicated: | | 2023 | 2022 | | --- | ---: | ---: | | Allowance for credit losses to year-end loans | 1.78% | 1.71% | | Allowance for credit losses to nonperforming loans | 92.73% | 169.93% | | Nonaccrual loans to total loans | 1.92% | 1.00% | | Allowance for credit losses to nonaccrual loans | 92.73% | 169.93% | | **Net charge-offs to average loans outstanding** | | | | Commercial real estate and loans | 0.44% | 0.03% | | Consumer and home equity | 0.03% | 0.01% | | Residential real estate | 0.01% | 0.00% | | Total charged-off | 0.48% | 0.04% | ### Bank Owned Life Insurance The Company held $24.6 million and $24.0 million in bank owned life insurance at December 31, 2023 and 2022, respectively. Bank owned life insurance increased $630,000, or 2.6%, to $24.6 million at December 31, 2023, as compared to December 31, 2022. The increase was primarily due to an increase in the cash value of the policies recorded as income in 2023. ### Deposits The Company’s deposit base is drawn from eleven full-service offices in its market area. The deposit base consists of demand deposits, money management and money market deposit accounts, savings, and time deposits. Average deposits increased by $1.3 million, or 0.12%, in 2023. For the year ended December 31, 2023, 57.2% of the Company's average deposit base of $1.1 billion consisted of core deposits. Core deposits, which exclude time deposits, are considered to be more stable and generally provide the Company with a lower cost of funds than time deposits. The Company will continue to emphasize retail and business core deposits in the future by providing depositors with a full range of deposit product offerings and will maintain its recent focus on deposit gathering within the Syracuse market. Total deposits of $1.12 billion at December 31, 2023 consisted in part of $242.7 million in various forms of brokered money market and certificates of deposit accounts. Brokered deposits represented 21.7% of all deposits at December 31, 2023. Total deposits of $1.13 billion at December 31, 2022 consisted in part of $248.6 million in brokered money market and certificates of deposit accounts. Brokered deposits represented 22.1% of all deposits at December 31, 2022. At December 31, 2023, consumer and business deposits increased by $25.2 million and $21.1 million, respectively, and municipal deposits decreased by $17.0 million, when compared to December 31, 2022. The year over year decrease in municipal deposits was primarily the result of the withdrawal of approximately $25.0 million (approximately 58% of the entity's total deposits with the Bank) in the third quarter of 2023 by a single large municipal depositor. Noninterest-bearing deposits, which are primarily demand deposits, were $170.2 million at year end, compared with $183.7 million on December 31, 2022. The increase in consumer and business deposits during the year ended December 31, 2023, reflected the Bank’s increased market penetration among both non-business and business customers. The following table sets forth our deposit balances by category, and as a percentage of total deposits for the periods indicated : *(Dollars in thousands)* | | December 31, 2023 | | 2022 | | 2021 | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Savings accounts | $113,543 | 10.0% | $134,880 | 12.0% | $131,176 | 12.4% | | Time accounts | 377,570 | 33.7% | 314,109 | 27.9% | 253,564 | 24.0% | | Time accounts in excess of $250,000 | 95,272 | 8.5% | 71,696 | 6.4% | 67,450 | 6.4% | | Money management accounts | 12,364 | 1.1% | 16,107 | 1.4% | 16,124 | 1.5% | | MMDA accounts | 224,707 | 20.1% | 270,326 | 24.0% | 256,963 | 24.3% | | Demand deposit interest-bearing | 119,321 | 10.7% | 127,395 | 11.3% | 130,816 | 12.4% | | Demand deposit noninterest-bearing | 170,169 | 15.2% | 183,711 | 16.3% | 191,858 | 18.2% | | Mortgage escrow funds | 7,121 | 0.7% | 7,206 | 0.7% | 7,395 | 0.8% | | Total Deposits | $1,120,067 | 100.0% | $1,125,430 | 100.0% | $1,055,346 | 100.0% | The Company has deposits that exceed the FDIC insurance limit of $250,000 of $403.2 million at December 31, 2023 and $501.2 million at December 31, 2022. At December 31, 2023, time deposit accounts in excess of $250,000 totaled $95.3 million, or 20.1% of time deposits and 8.5% of total deposits. At December 31, 2022, these deposits totaled $71.7 million, or 18.6% of time deposits and 6.4% of total deposits. The following table indicates the amount of the Company’s time deposit accounts in excess of $250,000 by time remaining until maturity as of December 31, 2023: *(In thousands)* | Remaining Maturity: | | | --- | ---: | | Three months or less | $28,083 | | Three through six months | 30,763 | | Six through twelve months | 25,903 | | Over twelve months | 10,524 | | Total | $95,272 | All municipal deposits, regardless of amount, are effectively insured, either through specific collateralization with securities held in third-party escrow or reciprocal deposit programs, as required under New York State law. Therefore, municipal deposits are not considered to be subject to the same risks of large unannounced withdrawals as consumer and business accounts for the reason of FDIC insurance coverage limitations. However, in 2023, the Bank's ability to garner municipal deposit balances came under increasing competitive pressure, primarily due to the rising interest rate environment and the entrance of new competitors within New York State. Management expects these trends to continue in the foreseeable future. #### Deposit Activity During 2023, the Bank experienced significant increases in its cost of deposits. This increase was due