Pathfinder Bancorp, Inc.: Form 10-Q for the period ended Mar 31, 2025

General

The Company is a Maryland corporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial bank, which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation.

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 FitzGibbons Agency, LLC (the “Agency”), an Oswego County property, casualty and life insurance brokerage business. The Company completed the sale of its majority membership interest in the FitzGibbons Agency to Marshall & Sterling Enterprises, Inc. in October 2024.

Although the Company previously owned, through its wholly owned subsidiary PRMC, 51% of the membership interest in the Agency until its October 2024 sale, the Company is required to consolidate 100% of the Agency within the consolidated financial statements. The 49% of the Agency, which the Company did not own, is accounted for separately as noncontrolling interests within the consolidated financial statements.

At March 31, 2025, the Company and subsidiaries had total consolidated assets of $1.50 billion, total consolidated liabilities of $1.37 billion and shareholders' equity of $124.9 million.

The following discussion reviews the Company's financial condition at March 31, 2025 and the results of operations for the three month periods ended March 31, 2025 and 2024. Operating results for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025 or any other period.

The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2024 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2025 (“the consolidated annual financial statements”) as of December 31, 2024 and 2023 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.

Statement Regarding Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of Pathfinder Bancorp, Inc. and its subsidiary, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions may be less favorable than expected; (2) competitive pressures among depository institutions may increase significantly; (3) changes in the interest rate environment may reduce interest margins; (4) loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (5) the impact of a pandemic or other health crises and the government's response to such pandemic or crises on our operations as well as those of our customers and on the economy generally and in our market area specifically; (6) political developments, tariffs, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (7) legislative or regulatory changes or actions may adversely affect the businesses in which Pathfinder Bancorp, Inc. is engaged; (8) changes and trends in the securities markets may adversely impact Pathfinder Bancorp, Inc.; (9) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (10) difficulties in integrating any businesses that we may acquire, including our acquisition of the East Syracuse branch of Berkshire Bank, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (11) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding

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and liquidity could be significant; (12) our ability to prevent or mitigate fraudulent activity and cybersecurity threats; and (13) the outcome of any future regulatory and legal investigations and proceedings may not be anticipated.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by law, we disclaim any obligation to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect future events or developments.

Application of Critical Accounting Estimates

The Company's consolidated quarterly 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 quarterly 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 accounting 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 from 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 unaffiliated 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 annual audited 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 quarterly 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 taxes, pension obligations, the evaluation of investment securities for credit losses, the estimation of fair values for accounting and disclosure purposes, and the evaluation of goodwill for impairment 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.

The ACL represents management's estimate of lifetime credit losses inherent in the loan portfolio. 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. In addition, an accruing substandard loan could be identified as being individually evaluated.

The measurement of individually evaluated loans is measured by determining 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. For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime incurred loss for each risk-rating category. 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 March 31, 2025, the Bank’s position in individually evaluated loans consisted of 44 loans totaling $15.8 million. Of these loans, 14 loans, totaling $923,000, were valued using the present value of future cash flows method; and 30 loans, totaling $14.9 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 incurred loss for each risk-rating category.

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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 March 31, 2025, the Bank held $542.7 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 59.0% of the Bank’s entire loan portfolio. The Bank allocated $10.8 million to the ACL for these loans, including $4.4 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 $1.1 million, 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 March 31, 2025 in the final recorded estimation of the ACL on loans recognized on the Statements of Financial Condition.

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.

The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to New York State income taxes, partially offset by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and to a much lesser degree, the utilization of low income housing tax credits. In addition, the tax effects of certain incentive stock option activity may reduce the Company’s effective tax rate on a sporadic basis.

We maintain a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, we informed our employees of our decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. Pension and post-retirement 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 annual financial statements.

