A N N U A L R E P O R T 33
OUR
VISION
To be the Local Bank
Our Community Trusts.
LOCAL
We have proudly served Central New York for over 150 years.
Like our customers, we live, work and play here. That fact not only
allows us to know our customers better, but gives our customers
access to decision makers right here in Central New York.
COMMUNITY
Our success is intertwined with the success of the communities
we serve. For that reason, and because it is the right thing to do,
we invest our resources, time, and talents in those communities.
TRUST
Because we want to serve our local communities for another
150 years, we must earn the trust of our customers every day.
We do that by being ethical, capable, honest, reliable and responsive.
We do not sell products and services to our customers. We listen,
and inquire, to determine our customers’ needs. Then, with the help
of a team of trusted advisors, we develop a program of services
and products to uniquely satisfy those needs.
JAMES A. DOWD
President and CEO
D E A R VA LU E D S H A R E H O L D E R S ,
As we reflect on 2023 at Pathfinder Bancorp, Inc., we celebrate
our accomplishments in a challenging period. Our progress
in 2023 was characterized by remarkable adaptability, driven
by strategic planning, improving operational efficiencies, and
a deep-rooted commitment to our local communities, our
people, and our stakeholders amid economic uncertainties.
metrics of the financial sector. It’s crucial to understand that the
current interest rate environment is temporary. Therefore, we
must remain diligent in structuring our balance sheet to optimize
future performance while upholding its strength and stability. By
doing so, we ensure the continued trust of our customers and
the communities we serve.
The year unfolded against a backdrop of economic fluctuations
and unprecedented market dynamics. The industry grappled
with rapidly rising interest rates, an inverted Treasury yield
curve and heightened inflation, leading us to combat potential
deposit outflows as customers sought higher yields, exploring
options in other institutions, the capital market, and U.S.
Treasury obligations. These trends triggered a rapid, but
carefully managed, escalation in our cost of funds. In particular,
we note that customers transferring funds from lower-yielding
core deposits to accounts offering higher interest rates within
Pathfinder Bank, exerted downward pressure on our net interest
margin.
We witnessed the failures of three large regional banks in the
spring of 2023 which prompted significant actions from key
regulatory bodies such as the U.S. Treasury Department, the
Federal Reserve, and the Federal Deposit Insurance Corporation
aimed to shore up confidence in the U.S. banking system. These
regional bank failures and resulting government actions only
exacerbated the industries liquidity challenges.
The events and conditions of 2023 demanded greater attention
to liquidity and capital. Our priorities shifted towards ‘weathering
the storm’ and safeguarding our customers and communities
amidst these uncertainties. Ultimately, liquidity and customer
retention emerged as our top priorities. To maintain trust, we
showcased a resilient and stable balance sheet. We leveraged
our existing liquidity contingency plan, enhanced reporting
and monitored liquidity patterns daily. We dedicated significant
time and effort to preserve deposits and valuable depositor
relationships. We proactively nurtured existing relationships
while we continued to attract new customers with competitive
deposit products and services. The success of these efforts was
evidenced by Pathfinder Bank’s year-end total deposits of $1.1
billion, which represented only a slight reduction of 0.48% from
the previous year end total.
An inverted yield curve, as experienced throughout 2023,
resulting from the Fed moving short-term rates up above 5.25%
was largely unkind to the banking industry’s net interest margins.
This inverted yield curve, combined with the deposits trends
previously discussed, resulted in a 29-basis point drop in our net
interest margin from 3.24% in 2022 to 2.95% in 2023.
The aforementioned challenges we faced this past year resulted
in performance levels that did not match up to the record
earnings performance experienced in 2022 and 2021. Net
income totaled $9.3 million for 2023 as compared to $12.9 million
in 2022. The Company’s return on average assets of 0.67% and
return on average equity of 8.09% represented reductions
from the prior year results of 0.96% and 11.77%, respectively.
In the midst of a highly inflationary environment, non-interest
expenses were managed carefully and were only 1.8% higher in
2023, totaling $29.4 million compared to $28.9 million in 2022.
Looking ahead to 2024, we are optimistic yet cautious. While
we have no direct control over interest rates or the shape of the
yield curve, we recognize the potential benefits of a historically
normal upward-shaped yield curve for our industry. Such a curve
is anticipated to significantly enhance the overall performance
Our forward strategic objectives remain unchanged; enhancing
our financial agility, managing interest rate fluctuations, growing
core deposits, generating non-interest income, expanding small
business deposit and lending activities, managing operational
expenses, and enriching the customer experience.
In the third quarter of 2024, Pathfinder Bank will officially
acquire Berkshire Bank’s East Syracuse Branch. We expect the
acquisition to generate a favorable internal rate of return and
attractive earnings per share accretion, all within a reasonable
tangible book value earn-back period. On a pro forma basis,
following the branch acquisition, Pathfinder’s capital ratios are
projected to remain strong and supportive of continued balance
sheet growth. Furthermore, the addition of nearly $200 million
in low-cost deposits will improve Pathfinder’s liquidity profile
and balance sheet flexibility.
The East Syracuse branch’s ideal location, relative to our
other branch locations, and its significant physical space, will
help strengthen our local presence in Central New York by
enhancing convenience for our existing customers, while
simultaneously providing the flexibility for team expansion.
This positioning aligns perfectly with the anticipated economic
surge accompanying Micron Technology’s
in
constructing four semiconductor fabrication plants, known as
“mega-fabs,” in Clay, NY.
investment
Micron intends to invest up to $100 billion over the next two
decades to construct the 1,400-acre campus, with $20 billion
planned by 2030. With two branches strategically located
on State Route 31, flanking the Micron site, we are optimally
positioned to capitalize on the anticipated economic growth.
As Micron’s project unfolds, it is expected to catalyze a ripple
effect of employment expansion, business development, and
increased demand for local services and housing. As Central New
York becomes increasingly attractive for talent and investment,
this rise in population growth, standard of living and household
income will position our Bank well to contribute to, and benefit
from, the region’s unfolding success story.
On behalf of the Board of Directors and our Executive Team, we
want to extend a special thank you to our dedicated employees.