to the significant increases in interest rates experienced during the 2023 and the lagged effect of the significant increases in interest rates in 2022. The Bank also experienced substantially increased competition from directly marketed U.S. Treasury securities and various forms of money market funds, both of which were in position to be more immediately responsive to the rising rate environment than banks in general. In addition, new competitors, including fintech entities, and financial institutions, including credit unions, within the Bank’s local market were highly competitive for the Bank’s deposits. The Bank anticipates continued competitive pressure on its deposit rates for the foreseeable future. We offer deposit accounts to consumers, business and local municipalities having a wide range of interest rates and terms. Our deposits consist of various types of transactional accounts such as savings accounts, money market accounts, NOW, and demand accounts as well as time accounts in the form of certificates of deposits. We solicit deposits in our market areas as well as online through our website. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Services (“CDARS”) and Insured Cash Sweep (“ICS”) networks. The Bank also has a substantial number of readily-available sources for brokered term deposits that it uses regularly as a secondary funding source. The Bank primarily relies on competitive pricing policies, marketing and customer service to attract and retain these deposits. As noted above, the Bank also accepts deposits from deposit brokers. At December 31, 2023 our brokered deposits, including CDARS, totaled $242.7 million, or 21.7% of total deposits with an average rate of 3.91%, including the effects of interest rate hedging activities and a weighted average maturity of 22 months. At December 31, 2022 our brokered deposits, including CDARS, totaled $248.6 million, or 22.1% of total deposits with an average rate of 2.57%, including the effects of interest rate hedging activities and a weighted average maturity of 21 months. Our reliance on brokered deposits may increase the cost of funds, particularly in a rising interest rate environment. The following table sets forth our brokered deposit balances and rates at December 31, 2023: *(Dollars in thousands)* | Maturity Year: | Balance | Average Rate | | --- | ---: | ---: | | 2024 | $148,722 | 4.55% | | 2025 | 34,624 | 2.11% | | 2026 | 34,703 | 2.38% | | 2027 | 8,773 | 3.04% | | 2028 | 15,884 | 5.63% | | | $242,706 | 3.91% | Included in the brokered deposit balances, detailed above, are $46.3 million in deposits that can be called at the Bank's discretion, should that become economically advantageous in the future. In addition to the term brokered deposits detailed above, the Bank had $40.0 million in overnight brokered funds, derived from a pool of individual depositors, at December 31, 2023. The interest rate paid for these funds is indexed to the overnight Fed funds effective rate plus 0.15%. These aggregate deposits are comprised of multiple individual deposits with balances small enough to be fully insured by the FDIC and the individual depositors with the aggregate pool can be readily substituted when withdrawals are made. These deposits are therefore considered to be highly stable in the aggregate. The Bank can exit this funding arrangement, in whole or in part, with 60 days prior notice to the issuing counterparty. Excluding brokered deposits, all other deposits, collectively referred to as nonbrokered deposits, totaled $877.4 million, or 78.3% of total deposits with an average rate of 2.4% at December 31, 2023. Nonbrokered deposits, totaled $876.8 million, or 77.9% of total deposits with an average rate of 1.0% at December 31, 2022. Our core deposits, which herein are defined as transactional and savings accounts, that do not include certificates of deposit, were $607.2 million, or 69.2% of nonbrokered deposits, and $699.6 million, or 78.8% of nonbrokered deposits, at December 31, 2023 and December 31, 2022, respectively. The following table sets forth our nonbrokered deposit activities in the periods indicated: *(Dollars in thousands)* | | Years Ended December 31, 2023 Core Deposits | Certificates of Deposit | Total Deposits | 2022 Core Deposits | Certificates of Deposit | Total Deposits | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Beginning balance | $699,624 | $177,175 | $876,799 | $694,287 | $203,254 | $897,541 | | Net (withdrawals) deposits | (99,920) | 85,338 | (14,582) | 2,849 | (27,772) | (24,923) | | Interest credited | 7,522 | 7,622 | 15,144 | 2,488 | 1,693 | 4,181 | | Ending balance | $607,226 | $270,135 | $877,361 | $699,624 | $177,175 | $876,799 | | Net (decrease) increase | $(92,398) | $92,960 | $562 | $5,337 | $(26,079) | $(20,742) | | Percent change | -13.2% | 52.5% | 0.1% | 0.8% | -12.8% | -2.3% | The Company’s management estimates that $45.0 million, or 48.4%, of the $93.0 million of the increase in the Bank’s certificates of deposit in 2023 were the result of transfers from the bank’s existing core deposit balances at December 31, 2022. The following table sets forth our certificate of deposit balances and rates at December 31, 2023: *(Dollars in thousands)* | Maturity Year: | Balance | Average Rate | | --- | ---: | ---: | | 2024 | $202,292 | 4.23% | | 2025 | 40,982 | 2.97% | | 2026 | 9,764 | 4.54% | | 2027 | 824 | 1.76% | | 2028 | 2,093 | 3.05% | | After 2029 | 494 | 1.60% | | | $256,449 | 4.02% | #### Deposit Concentrations The Bank has a broadly diversified customer base for its consumer, business and municipal deposits. However, due to the