When the fair value of a security categorized as available-for-sale ("AFS") or held-to-maturity ("HTM") is less than its amortized cost basis, an assessment is made as to whether or not credit loss is present. Management makes a quantitative determination of potential credit loss for all HTM securities even if the risk of credit loss is considered remote and uses a best estimate threshold for securities categorized as AFS. The Company considers numerous factors when determining whether a potential credit loss exists. The principal factors considered are (1) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (2) failure of the issuer of the security to make scheduled interest or principal payments, (3) any changes to the rating of the security by a nationally recognized statistical rating organization (“NRSRO”), and (4) the presence of contractual credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

The Company carries all of its AFS investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities’ credit losses securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities portfolio, for both AFS and HTM securities for credit losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is insufficient to recover the entire amortized cost basis.

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The estimation of fair value is significant to several of our assets; including AFS and marketable equity investment securities, 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 annual audited consolidated financial statements. Fair values on our AFS 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 AFS securities are obtained from unaffiliated third party pricing services. 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 sources. Fair values for marketable equity securities are based on quoted prices on a nationally recognized securities exchange for similar benchmark securities. The fair values of foreclosed real estate and the underlying collateral value of individually evaluated 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.

Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the December 31, 2024 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. Management will continuously evaluate all relevant economic and operational factors potentially affecting the Bank or the fair value of its assets, including goodwill. Should future economic consequences require a significant and sustained change in the operations of the Bank, re-evaluations of the Bank’s goodwill valuation will be conducted on a more frequent basis.

Recent Events

On March 31, 2025, the Company announced that its Board of Directors declared a cash dividend of $0.10 per share on the Company's voting common and non-voting common stock, and a cash dividend of $0.10 per notional share for the issued warrant relating to the fiscal quarter ended March 31, 2025. The dividends are payable to all shareholders of record on April 18, 2025 and will be paid on May 9, 2025.

Overview and Results of Operations

The Company recorded net income of $3.0 million for the three months ended March 31, 2025 compared to net income of $2.1 million for the three months ended March 31, 2024. The $854,000 increase in net income was due primarily to a $1.2 million decrease in total interest expense, a $831,000 increase in total interest and dividend income, and a $269,000 decrease in provision for credit losses. These quarter-over-quarter changes were partially offset by a $727,000 increase in total noninterest expense, a $540,000 decrease in total noninterest income, and a $212,000 increase in provision for income taxes.

Net interest income before the provision for credit losses increased $2.0 million, or 21.4%, to $11.4 million for the three months ended March 31, 2025, as compared to $9.4 million for the same three month period in 2024. The increase in net interest income was primarily due to a 36 basis points decrease in the average cost of total interest-bearing liabilities in the first quarter of 2025, as compared to the same quarter in 2024, combined with a $22.0 million decrease in the average balance of total interest-bearing liabilities for the same comparative periods. The decrease in the average balance of total interest-bearing liabilities was mostly due to a $67.1 million decrease in average total borrowings, partially offset by a $45.1 million increase in the average balance of interest-bearing deposits. The decrease in the average rates paid on interest-bearing liabilities in the first quarter of 2025, as compared to the same quarter in 2024, reflects significant reductions in borrowings, continued changes in the Bank's funding mix, as well as deliberate deposit pricing adjustments.

The increase in net interest income was also due to a 19 basis points increase in the average yield of total interest-earning assets in the first quarter of 2025, as compared to the same quarter in 2024, combined with a $10.7 million increase in the average balance of total interest-earning assets. The increase in the average balance of total interest-earning assets was mostly due to a $20.9 million increase in average loans, partially offset by a $9.3 million decrease in the average balance of total investment securities, and a $934,000 decrease in average federal funds sold and interest-earning deposits. The increase in the average yield received on interest-earning assets in the first quarter of 2025, as compared to the same quarter in 2024, reflects generally increased rates of interest for newly funded loans and investment securities, as compared to the average

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yields within these portfolios, as well as increases in rates for certain adjustable-rate loans and securities in the higher interest rate environment that has occurred in 2024 and the first quarter of 2025.