To our customers, we appreciate your trust and partnership. And
to you, our valued shareholders, thank you for your ongoing
support and confidence in Pathfinder Bancorp, Inc.
I would also like to express my personal appreciation to our
outstanding Board of Directors for their strategic leadership and
contributions to our success. It is a privilege to lead Pathfinder
Bank, and I remain excited about the future and all we can
accomplish together.
As we embark on 2024, we are poised to confront challenges
and seize opportunities with strategic foresight and a steadfast
commitment to our values. Together, we look forward to a year
of building, growing, thriving, and continuing to strengthen
Pathfinder Bancorp, Inc. for the future.
Pathfinder Bancorp, Inc. for the fut
165 YEARS
STRONG
As we celebrate this milestone, we acknowledge
that our achievements are not ours alone but a
shared victory with the people, businesses, and places
we call home. Our success reflects a collective spirit
and deep community ties, built on a foundation of
trust. Together, we have created a story of resilience,
growth, and mutual success that is as inspiring as
it is enduring.
FOUNDED IN
1859
11 FULL-SERVICE
LOCATIONS
191
EMPLOYEES
1 LOAN
PRODUCTION
OFFICE
1.45 BILLION1
IN ASSETS
1Accurate as of March 31, 2024.
23% INSIDER
OWNERSHIP2
2Ownership percentages shown
on a fully-diluted basis. Based on
outstanding shares as of April 4, 2024.
LEADING THE WAY IN OSWEGO COUNTY:
Our Dominant Market Position
#1 DEPOSIT
MARKET SHARE
RANK
48.59%
DEPOSIT MARKET
SHARE
$864M
TOTAL
DEPOSITS
Source: FDIC Summary of Deposits Report. Data as of June 30, 2023.
EXPANDING FOOTPRINT IN ONONDAGA COUNTY:
Pathfinder Bank to Acquire East Syracuse Branch from Berkshire Bank
TRANSACTION OVERVIEW
(cid:81) Branch Location: 6611 Manlius Center Road, East Syracuse, NY, 13057
(cid:81) Total Deposits: $198 Million1
(cid:81) Cost of Deposits: 1.84%1
(cid:81) # of Accounts: 11,000 +1
(cid:81) Total Loans: $32 Million1
(cid:81) Branch Portfolio Yield: 5.71%1
(cid:81) Closing Premium: 5.8% premium for core deposits2 delivered at closing,
No premium paid for time deposits delivered at closing
(cid:81) Closing: Expected to close third quarter 2024. Subject to regulatory approval
and satisfaction of certain customary conditions.
STRATEGIC RATIONALE
(cid:81) Continue Pathfinder’s growth strategy to expand into attractive markets
(cid:81) Significantly strengthens Pathfinder’s core deposit base
(cid:81) Financially compelling:
- Improves future returns on assets and equity
- Attractive tangible book value earn back period (less than 2.8 years)
- Pro-forma capital ratios remain strong and supportive
of continued balance sheet growth
- Addition of nearly $200 million in low-cost deposits
improves liquidity profile and balance sheet flexibility
- Helps improve funding base by reducing
loan/deposit ratio below current level
- Excess liquidity received creates opportunity
to pay down higher rate wholesale borrowings
(cid:81) Helps key strategic initiatives by expanding presence in the attractive
Syracuse market, and helps to attract & retain both sales and
administrative talent in support of further expansion in that market
(cid:43) 4 EXISTING
FULL-SERVICE
BRANCHES
(cid:43) EAST SYRACUSE
ACQUISITION
Lacona
Oswego (3)
Mexico
OSWEGO COUNTY
Central Square
Clay
Cicero
Syracuse (2)
ONONDAGA COUNTY
PBHC Branches (11)
PBHC Headquarters
PBHC Newly Acquired Branch
1Data as of January 31, 2024. 2Core deposits defined as total deposits less time deposits, core deposits were $129 million as of January 31, 2024. Note: Estimated financial impacts of the
transaction are presented for illustrative purposes only and are based on management’s assumptions regarding the transaction, including transaction expenses and accounting treatment.
POSITIONED FOR
UNPRECEDENTED GROWTH:
Embracing Syracuse’s Promising Landscape
Micron Mega – Complex
(cid:81) In 2022, Micron announced its plans to build the largest
semiconductor fabrication facility in the history of the
United States. Micron intends to invest up to $100 billion
over the next 20-plus years to construct a new megafab
in Syracuse, NY, with the first-phase investment of
$20 billion planned by the end of this decade.
(cid:81) The new megafab will increase domestic supply of
leading-edge memory, create nearly 50,000 NY jobs
and represent the largest private investment in
NY state history
(cid:81) The state of NY projects the facility would add an annual average
of $16.7 billion in real economic output and $9.6 billion in real
Gross Domestic Product (GDP) over the time period 2025-2055
with a potential economic impact of +10% local GDP by 2030.
Source: micron.com, ny.gov
Median Household Income Expected Trends
2023
68,883
68,528
80,716
73,503
2029
+10.23%
+8.46%
+8.26%
87,387
83,550
75,933
74,326
Onondaga County
Syracuse MSA
State of New York
United States
Onondaga County
Syracuse MSA
State of New York
United States
Source: rockethomes.com
336,157,119
19,649,850
Attractive Market Demographics
POPULATION:
651,613
MEDIAN HOME SALE PRICE:
$171 Thousand
TOTAL BANK DEPOSITS:
$15.2 Billion
AVERAGE BANK BRANCH DEPOSIT:
$102.6 Million
POPULATION
(Actual)
467,172
651,613
Onondaga County
Syracuse MSA
State of New York
United States
POPULATION DENSITY 2024
(#/sq. mile)
600.2
417.0
273.2
95.1
Onondaga County
Syracuse MSA
State of New York
United States
15,085,639
TOTAL DEPOSITS IN MARKET
($MMs)
12,194
15,185
1,987,773
Onondaga County
Syracuse MSA
State of New York
United States
Source: S&P Capital IQ Pro; census.gov
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
$20
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 001-36695
PATHFINDER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
38-3941859
(I.R.S. Employer Identification No.)