nature of the Bank’s deposit gathering activities, particularly for certain business and municipal deposit accounts, it also has significant concentrations of deposits gathered from a relatively small number of large balance depositors. The Bank faces substantial competition for these deposits and these depositors are generally offered higher interest rates than other depositors. Withdrawals of large balances by these customers would require the Bank to replace the withdrawn funds with other funding obtained from sources, such as FHLB advances or brokered deposits. These replacement funding activities would likely reduce the Bank’s overall available liquidity, as well increase its overall funding costs. The following table sets forth certain statistics by customer type related to large balance customers within our nonbrokered deposit balances at the periods indicated: *(Dollars in thousands)* | Year end balances: | At December 31, 2023 Consumer | Business | Municipal | Total Deposits | 2022 Consumer | Business | Municipal | Total Deposits | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | 25 largest customers by depositor type | $74,801 | $67,942 | $140,687 | $283,430 | $90,218 | $66,280 | $147,774 | $304,272 | | 100 largest customers, including the 25 largest customers by depositor type | 133,080 | 122,528 | 152,666 | 408,274 | 148,716 | 122,166 | 160,373 | 431,255 | | All other customers by depositor type | 389,646 | 79,441 | - | 469,087 | 366,814 | 78,730 | - | 445,544 | | Total deposits | $522,726 | $201,969 | $152,666 | $877,361 | $515,530 | $200,896 | $160,373 | $876,799 | | Percentage of year end balances: | | | | | | | | | | 25 largest customers by depositor type | 14.3% | 33.6% | 92.2% | 32.3% | 17.5% | 33.0% | 92.1% | 34.7% | | 100 largest customers, including the 25 largest customers by depositor type | 25.5% | 60.7% | 100.0% | 46.5% | 28.8% | 60.8% | 100.0% | 49.2% | | All other customers by depositor type | 74.5% | 39.3% | 0.0% | 53.5% | 71.2% | 39.2% | 0.0% | 50.8% | ### Borrowings Borrowings are comprised primarily of advances and overnight borrowings at the FHLBNY. The following table represents information regarding short-term borrowings for the years ended December 31: *(Dollars in thousands)* | | 2023 | 2022 | 2021 | | --- | ---: | ---: | ---: | | Maximum outstanding at any month end | $125,680 | $60,333 | $12,500 | | Average amount outstanding during the year | 49,601 | 12,492 | 3,677 | | Balance at the end of the period | 125,680 | 60,333 | 12,500 | | Average interest rate during the year | 5.42% | 2.48% | 0.28% | | Average interest rate at the end of the period | 4.50% | 3.86% | 1.28% | The following table represents information regarding long-term borrowings for the years ended December 31: *(Dollars in thousands)* | | 2023 | 2022 | 2021 | | --- | ---: | ---: | ---: | | Maximum outstanding at any month end | $58,369 | $67,371 | $85,125 | | Average amount outstanding during the year | 55,091 | 58,593 | 75,724 | | Balance at the end of the period | 49,919 | 55,664 | 64,598 | | Average interest rate during the year | 1.54% | 0.96% | 1.34% | | Average interest rate at the end of the period | 1.84% | 1.39% | 1.12% | ### Subordinated Debt The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the FDIC and the Federal Reserve. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd., with interest rates that reset quarterly, and are indexed to the 3-month the Secured Overnight Financing Rate ("SOFR") which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, plus1.91%. These securities have a five-year call provision. The Company guarantees all of these securities. The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2023 and 2022. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them. On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Debt (the “2020 Subordinated Debt”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Debt has a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month SOFR plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Debt at par, in whole or in part, at its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this transaction of $1.6 million was recorded in both the years ended December 31, 2023 and 2022. ### Shareholders' Equity The Company’s shareholders’ equity increased $8.5 million, or 7.7%, to $119.5 million at December 31, 2023 from $111.0 million at December 31, 2022. This increase was primarily due to a $4.8 million increase in retained earnings, a $1.0 million increase in additional paid in capital, a $2.6 million decrease in comprehensive loss and an increase of $180,000 of ESOP shares earned. The increase in retained earnings resulted from $9.3 million in net income recorded in 2023. Partially offsetting these increases in retained earnings were a $2.1 million nonrecurring charge to retained earnings related to the implementation of CECL, $1.7 million for cash dividends declared on our voting common stock, $497,000 for cash dividends declared on our non-voting common stock and $45,000 for cash dividends declared on our issued warrant, and $199,000 for the cumulative effect of affiliate capital allocation. Comprehensive loss decreased primarily as the result of decreased losses on available for sale securities of $2.6 million and a $354,000 adjustment to pension and post retirement, partially offset by a $350,000 loss on derivatives and hedging activities. Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to support growth and expansion activities, while maintaining a strong capital position and exceeding regulatory standards. At December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a “well-capitalized” institution. See “Supervision and Regulation – Federal Regulations – Capital Requirements” As a result of the Dodd-Frank Act, the Company’s ability to raise new capital through the use of trust preferred securities may be limited because these securities will no longer be included in Tier 1 capital. In addition, our ability to generate or originate additional revenue producing assets may be constrained in the future in order to comply with capital standards required by federal regulation. See Note 20 to the consolidated financial statements contained herein and the regulation and supervision section within Part I of this Annual Report on Form 10-K for further discussion on regulatory capital requirements. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2023, the Bank’s most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well-capitalized”, under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, the Bank must maintain specified total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank’s category. The regulations also impose a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action (“PCA”) standards and imposes restrictions on dividend distributions and discretionary bonuses for senior officers if the buffer is not met (See Note 20 contained within the accompanying consolidated financial statements). In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. At December 31, 2023, the Bank exceeded all current regulatory required minimum capital ratios, including the capital buffer requirements. ### LIQUIDITY Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements. The Company's liquidity has been enhanced by its ability to borrow from the FHLBNY, whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, or the sale of loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans. For the year ended December 31, 2023, cash and cash equivalents increased by $11.9 million. The Company reported net cash flows from financing activities of $52.8 million generated principally by a $65.3 million increase in short term borrowings, offset by a decrease in brokered deposits of $5.0 million, customer deposits of $352,000, a decrease in net proceeds from long-term borrowings of $5.7 million, and an aggregate decrease in net cash of all other financing sources, including dividends paid to common shareholders, and the holder of the Warrant of $2.2 million. Additionally, $13.8 million was provided through operating activities generated principally by net income and proceeds from loan sales. These cash flows were primarily invested in: $112.8 million in purchases of investment securities in 2023, and $1.8 million net increases in loans outstanding. Certificates of deposit due within one year of December 31, 2023 totaled $325.0 million, representing 68.7% of certificates of deposit at December 31, 2023, an increase from 56.0% at December 31, 2022. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2024. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and making payments on its subordinated debt. The Company may repurchase shares of its common stock. The Company’s primary sources of funds are the proceeds it retained from the Private Placement, the issuance of the 2020 Subordinated Debt, interest and dividends on securities and, potentially, dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without prior regulatory approval, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. The Company believes that this restriction will not have an impact on the Company's ability to meet its ongoing cash obligations. At December 31, 2023 and 2022, the Company had cash and cash equivalents of $47.1 million and $35.3 million, respectively. The Bank has a number of existing credit facilities available to it. At December 31, 2023, total credit available under the existing lines of credit was approximately $236.7 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2023, the Company had $175.6 million of the available lines of credit utilized, including encumbrances supporting the outstanding letters of credit, described above, on its existing lines of credit with the remainder of $61.1 million available. The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of December 31, 2023, management reported to the Board of Directors that the Bank was in compliance with its liquidity policy guidelines. ### OFF-BALANCE SHEET ARRANGEMENTS The Bank is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. At December 31, 2023, the Bank had $205.0 million in outstanding commitments to extend credit and standby letters of credit. See Note 18 within the Notes to consolidated financial statements contained herein. ## Controls and procedures As filed, 1,826 characters. #### Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) (the Company’s principal executive officer and principal financial officer), management conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023. The term “disclosure controls and procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In connection with the filing of the Annual Report on Form 10-K as of December 31, 2023, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective at December 31, 2023. #### CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING We did not make any changes in internal control over financial reporting during the quarter ended December 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Filed Mar 22, 2024. Source: SEC EDGAR, the filing index for accession 0000950170-24-035248. Last ingested by Listed: Nov 2, 2026, 08:32 ET. No prices; not investment advice.