The Company's noninterest income for the first quarter of 2025 amounted to $1.2 million, reflecting a decrease of $540,000, compared to the same quarter of 2024. This decrease was primarily attributable to a $397,000 decrease in insurance agency revenue, as a result of the sale of the Company's insurance agency in October 2024. All other components of recurring noninterest income decreased $195,000, or 17.5%, during the same period. Other charges, commissions and fees decreased by $160,000, or 36.0%, in the quarter ended March 31, 2025, as compared to the same three month period in 2024, primarily as a result of New York State cumulative mortgage recording tax refunds in the amount of $141,000. Debit card interchange fees decreased $118,000 for the first quarter of 2025, as compared to the same quarter in 2024, driven by non-recurring catch up expenses related to prior periods of $158,000. Offsetting these decreases were increases of $65,000 in service charges on deposit accounts and $5,000 in earnings and gain on bank owned life insurance ("BOLI").

The quarter-over-quarter increase of $52,000, or 23.3%, in all other nonrecurring categories of noninterest income was primarily due to a $140,000 decrease in losses on sales and redemptions of investment securities, a $110,000 increase in gains on marketable equity securities, and a $47,000 increase in gain on sales of loans and foreclosed real estate. This cumulative gain of $297,000 was mostly offset by the recognition of a $245,000 refund received from cumulative lessor related pass-through operating expense charges for a leased branch location during the first quarter of 2024.

Total noninterest expense for the first quarter of 2025 was $8.4 million, an increase of $727,000, or 9.4%, compared to the same three month period in 2024. The increase was mostly the result of a $531,000 increase in building and occupancy, primarily due to ongoing facility-related costs associated with operating the East Syracuse branch acquired in July 2024. Other contributors to this quarter-over-quarter increase mostly related to the opening of the new East Syracuse branch include a $154,000 increase in amortization expense, a $138,000 increase in data processing, and a $121,000 increase in salaries and benefits. Partially offsetting these increases was a $285,000 decrease in insurance agency expense, as a result of the sale of the Company's insurance agency in October 2024.

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve requirements on loans individually evaluated, in its determination of the adequacy of the ACL. For the three months ended March 31, 2025, $457,000 was recorded in PCL as compared to $726,000 in the same prior year three month period. The provision in the quarter ended March 31, 2025 was reflective of the qualitative factors used in determining the adequacy of the ACL and changes in the levels of delinquent and nonaccrual loans. The first quarter PCL reflects an addition to reserves considering loan growth and asset quality metrics. The credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios.

The total PCL for the three months ended March 31, 2025 was $457,000, with $504,000 related to the Company's loan portfolio, which was partially offset by a benefit of $47,000 for reserves related to unfunded commitments. The ACL related to loans was therefore $17.4 million at March 31, 2025.

In comparing the year-over-year first quarter periods, the Company’s return on average assets increased 22 basis points to 0.81% due to the combined effects of the increase in net income (the numerator in the ratio) outpacing the increase in average assets (the denominator in the ratio). Average assets increased mostly due to an increase of $20.9 million in the average balance of loans in the first quarter of 2025, as compared to the same quarter of 2024.

Net Interest Income

Net interest income is the Company's primary source of operating income for payment of operating expenses and providing for credit losses. It is the amount by which interest earned on loans, interest-earning deposits, and investment securities, exceeds the interest paid on deposits and other interest-bearing liabilities. Changes in net interest income and net interest margin result from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, related yields, and associated funding costs.

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The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. 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. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.

(Unaudited)

(In thousands)

First quarter 2025 net interest income was $11.4 million, an increase of $2.0 million, or 21.4%, from the first quarter of 2024. The increase in interest and dividend income of $831,000 from the year-ago period was primarily attributed to an increase in interest from loans of $1.4 million, partially offset by average yield decreases of 231 basis points on tax-exempt investment securities and 25 basis points on taxable investment securities. The corresponding decreases in income from tax-exempt and taxable investment securities from the first quarter of 2024 were $106,000 and $458,000, respectively. The increase in interest from loans from the year-ago period reflected a benefit of approximately $347,000, including $247,000 of 2024 interest recovered from loans removed from nonaccrual status and $100,000 of first quarter 2025 prepayment fees.

A decrease in interest expense of $1.2 million from the first quarter of 2024 was primarily attributed to average balance decreases for time deposits and borrowings coupled with average cost decreases of 32 basis points for interest-bearing deposits, 25 basis points for subordinated debt, and 33 basis points for borrowings. The corresponding decreases in deposits and borrowings expense from the year-ago period were $466,000 and $698,000 respectively. These reductions reflect continued changes in the Bank’s funding mix, including growing core deposits, as well as deliberate deposit pricing adjustments and significant reductions in borrowings.