214 West First Street
Oswego, NY 13126
(315) 343-0057
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading Symbol(s)
PBHC
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth
company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐
☐
☒
Smaller reporting company
Emerging growth company
☒
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30,
2023, as reported by the NASDAQ Capital Market ($14.10), was approximately $68.1 million.
As of March 19, 2024, there were 4,719,788 shares outstanding of the Registrant’s voting common stock and 1,380,283 shares of the Registrant’s Series A nonvoting
common stock.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the 2024 Annual Meeting of Shareholders of the Registrant (Part III).
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2023
PATHFINDER BANCORP, INC.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosure
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Reserved
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART I
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
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PART I
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, 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, 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 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. We disclaim any obligation to revise or update any forward-looking statements contained in this Annual Report on
Form 10-K to reflect future events or developments.
ITEM 1: BUSINESS
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.
- 3 -
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
- 4 -
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.
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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.
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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.
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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
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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
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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.
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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,
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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.
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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
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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.
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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.”
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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
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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
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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;
- 18 -
•
•
•
•
•
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
- 19 -
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.
- 20 -
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.
- 21 -
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
12/31/2023
12/31/2022
12/31/2021
12/31/2020
12/31/2019
Headcount
174
174
173
183
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
2023
2022
2021
2020
2019
Voluntary Turnover %
23.4%
25.0%
24.2%
13.2%
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,
- 22 -
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
Asian
Black or African American
Hispanic or Latino
Two or more races (Not Hispanic or Latino)
White
Age Range
18-25
26-35
36-45
46-55
56-65
Over 65
Grand Total
Compensation and Benefits
%
0.6%
2.2%
2.2%
3.4%
1.1%
90.5%
Total
21
56
44
16
34
3
174
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.
- 23 -
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.
ITEM 1A: RISK FACTORS
Not required of a smaller reporting company.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
- 24 -
ITEM 1C: CYBERSECURITY
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.
- 25 -
ITEM 2: PROPERTIES
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
Main Office
214 West First Street
Oswego, New York 13126
Plaza Branch
291 State Route 104 East
Oswego, New York 13126
Mexico Branch
3361 Main Street
Mexico, New York 13114
Oswego East Branch
34 East Bridge Street
Oswego, New York 13126
Lacona Branch
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch
5 West First Street South
Fulton, New York 13069
Central Square Branch
3025 East Ave
Central Square, New York 13036
Cicero Branch
6194 State Route 31
Cicero, New York 13039
Pike Block Branch
109 West Fayette Street
Syracuse, New York 13202
Clay Branch
3775 State Route 31
Liverpool, NY 13090
Southwest Corridor Branch
506 West Onondaga Street
Syracuse, NY 13204
Opening Date
1874
Owned/Leased
Owned
1989
1978
1994
2002
2003
2005
2011
2014
2018
2022
2017
Owned (1)
Owned
Owned
Owned
Owned (2)
Owned
Owned
Leased (3)
Leased (4)
Leased (5)
Leased (6)
Utica Loan Production Office
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)
(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.
Both building and land are owned as of July 2023; the land lease expense in 2023 was $23,000.
- 26 -
ITEM 3: LEGAL PROCEEDINGS
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.
ITEM 4: MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s voting common stock trades on the NASDAQ Capital Market under the symbol “PBHC.”
There were 310 shareholders of record (excluding the number of persons or entities holding stock in street name through various
brokerage firms) as of March 22, 2024.
The Company did not repurchase any shares of its common stock for the year ended December 31, 2023.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023 with respect to shares of voting common stock that may be issued
under the Company’s existing equity compensation plans.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by stockholders
Dividends and Dividend History
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
164,857
$
N/A
11.03
N/A
10,408
N/A
The Company has historically paid regular quarterly cash dividends on its common stock. The Board of Directors presently intends to
continue the payment of regular quarterly cash dividends, subject to the need for those funds for debt service and other purposes.
Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon
a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder Bank and its
subsidiaries’ results of operations and financial condition, tax considerations, and general economic conditions. More details are
included within the section titled Regulation and Supervision.
ITEM 6: RESERVED
- 27 -
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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
- 28 -
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.
- 29 -
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.
- 30 -
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
Total assets
Investment securities available-for-sale
Investment securities held-to-maturity
Loans receivable, net
Deposits
Borrowings and subordinated debt
Shareholders' equity
For the Year
Total interest income
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Total noninterest income
Total noninterest expense
Income before income taxes
Income tax expense
Net income attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp, Inc.
Convertible preferred stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders
Per Share
Income per share - basic
Income per share - diluted
Book value per common share
Tangible book value per common share (a)
Cash dividends declared
Performance Ratios
Return on average assets
Return on average equity
Average equity to average assets
Shareholders' Equity to total assets at end of year
Net interest rate spread
Net interest margin
Average interest-earning assets to average interest-bearing
liabilities
Noninterest expense to average assets
Efficiency ratio (a) (b)
Dividend payout ratio
Return on average common equity
At or for the year ended December 31,
2023
2022
2021
2020
2019
$ 1,465,798
258,716
179,286
881,232
1,120,067
205,513
120,256
$ 1,399,921
191,726
194,402
882,435
1,125,430
145,730
111,582
$ 1,285,177
190,598
160,923
819,524
1,055,346
106,661
110,633
$ 1,227,443
128,261
171,224
812,718
995,907
121,450
97,722
$ 1,093,807
111,134
122,988
772,782
881,893
108,253
90,669
$
$
$
$
67,663
28,744
38,919
2,930
35,989
5,190
29,395
11,784
2,362
129
9,293
-
45
1,729
7,519
1.51
1.51
19.59
18.83
0.36
$
$
$
$
51,098
9,695
41,403
2,754
38,649
5,914
28,874
15,689
2,656
101
12,932
-
45
2,666
10,221
2.13
2.13
18.40
17.63
0.36
$
$
$
$
45,827
7,532
38,295
1,022
37,273
6,231
27,495
16,009
3,499
103
12,407
97
35
2,699
9,576
2.07
2.07
18.43
17.66
0.28
$
$
$
$
42,507
10,864
31,643
4,707
26,936
6,485
25,080
8,341
1,295
96
6,950
291
30
1,224
5,405
1.17
1.17
17.56
16.53
0.24
$
$
$
$
41,758
13,528
28,230
1,966
26,264
4,917
25,730
5,451
1,165
10
4,276
208
23
467
3,578
0.80
0.80
15.94
14.95
0.24
0.67 %
8.09
8.26
8.15
2.47
2.95
121.63
2.11
66.62
28.95
8.09
0.96 %
11.77
8.17
7.93
3.05
3.24
124.03
2.15
61.11
20.87
11.77
0.98 %
11.91
8.26
8.58
3.06
3.21
124.61
2.18
63.07
16.17
11.91
0.60 %
7.43
8.02
7.94
2.68
2.88
120.49
2.15
68.71
20.39
8.92
0.43 %
5.34
7.97
8.27
2.73
2.98
116.84
2.56
78.75
30.21
6.02
- 31 -
Asset Quality Ratios
Nonperforming loans to year end loans
Nonperforming assets to total assets
Allowance for credit losses to year end loans
Allowance for credit losses to nonperforming loans
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to adjusted assets)
Tier 1 Common Equity (to risk-weighted assets)
Number of:
Banking offices
Fulltime equivalent employees
(a)
(b)
2023
2022
2021
2020
2019
At December 31,
1.92 %
1.19
1.78
92.73
15.05 %
13.80
10.11
13.80
1.00 %
0.66
1.71
169.93
1.00 %
0.65
1.57
155.99
15.14 %
13.88
9.67
13.88
15.19 %
13.94
9.52
13.94
2.58 %
1.74
1.55
59.89
13.13 %
11.87
8.63
11.87
0.67 %
0.49
1.11
165.25
12.28 %
11.16
8.20
11.16
12
164
12
160
11
161
11
176
11
157
See table below for reconciliation of the non-GAAP financial measures.