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Net interest margin was 3.31% in the first quarter of 2025 compared to 2.75% in the first quarter of 2024. The increase reflected significant reductions in deposit and borrowing costs, as well as increased interest income associated with loans.

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 periods 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.

Unaudited

(In thousands)

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Deposits

The Company’s deposit base is drawn from eleven full-service branches and one motor bank in its market area. The deposit base consists of demand deposits, money management and money market deposit accounts, savings, and time deposits. Total deposits increased by $60.0 million, or 5.0% from December 31, 2024. The increase in consumer and business deposits during the quarter ended March 31, 2025, reflected the Bank’s increased market penetration among both non-business and business customers. For the quarter ended March 31, 2025, 78.3% of the Company's deposit base of $1.1 billion consisted of core deposits. Core deposits, which exclude brokered deposits and certificates of deposit of $250,000 or more, are considered to be more stable and generally provide the Company with a lower cost of funds than brokered and 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.

A summary of deposits by category at March 31, 2025 and December 31, 2024 is as follows:

(In thousands)

In addition to deposits obtained from its business operations within its target market areas, the Bank also obtains brokered deposits through various programs administered by IntraFi Network and through other unaffiliated third-party financial institutions.

The following table sets forth our nonbrokered and brokered deposit activities at the dates indicated:

(In thousands)

Provision for Credit Losses

We establish a provision for credit losses, which is charged 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 of loans and the amount of loans in the loan portfolio, adverse situations that may affect the 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.

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The Company recorded $457,000 in provision for credit losses for the three month period ended March 31, 2025, as compared to $726,000 for the three month period ended March 31, 2024. The provisioning in the first quarter of 2025 and 2024 reflects management’s determination of the appropriate level of additions to reserves, the composition of the loan portfolio, changes in quantifiable econometric data statistically correlated to historical charge-off rates, subjective qualitative assessments of changes in a broad array of factors including changes to underwriting criteria, loan staffing and local market conditions and changes in the levels of delinquent and nonaccrual loans. This represents a $269,000 decrease in provision for credit losses in the first quarter of 2025, as compared to the same period in 2024. The first quarter PCL reflects an addition to reserves considering loan growth and asset quality metrics. The Bank's credit sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for credit losses.

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 decreased to 3.1% at March 31, 2025 as compared to 3.8% at December 31, 2024. Delinquent loans (numerator) decreased $7.1 million while total loan balances (denominator) decreased $6.8 million at March 31, 2025, as compared to December 31, 2024. The decrease in past due loans between these two periods was driven by an $8.9 million decrease in loans delinquent 90 days and over, and a decrease of $297,000 in loans delinquent 60-89 days, partially offset by an increase of $2.1 million in loans delinquent 30-59 days.

At March 31, 2025, there were $28.0 million in loans past due including $10.9 million in loans 30-59 days past due, $3.9 million in loans 60-89 days past due and $13.2 million in loans 90 or more days past due. At December 31, 2024, there were $35.1 million in loans past due including $8.8 million in loans 30-59 days past due, $4.2 million in loans 60-89 days past due and $22.1 million in loans 90 or more days past due.

The Bank continues to diligently monitor credit portfolios, particularly those considered sensitive to prevailing economic stressors, and apply conservative loan classification and reserve building methodologies.

Noninterest Income

The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions, including insurance agency commissions, and net gains on sales of securities, loans, and foreclosed real estate.

The following table sets forth certain information on noninterest income for the periods indicated:

(In thousands)

First quarter 2025 noninterest income totaled $1.2 million and no longer includes contributions from the insurance agency business sold in October 2024. First quarter 2024 noninterest income totaled $1.7 million, including $397,000 in insurance revenue.