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.
- 32 -
(In thousands, except per share amounts)
Per Share
Book value per common share
Total Pathfinder Bancorp, Inc. shareholders' equity (book value)
(GAAP)
Preferred stock
Total shares outstanding
Book value per common share
Total common equity
Total equity (GAAP)
Goodwill
Intangible assets
Tangible common equity
Tangible book value per common share
Tangible common equity
Total shares outstanding
Tangible book value per common share
Performance Ratios
Efficiency ratio
Operating expenses (numerator)
Net interest income
Noninterest income
Less: Gains/(Losses) on the sale/redemption of investment
securities, fixed assets, loans, and foreclosed real estate
Less : (Losses)/Gains on marketable securities
Denominator
Efficiency ratio
Dividend payout ratio
Dividends declared (numerator)
Net income available to common shareholders (denominator)
Dividend payout ratio
Return on average common equity
Net income attributable to Pathfinder Bancorp Inc. (GAAP)
(numerator)
Average equity
Average preferred stock
Denominator
Return on average common equity
2023
At or for the year ended December 31,
2020
2021
2022
2019
90,434
15,370
4,709
15.94
75,064
4,536
149
70,379
70,379
4,709
14.95
25,730
28,230
4,917
393
81
32,673
78.75 %
$
$
$
$
$
$
$
97,456
17,901
4,531
17.56
79,555
4,536
133
74,886
74,886
4,531
16.53
25,080
31,643
6,485
2,255
(629)
36,502
68.71 %
$
$
$
$
$
$
$
$
$ 119,495
-
6,100
19.59
$
$ 110,997
-
6,032
18.40
$
$ 110,287
-
5,983
18.43
$
$ 119,495
4,536
85
$ 114,874
$ 110,997
4,536
101
$ 106,360
$ 110,287
4,536
117
$ 105,634
$ 114,874
6,100
18.83
$
$ 106,360
6,032
17.63
$
$ 105,634
5,983
17.66
$
29,395
38,919
5,190
$
28,874
41,403
5,914
$
27,495
38,295
6,231
243
(255)
44,121
66.62 %
$
(282)
352
47,247
61.11 %
$
551
382
43,593
63.07 %
$
$
$
$
$
2,177
7,519
28.95 %
$
2,143
10,221
20.97 %
$
1,548
9,576
16.17 %
$
1,102
5,405
20.39 %
1,081
3,578
30.21 %
$
9,293
114,824
-
$ 114,824
$
12,932
109,898
-
$ 109,898
$
12,407
104,131
-
$ 104,131
$
$
6,950
93,586
15,709
77,877
$
$
4,276
80,136
9,074
71,062
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)
Total equity (GAAP)
Goodwill
Intangible assets
Addback: Accumulated other comprehensive income
Total Tier 1 Capital
Allowance for loan and lease losses
Total Tier 2 Capital
Total Tier 1 plus Tier 2 Capital (numerator)
Risk-weighted assets (denominator)
Total core capital to risk-weighted assets
Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)
Risk-weighted assets (denominator)
Total capital to risk-weighted assets
Tier 1 capital (to adjusted assets)
Total Tier 1 capital (numerator)
Total average assets
Goodwill
Intangible assets
Adjusted assets (denominator)
Total capital to adjusted assets
Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 capital (numerator)
Risk-weighted assets (denominator)
Total Tier 1 Common Equity to risk-weighted assets
CRITICAL ACCOUNTING ESTIMATES
At or for the year ended December 31,
2023
2022
2021
2020
2019
$ 137,943
(4,536)
(85)
9,605
$ 142,927
12,995
$
12,995
$ 155,922
1,035,747
$ 126,148
(4,536)
(101)
12,172
$ 133,683
12,076
$
12,076
$ 145,759
962,861
$ 121,896
(4,536)
(117)
1,268
$ 118,511
10,655
$
10,655
$ 129,166
850,157
$ 106,720
(4,536)
(133)
2,236
$ 104,287
11,002
$
11,002
$ 115,289
878,380
$
$
$
$
88,138
(4,536)
(149)
2,971
86,424
8,669
8,669
95,093
774,177
15.05 %
15.14 %
15.19 %
13.13 %
12.28 %
$ 142,927
1,035,747
$ 133,683
962,861
$ 118,511
850,157
$ 104,287
878,380
$
86,424
774,177
13.80 %
13.88 %
13.94 %
11.87 %
11.16 %
$ 142,927
1,418,313
(4,536)
(85)
$1,413,692
$ 133,683
1,387,480
(4,536)
(101)
$1,382,843
$ 118,511
1,249,752
(4,536)
(117)
$1,245,099
$ 104,287
1,212,512
(4,536)
(133)
$1,207,843
$
86,424
1,059,060
(4,536)
(149)
$1,054,375
10.11 %
9.67 %
9.52 %
8.63 %
8.20 %
$ 142,927
1,035,747
$ 133,683
962,861
$ 118,511
850,157
$ 104,287
878,380
$
86,424
774,177
13.80 %
13.88 %
13.94 %
11.87 %
11.16 %
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
- 34 -
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
- 35 -
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
- 36 -
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.
- 37 -
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.
- 38 -
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:
Loans
Taxable investment securities
Tax-exempt investment securities
Fed funds sold and interest-earning deposits
Total interest-earning assets
Noninterest-earning assets:
Other assets
Allowance for credit losses
Net unrealized losses
on available-for-sale securities
Total assets
Interest-bearing liabilities:
NOW accounts
Money management accounts
MMDA accounts
Savings and club accounts
Time deposits
Subordinated debt
Borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities & shareholders' equity
$
Net interest income
Net interest rate spread
Net interest margin
Ratio of average interest-earning assets
to average interest-bearing liabilities
For the year ended December 31,
2023
Interest
Average
Balance
Average
Yield /
Cost
Average
Balance
$
$
899,605
379,600
30,318
11,730
1,321,253
100,319
(17,870)
(13,600)
1,390,102
92,223
14,116
239,182
124,617
480,867
29,815
105,471
1,086,291
172,950
16,037
1,275,278
114,824
1,390,102
47,348
18,073
1,947
295
67,663
5.26% $
4.76%
6.42%
2.51%
5.12%
869,591
351,898
38,456
19,134
1,279,079
538
15
6,695
274
15,743
1,941
3,538
28,744
89,391
(13,196)
(9,580)
1,345,694
$
0.58% $
0.11%
2.80%
0.22%
3.27%
6.51%
3.35%
2.65%
$
102,223
16,201
260,594
138,954
412,536
29,639
71,152
1,031,299
192,106
12,391
1,235,796
109,898
1,345,694
$
$
2022
Interest
38,322
11,454
1,173
149
51,098
319
18
1,941
210
4,584
1,749
874
9,695
$
38,919
$
41,403
2.47%
2.95%
121.63%
Average
Yield /
Cost
4.41%
3.25%
3.05%
0.78%
3.99%
0.31%
0.11%
0.74%
0.15%
1.11%
5.90%
1.23%
0.94%
3.05%
3.24%
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.
Years Ended December 31,
2023 vs 2022
Increase/(Decrease) Due to
2022 vs 2021
Increase/(Decrease) Due to
Volume
1,361
962
(292)
(77)
1,954
(34)
(2)
(172)
(23)
875
10
581
1,235
719
$
$
$
$
Rate
7,665
5,657
1,066
223
14,611
253
(1)
4,926
87
10,284
182
2,083
17,814
(3,203)
$
$
Total
Increase
(Decrease)
Volume
Rate
Total
Increase
(Decrease)
9,026
6,619
774
146
16,565
219
(3)
4,754
64
11,159
192
2,664
19,049
(2,484)
$
$
1,601
1,132
494
(4)
3,223
26
-
65
23
441
(177)
(103)
275
2,948
$
$
(305)
1,746
463
144
2,048
7
1
886
28
881
136
(51)
1,888
160
$
$
1,296
2,878
957
140
5,271
33
1
951
51
1,322
(41)
(154)
2,163
3,108
(In thousands)
Interest Income:
Loans
Taxable investment securities
Tax-exempt investment securities
Interest-earning deposits
Total interest income
Interest Expense:
NOW accounts
Money management accounts
MMDA accounts
Savings and club accounts
Time deposits
Subordinated debt
Borrowings
Total interest expense
Net change in net interest income
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.
- 40 -
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.
For the year ended December 31,
(In thousands)
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Debit card interchange fees
Insurance agency revenue
Historical tax credit
Other charges, commissions and fees
Noninterest income before gains
Net gains (losses) on sales of securities, fixed assets, loans
and foreclosed real estate
(Losses) gains on marketable equity securities
Total noninterest income
$
$
$
2023
1,249
630
307
616
1,304
-
1,096
5,202
$
2022
1,126
589
363
867
1,128
521
1,250
5,844
243
(255)
5,190
$
(282)
352
5,914
$
Change
123
41
(56)
(251)
176
(521)
(154)
(642)
525
(607)
(724)
10.9%
7.0%
-15.4%
-29.0%
15.6%
-100.0%
-12.3%
-11.0%
-186.2%
-172.4%
-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.
- 41 -
Noninterest Expense
The following table sets forth certain information on noninterest expense for the years indicated.
(In thousands)
Salaries and employee benefits
Building and occupancy
Data processing
Professional and other services
Advertising
FDIC assessments
Audits and exams
Insurance agency expense
Community service activities
Foreclosed real estate expenses
Other expenses
Total noninterest expenses
For the year ended December 31,
$
$
2023
15,920
3,563
2,018
2,019
671
885
735
1,033
200
111
2,240
29,395
$
$
2022
16,022
3,380
2,042
1,528
905
606
688
906
267
78
2,452
28,874
$
$
Change
(102)
183
(24)
491
(234)
279
47
127
(67)
33
(212)
521
-0.6%
5.4%
-1.2%
32.1%
-25.9%
46.0%
6.8%
14.0%
-25.1%
42.3%
-8.6%
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.