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Compared to the year-ago period, first quarter 2025 noninterest income reflected a reduction of $264,000 in debit card interchange fees driven by $158,000 of non-recurring catch up expenses and seasonal reductions estimated at $100,000, as well as decreases of $31,000 in service charges on deposit accounts and $7,000 in earnings and gain on bank owned life insurance (“BOLI”). Compared to the linked quarter, first quarter 2025 noninterest income also reflected increases of $52,000 in net realized gains on sales of marketable equity securities and $26,000 in gains on sales of loans and foreclosed real estate, as well as a decrease of $257,000 in net realized gains on sales and redemptions of investment securities.

Compared to the year-ago period, first quarter 2025 noninterest income included increases of $65,000 in service charges on deposit accounts, $13,000 in loan servicing fees, and $5,000 in earnings and gain on BOLI, as well as a decline of $118,000 in debit card interchange fees driven by $158,000 of non-recurring catch up expenses related to prior periods. Noninterest income growth from the year-ago quarter also reflected a $140,000 decrease in net realized losses on sales and redemptions of investment securities and increases of $110,000 in net realized gains on sales of marketable equity securities and $47,000 in gains on sales of loans and foreclosed real estate.

Noninterest Expense

The following table sets forth certain information on noninterest expense for the periods indicated:

(In thousands)

Total noninterest expense for the first quarter of 2025 was $8.4 million, an increase of $727,000, or 9.4%, compared to the same three month period in 2024. Salaries and benefits were $4.5 million in the first quarter of 2025, increasing $121,000 from the year-ago same period. The increase from the first quarter of 2024 was primarily attributed to a $95,000 increase in stock-based compensation and $123,000 in other salary and benefits expenses associated with personnel in the East Syracuse branch acquired in July 2024.

Building and occupancy was $1.3 million in the first quarter of 2025, increasing $531,000 from the year-ago quarter. The increase from the first quarter of last year was primarily due to ongoing facilities-related costs associated with operating the East Syracuse branch acquired in July 2024.

Data processing expense was $666,000 in the first quarter of 2025, increasing $138,000 from the year-ago period. The increase from the first quarter of 2024 was primarily attributed to the ongoing operations of the East Syracuse branch acquired in July 2024.

Partially offsetting these increases was a $285,000 decrease in insurance agency expense, as a result of the sale to the Company's insurance agency in October 2024.

We anticipate making planned investments in our workforce, filling vacancies, introducing additional performance-based compensation programs, and making targeted compensation adjustments in order to retain top talent and incentivize desired operational and financial outcomes. Such strategic staffing enhancements are believed to be integral to maintaining our competitive position and achieving long-term success in the dynamic banking landscape.

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Annualized noninterest expense represented 2.33% of average assets in the first quarter of 2025, compared to 2.16% in the year-ago period, including costs associated with transactions of the divested insurance agency business. The efficiency ratio improved to 66.84% in the first quarter of 2025 as revenue growth outpaced increases in noninterest expense, compared to 68.29% in the year-ago period. The efficiency ratio, which is not a financial metric under GAAP, is a measure that the Company believes is helpful to understanding its level of non-interest expense as a percentage of total revenue.

Income Tax Expense

Income tax expense increased $212,000 to $744,000, with an effective tax rate of 20.0%, for the quarter ended March 31, 2025, as compared to $532,000 with an effective tax rate of 19.7% for the same three month period in 2024. The increase in income tax expense for the quarter ended March 31, 2025, as compared to the same quarter in 2024, was primarily driven by an increase of $1.0 million in income before taxes. The effective income tax rate increased 30 basis points to 20.0% for the three months ended March 31, 2025 as compared to 19.7% for the same three month period in 2024. The increase in the tax rate in the first quarter of 2025, as compared to the same quarter in 2024, was primarily related to fluctuations in permanent tax differences.

The Company’s tax liability is a function of the 21% statutory federal tax rate, the level of pretax income, the varying effects of New York State income taxes, and is partially reduced by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits. In addition, the tax effects of certain incentive stock option activity may reduce the Company’s effective tax rate on a sporadic basis.

Earnings per Share

Basic and diluted earnings per Voting and Series A Non-Voting share were $0.48 and $0.41 per share for the first quarter of 2025, respectively. The difference between basic and diluted earnings per share reflects the accounting impact of restricted stock units granted to senior executive officers during the period under the 2024 Equity Incentive Plan, which was approved by shareholders at the 2024 annual meeting.

For the first quarter of 2024, both basic and diluted earnings per Voting and Series A Non-Voting share were $0.34 per share. The increase in earnings per share between these two periods was due to the increase in net income between these two time periods. Further information on earnings per share can be found in Note 3 of the unaudited consolidated financial statements of this Form 10-Q.

Changes in Financial Condition

Assets

Total assets increased $20.5 million, or 1.39%, to $1.50 billion at March 31, 2025 as compared to December 31, 2024. This increase was due primarily to increases in total cash and cash equivalents.

Loans totaled $912.2 million at March 31, 2025, a decrease of $6.8 million, or 0.74%, compared to $919.0 million at December 31, 2024. This was primarily due to decreases of $9.2 million in total residential mortgage loans and $662,000 in total consumer loans, partially offset by increases of $3.1 million in commercial loans. Total cash and cash equivalents totaled $51.5 million at March 31, 2025, an increase of $19.9 million, or 63.0%, compared to $31.6 million at December 31, 2024. This was due to increases of $15.3 million in interest-earning deposits, and increases in cash and due from banks of $4.6 million.

Total increases in assets were also due to an increase in investment securities, including investment in FHLB-NY stock, of $10.4 million, or 2.4%, to $447.1 million at March 31, 2025, as compared to December 31, 2024. This was due to increases of $14.7 million in available-for-sale securities and $325,000 in marketable equity securities, partially offset by decreases of $3.0 million in held-to-maturity securities and $1.7 million in FHLB-NY stock.

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Liabilities

Total liabilities increased $17.1 million, or 1.3%, to $1.37 billion at March 31, 2025 as compared to December 31, 2024. This increase was due primarily to an increase in total deposits of $60.0 million, or 5.0%, to $1.26 billion at March 31, 2025, from $1.20 billion at December 31, 2024. Interest-bearing deposits increased $70.4 million, or 7.1% from December 31, 2024 to March 31, 2025, while noninterest-bearing deposits decreased $10.4 million, or 4.9%, during the same period.

Total increases in liabilities were offset partially by a $43.4 million, or 49.3% decrease in borrowed funds balances from the FHLB-NY of $44.6 million at March 31, 2025, as compared to December 31, 2024. This decrease in borrowed funds includes a decrease of $34.0 million in short-term borrowing, and $9.4 million in long term borrowing.

Shareholders’ Equity

Shareholders' equity increased by $3.4 million, or 2.8%, from $121.5 million at December 31, 2024, to $124.9 million on March 31, 2025. This increase was primarily due to the Company’s $2.3 million increase in retained earnings and a decrease in accumulated other comprehensive loss of $712,000, partially reduced by declared dividends to shareholders of $627,000.

Capital

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 maintain a strong capital position, consistent with the risk profile of its banking operations. This strong capital position serves to support growth and expansion activities while at the same time exceeding regulatory standards. At March 31, 2025, the Bank met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management 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. The buffer is separate from the capital ratios required under the Prompt Corrective Actions (“PCA”) standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. At March 31, 2025, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.

Pathfinder Bank’s capital amounts and ratios as of the indicated dates are presented in the following table:

(In thousands)

Non-GAAP Financial Measures

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted

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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. 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. The Company provides, below, an explanation of the calculations, as supplemental information, for non-GAAP measures included in the consolidated annual financial statements. In addition, the Company provides a reconciliation of its subsidiary bank’s disclosed regulatory capital measures, below.

(In thousands)

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Loan and Asset Quality and Allowance for Credit Losses

The following table represents information concerning the aggregate amount of non-accrual loans at the indicated dates:

(In thousands)

Nonperforming assets include nonaccrual loans, and foreclosed real estate (‘‘FRE”).

As indicated in the table above, nonperforming assets at March 31, 2025 were $13.2 million, and were $8.9 million lower than the $22.1 million reported at December 31, 2024 and $6.5 million lower than the $19.7 million reported at March 31, 2024. The decrease in the nonperforming loans on March 31, 2025, as compared to December 31, 2024, was primarily the result of certain commercial loans returning to accrual status.

Fair values for commercial FRE are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). On a prospective basis, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate’s fair value less costs to sell. Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged 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 for the FRE property.