- 42 -
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
Held-to-Maturity
2023
2022
2021
2023
2022
2021
US treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Common stock - financial services industry
Total investment securities
$
$
80,083
32,924
10,919
19,892
24,418
12,179
78,095
206
258,716
$
$
29,364
45,385
11,829
15,400
16,400
11,708
61,434
206
191,726
$
$
32,273
39,199
14,127
13,613
22,164
12,285
56,731
206
190,598
$
$
3,760
16,576
45,427
16,860
6,974
13,221
76,819
-
179,637
$
$
3,852
15,211
45,086
19,158
7,489
15,109
88,497
-
194,402
$
$
-
14,790
46,290
14,636
9,740
11,362
64,105
-
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:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private
label
Total
Other non-maturity investments:
Equity securities
Total
Total investment securities
One Year or Less
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
$
$
6,004
-
4,096
-
10,100
5,055
-
5,871
10,926
206
206
21,232
3,463
513
5,221
-
9,197
2,495
1,741
9,787
14,023
-
-
23,220
4.67% $
0.00%
5.45%
0.00%
4.99% $
5.81% $
0.00%
6.72%
6.30% $
0.53% $
0.53% $
5.62% $
- 43 -
2.21% $
1.82%
5.65%
0.00%
4.14% $
0.99% $
2.18%
5.88%
4.55% $
0.00% $
0.00% $
4.39% $
30,584
3,103
756
5,498
39,941
-
1,974
15,619
17,593
-
-
57,534
2.28%
2.15%
1.80%
7.36%
2.96%
0.00%
5.48%
3.94%
4.11%
0.00%
0.00%
3.31%
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Other non-maturity investments:
Equity securities
Total
Total investment securities
HELD-TO-MATURITY
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private
label
Total
Total investment securities
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Total investment securities
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
$
$
$
$
$
$
$
42,537
30,972
935
14,753
89,197
17,896
9,343
50,535
77,774
-
-
166,971
5.77% $
2.09%
5.22%
5.23%
4.40% $
4.22% $
3.54%
6.29%
5.48% $
0.00%
0.00% $
4.90% $
82,588
34,588
11,008
20,251
148,435
25,446
13,058
81,812
120,316
206
206
268,957
$
$
$
$
$
$
$
Fair
Value
80,083
32,924
10,919
19,892
143,818
24,418
12,179
78,095
114,692
206
206
258,716
Annualized
Weighted
Avg Yield
4.25%
2.09%
5.27%
5.81%
4.05%
4.22%
3.65%
5.82%
5.25%
0.53%
0.53%
4.58%
One Year or Less
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
-
666
1,754
-
2,420
-
-
12,298
12,298
14,718
0.00% $
3.14%
4.10%
0.00%
0.00% $
0.00% $
0.00%
8.47%
8.47% $
7.08% $
-
2,614
11,695
4,259
18,568
1,253
1,302
12,283
14,838
33,406
0.00% $
3.15%
4.82%
4.09%
4.42% $
3.40% $
3.63%
5.11%
4.84% $
4.60% $
1,497
7,987
31,978
1,997
43,459
2,374
4,938
8,117
15,429
58,888
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
$
$
$
$
$
2,263
5,309
-
10,604
18,176
3,347
6,981
44,121
54,449
72,625
2.66% $
2.51%
0.00%
4.55%
3.72% $
2.79% $
2.93%
4.33%
4.06% $
3.89% $
3,760
16,576
45,427
16,860
82,623
6,974
13,221
76,819
97,014
179,637
$
$
$
$
$
Fair
Value
3,456
14,730
42,155
15,680
76,021
6,324
11,928
73,761
92,013
168,034
3.18%
2.36%
4.85%
7.52%
4.11%
2.82%
2.80%
6.18%
4.58%
4.23%
Annualized
Weighted
Avg Yield
2.87%
2.56%
4.81%
4.79%
4.28%
2.91%
2.95%
5.31%
4.84%
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.
- 44 -
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)
Residential real estate
Residential real estate held-for-
sale
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Total loans receivable
2023
2022
2021
2020
2019
$ 258,198
28.8% $ 262,008
29.2% $ 246,344
29.6% $ 233,094
28.2% $ 212,663
27.2%
December 31,
-
358,521
165,460
35,231
79,797
$ 897,207
19
0.0%
40.0% 344,721
18.4% 163,806
34,349
3.9%
92,851
8.9%
100.0% $ 897,754
513
0.0%
38.4% 287,279
18.3% 156,167
32,048
3.8%
10.3% 110,108
100.0% $ 832,459
1,526
0.1%
34.5% 286,066
18.8% 194,963
38,941
3.8%
13.2%
70,905
100.0% $ 825,495
35,936
0.2%
34.7% 254,781
23.6% 148,776
46,688
4.7%
82,607
8.6%
100.0% $ 781,451
4.6%
32.6%
19.0%
6.0%
10.6%
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:
Commercial real estate
Residential real estate
Total real estate loans
Commercial and tax exempt
Home Equity and junior liens
Consumer
Total loans
Due
Under
One Year
Due 1-5
Years
Due > 5
Years to
Fifteen
Years
Due Over
Fifteen
Years
Total
$
8,692 $
853
9,545
74,433
18,599
2,784
$ 105,361 $
86,709 $ 250,940 $ 358,521
12,180 $
258,198
203,164
51,648
2,533
616,719
454,104
138,357
14,713
165,460
6,279
43,983
40,765
35,231
3,328
12,064
1,240
6,854
79,797
61,313
8,846
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:
Fixed
Variable
Total loans
Due After
One Year
$
$
408,149
383,697
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.
- 45 -
Nonperforming Loans and Assets
The following table represents information concerning the aggregate amount of nonperforming assets:
(Dollars In thousands)
Nonaccrual loans:
Commercial and commercial real estate
loans
Consumer
Residential mortgage loans
Total nonaccrual loans
Total nonperforming loans
Foreclosed real estate
Total nonperforming assets
2023
2022
December 31
2021
2020
2019
$
$
12,317
3,140
1,770
17,227
17,227
151
17,378
$
$
5,720
2,183
1,112
9,015
9,015
221
9,236
$
$
6,297
1,104
891
8,292
8,292
-
8,292
$
$
17,978
747
2,608
21,333
21,333
-
21,333
$
$
3,002
631
1,613
5,246
5,246
88
5,334
Nonperforming loans to total loans
Nonperforming assets to total assets
1.92%
1.19%
1.00%
0.66%
1.00%
0.65%
2.58%
1.74%
0.67%
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.
- 46 -
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.
- 47 -
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.