The allowance for credit losses on loans represents management’s estimate of the lifetime losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for credit losses was $17.4 million and $17.2 million at March 31, 2025 and December 31, 2024, respectively. The ratio of the allowance for credit losses to total loans was 1.91% as of March 31, 2025, as compared to 1.88% at December 31, 2024 and 1.87% at March 31, 2024. Management performs a quarterly evaluation of the allowance for credit losses based on quantitative and qualitative factors and has determined that the current level of the allowance for credit losses is adequate to absorb the losses in the loan portfolio as of March 31, 2025.

Loans purchased outside 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, 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.

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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.

At March 31, 2025 and December 31, 2024, the Company had $15.8 million and $20.0 million in loans, respectively, which were individually analyzed, having established specific reserves of $2.5 million, respectively, on these loans.

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 totaled $58.5 million at March 31, 2025, a decrease of $2.1 million, as compared to $56.4 million at December 31, 2024. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered individually evaluated.

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.

The future performance of the Company’s loan portfolios with respect to credit losses will be highly dependent upon the course and duration, both nationally and within the Company’s market area, of the concentrations in the Company’s loan portfolio. Concentrations of loans within a portfolio that are made to a single borrower, to a related group of borrowers, or to a limited number of industries, are generally considered to be additional risk factors in estimating future credit losses. Therefore, the Company monitors all of its credit relationships to ensure that the total loan amounts extended to one borrower, or to a related group of borrowers, does not exceed the maximum permissible levels defined by applicable regulation or the Company’s generally more restrictive internal policy limits.

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 composition and 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 Federal Home Loan Bank of New York (“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, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense and/or losses on the sale of securities or loans.

Through the first three months of 2025, as indicated in the Consolidated Statement of Cash Flows, the Company reported net cash inflows from financing activities of $16.1 million and $5.7 million from operating activities. The net cash inflows from financing activities was primarily due to increases of $60.0 million in net deposit balances, partially offset by a $43.4 million decrease in net borrowings, and a $445,000 decrease in net cash from all other financing sources, including dividends paid to common voting and non-voting shareholders and warrants of $625,000. The Company reported net cash outflows of $1.9 million related to investing activities, generated primarily by decreases of $7.9 million and $637,000 in net

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investment activity and premises and equipment, respectively, offset partially by increases of $6.7 million in net loan activity.

The Bank’s management monitors liquidity on a continuous basis through a broad range of internal programs and considers effective liquidity management to be one of its primary objectives. At March 31, 2025 the Bank had deposits of $1.26 billion, of which a portion were nominally uninsured, as they were above the insurance limits established by the Federal Deposit Insurance Corporation (“FDIC”) on that date. Of the nominally uninsured deposits at March 31, 2025, $107.0 million were insured through a long-standing reciprocal deposit program managed by a third-party entity. In addition, $138.0 million in municipal deposits are fully protected against principal loss by a collateral program whereby the Bank places high-quality securities with an independent custodian as collateral. The Bank had $150.0 million in deposits, representing 13.2% of all deposits, that were considered to be uninsured at March 31, 2025.

The Company has a number of existing credit facilities available to it. At March 31, 2025, total credit available under the existing lines of credit was approximately $224.5 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. At March 31, 2025, the Company had $44.6 million of the available lines of credit utilized on its existing lines of credit with the remainder of $179.8 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 March 31, 2025, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.

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Off-Balance Sheet Arrangements

The Company 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 March 31, 2025, the Company had $211.2 million in outstanding commitments to extend credit and standby letters of credit.

The Company's exposure to credit loss in the event of nonperformance related to off-balance sheet arrangements is proportional to the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless such commitments are unconditionally cancelable, through the provision for credit losses expense. The allowance for credit losses on off-balance sheet credit exposures as of March 31, 2025 was $513,000 and is included in other liabilities on the Company's consolidated Statements of Condition.

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 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 March 31, 2025. 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.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of March 31, 2025, our CEO and CFO concluded that our disclosure controls and procedures were effective as of that date.

We did not make any changes in internal control over financial reporting during the quarter ended March 31, 2025 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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