2023
2022
2021
2020
2019
(Dollars in thousands)
Residential real estate
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Unallocated (1)
Total
Allocation
of the
Allowance
2,466
$
5,751
4,956
657
2,145
-
15,975
$
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
714
5,881
6,937
741
1,046
-
15,319
28.8% $
40.0%
18.4%
3.9%
8.9%
-
100.0% $
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
872
5,308
3,701
774
1,297
983
12,935
29.2% $
38.4%
18.3%
3.8%
10.3%
-
100.0% $
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
931
4,776
4,663
739
1,123
545
12,777
29.6% $
34.5%
18.8%
3.8%
13.2%
0.1%
100.0% $
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
580
4,010
2,841
553
413
272
8,669
28.2% $
34.7%
23.6%
4.7%
8.6%
0.2%
100.0% $
Percent of
Loans to
Total Loans
27.2%
32.6%
19.0%
6.0%
10.6%
4.6%
100.0%
(1)
Includes loans held-for-sale at December 31 for each of the indicated years.
- 48 -
The following table sets forth the allowance for credit losses for the years indicated:
(Dollars In thousands)
Balance at beginning of year
Adoption of New Accounting Standards
Provisions charged to operating expenses
Recoveries of loans previously charged-off:
Commercial real estate and loans
Consumer and home equity
Residential real estate
Total recoveries
Loans charged off:
Commercial real estate and loans
Consumer and home equity
Residential real estate
Total charged-off
Net charge-offs
Balance at end of year
Net charge-offs to average loans outstanding
Allowance for credit losses to year-end loans
$
$
2023
15,319
1,886
2,991
236
118
1
355
(4,109)
(346)
(121)
(4,576)
(4,221)
15,975
0.48%
1.78%
$
$
2022
12,935
2,754
296
95
-
391
(585)
(147)
(29)
(761)
(370)
15,319
0.04%
1.71%
$
$
2021
12,777
1,022
70
88
-
158
(764)
(240)
(20)
(1,024)
(866)
12,935
0.10%
1.57%
$
$
2020
8,669
4,707
4
95
2
101
(222)
(353)
(125)
(700)
(599)
12,777
0.08%
1.55%
$
$
The following table sets forth the loan net charge-off ratios for the years indicated:
Allowance for credit losses to year-end loans
Allowance for credit losses to nonperforming loans
Nonaccrual loans to total loans
Allowance for credit losses to nonaccrual loans
Net charge-offs to average loans outstanding
Commercial real estate and loans
Consumer and home equity
Residential real estate
Total charged-off
Bank Owned Life Insurance
2023
1.78%
92.73%
1.92%
92.73%
0.44%
0.03%
0.01%
0.48%
2019
7,306
1,966
1
60
2
63
(294)
(361)
(11)
(666)
(603)
8,669
0.09%
1.11%
2022
1.71%
169.93%
1.00%
169.93%
0.03%
0.01%
0.00%
0.04%
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
- 49 -
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)
Savings accounts
Time accounts
Time accounts in excess of $250,000
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
2023
December 31,
2022
$ 113,543
377,570
95,272
12,364
224,707
119,321
170,169
7,121
$ 1,120,067
10.0% $ 134,880
314,109
33.7%
71,696
8.5%
16,107
1.1%
270,326
20.1%
127,395
10.7%
183,711
15.2%
7,206
0.7%
100.0% $ 1,125,430
2021
12.0% $ 131,176
253,564
27.9%
67,450
6.4%
16,124
1.4%
256,963
24.0%
130,816
11.3%
191,858
16.3%
7,395
0.7%
100.0% $ 1,055,346
12.4%
24.0%
6.4%
1.5%
24.3%
12.4%
18.2%
0.8%
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
Three through six months
Six through twelve months
Over twelve months
Total
$
$
28,083
30,763
25,903
10,524
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
- 50 -
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:
2024
2025
2026
2027
2028
$
$
Balance
148,722
34,624
34,703
8,773
15,884
242,706
Average Rate
4.55%
2.11%
2.38%
3.04%
5.63%
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)
Beginning balance
Net (withdrawals) deposits
Interest credited
Ending balance
Net (decrease) increase
Percent change
Years Ended December 31,
Core Deposits
$
$
$
699,624 $
(99,920)
7,522
607,226 $
(92,398) $
-13.2%
2023
Certificates of
Deposit
177,175 $
85,338
7,622
270,135 $
92,960 $
52.5%
Total Deposits
876,799
(14,582)
15,144
877,361
562
0.1%
$
$
$
Core Deposits
694,287 $
2,849
2,488
699,624 $
5,337 $
0.8%
2022
Certificates of
Deposit
203,254 $
(27,772)
1,693
177,175 $
(26,079) $
-12.8%
Total Deposits
897,541
(24,923)
4,181
876,799
(20,742)
-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:
2024
2025
2026
2027
2028
After 2029
$
$
Balance
202,292
40,982
9,764
824
2,093
494
256,449
Average Rate
4.23%
2.97%
4.54%
1.76%
3.05%
1.60%
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
- 51 -
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:
2023
2022
At December 31,
Consumer
Business Municipal
Total
Deposits
Consumer
Business Municipal
Total
Deposits
74,801 $
67,942 $
140,687 $
283,430
$
90,218 $
66,280 $
147,774 $
304,272
133,080
122,528
152,666
408,274
148,716
122,166
160,373
431,255
389,646
522,726 $
79,441
201,969 $
-
152,666 $
469,087
877,361
366,814
515,530 $
78,730
200,896 $
$
-
160,373 $
445,544
876,799
14.3%
33.6%
92.2%
32.3%
17.5%
33.0%
92.1%
34.7%
25.5%
60.7%
100.0%
46.5%
28.8%
60.8%
100.0%
49.2%
74.5%
39.3%
0.0%
53.5%
71.2%
39.2%
0.0%
50.8%
(Dollars in thousands)
Year end balances:
25 largest customers by
$
depositor type
100 largest customers, including
the 25 largest customers by
depositor type
All other customers by depositor
type
Total deposits
Percentage of year end balances:
$
25 largest customers by
depositor type
100 largest customers, including
the 25 largest customers by
depositor type
All other customers by depositor
type
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)
Maximum outstanding at any month end
Average amount outstanding during the year
Balance at the end of the period
Average interest rate during the year
Average interest rate at the end of the period
$
$
2023
125,680
49,601
125,680
5.42%
4.50%
$
2022
60,333
12,492
60,333
2.48%
3.86%
The following table represents information regarding long-term borrowings for the years ended December 31:
(Dollars in thousands)
Maximum outstanding at any month end
Average amount outstanding during the year
Balance at the end of the period
Average interest rate during the year
Average interest rate at the end of the period
Subordinated Debt
$
$
2023
58,369
55,091
49,919
1.54%
1.84%
$
2022
67,371
58,593
55,664
0.96%
1.39%
2021
12,500
3,677
12,500
0.28%
1.28%
2021
85,125
75,724
64,598
1.34%
1.12%
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
- 52 -
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.
- 53 -
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.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required of a smaller reporting company.
- 54 -
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Pathfinder Bancorp, Inc.
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Condition – December 31, 2023 and 2022
Consolidated Statements of Income – Years ended December 31, 2023 and 2022
Consolidated Statements of Comprehensive Income – Years ended December 31, 2023 and 2022
Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows – Years ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
Page
56
57
59
60
61
62
63
65
- 55 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview of Internal Control
Internal control processes and procedures help entities achieve important objectives and sustain and improve performance. The COSO
Framework (as defined below) enables organizations to effectively and efficiently develop systems of internal control that adapt to
changing business and operating environments, mitigate risks at acceptable levels and support sound decision making and governance
of organizations. The COSO Framework defines internal control as “a process, effected by an entity’s Board of Directors, management,
and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting
and compliance.” The COSO Framework provides three categories of objectives, which allow organizations to focus on differing aspects
of internal control: (a) Operations Objectives, (b) Reporting Objectives and (c) Compliance Objectives.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP.
Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial
information through a program of ongoing internal audits. Any system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur
and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an
effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Under
applicable SEC accounting related rules, a material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial
statements would not be prevented or detected on a timely basis.
Management conducted the Evaluation based on the 2013 framework established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
As a result of the Evaluation as of December 31, 2023, management has determined that there were no material weaknesses in the
Company’s internal controls over financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered
public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
/s/ James A. Dowd
James A. Dowd
President and Chief Executive Officer
Oswego, New York
March 22, 2024
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, Chief Financial Officer
- 56 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pathfinder Bancorp, Inc.
Oswego, New York:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries (the “Company”)
as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and their cash flows for
each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standard Update No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2023.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements
that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Allowance for Credit Losses
In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of
January 1, 2023 as described in Notes 1 and 6 of the consolidated financial statements. See also explanatory paragraph above. The ASU
requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates
of expected credit losses for loans are based on evaluation of the size of the portfolio, current risk characteristics, past events, current
conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The Company disclosed the
impact of adoption of this standard on January 1, 2023 with a $1.9 million increase to the allowance for credit losses and a $2.1 million
decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Provision expense for the year ending
December 31, 2023 was $2.9 million and the allowance for credit losses as of December 31, 2023 was $15.98 million.
- 57 -
The Company’s methodology for estimating the allowance for credit losses on loans includes quantitative and qualitative components
of the calculation. The Company’s loan portfolio is segmented by loan types that behave similarly during economic cycles. The
quantitative analysis includes using a discounted cash flow (DCF) model for determining the allowance for credit losses. Economic
forecasts are used in the model to estimate the probability of default and loss given default through regression which are key inputs into
the DCF model calculation. Quantitative model assumptions include, but are not limited to the discount rate, prepayment speeds, and
curtailments. The quantitative model output is adjusted with qualitative adjustments. Management develops a qualitative framework
that serves as the basis for determining the reasonableness of the model’s output and makes qualitative adjustments as necessary. The
allowance methodology is inherently complex and requires the use of significant management judgment.
We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment
applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the
initial adoption and subsequent application processes, including segmentation, the economic forecasts used to calculate the regressions
within the DCF model, the quantitative model assumptions as mentioned above, and the qualitative adjustments made using the
qualitative framework.
The primary procedures performed to address this critical audit matter included the following:
•
•
•
•
•
•
Evaluated management’s selection and application of the DCF model, including the evaluation of the reasonableness of the
segmentation, the reasonable and supportable economic forecasts, the significant model assumptions, and the relevance and
reliability of data used in the model, and the validation of the DCF model outputs.
Evaluated management’s review of the appropriateness of the qualitative framework, the reasonableness of significant
assumptions applied, the relevance and reliability of data used in the qualitative adjustments, and the mathematical accuracy
of the qualitative adjustments calculation.
Evaluated the reasonableness of management’s judgments related to the selection of the segmentation, DCF model, the
reasonable and supportable economic forecasts, the significant model assumptions, and the relevance and reliability of the
data used in the DCF model.
Tested the mathematical accuracy and application of the DCF model to validate the DCF model outputs.
Evaluated the reasonableness of qualitative adjustments, including evaluating the appropriateness of the qualitative
framework, the assumptions and judgments applied in the determination of the qualitative adjustments, the relevance and
reliability of data used in the qualitative adjustments, and the mathematical accuracy of the qualitative adjustments
calculation.
Performed a sensitivity analysis on the components of the calculation.
We have served as the Company’s auditor since 2011.
Bonadio & Co., LLP
Syracuse, New York
March 22, 2024
/s/ BONADIO & CO., LLP
- 58 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(In thousands, except share and per share data)
ASSETS:
Cash and due from banks
Interest-earning deposits
Total cash and cash equivalents
Available-for-sale securities, at fair value
Held-to-maturity securities, at amortized cost (fair value of $168,034 and $181,491, respectively)
Marketable equity securities, at fair value
Federal Home Loan Bank stock, at cost
Loans
Loans held-for-sale
Less: Allowance for credit losses
Loans receivable, net
Premises and equipment, net
Assets held-for-sale
Operating lease right-of-use assets
Finance lease right-of-use assets
Accrued interest receivable
Foreclosed real estate
Intangible assets, net
Goodwill
Bank owned life insurance
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing
Noninterest-bearing
Total deposits
Short-term borrowings
Long-term borrowings
Subordinated debt
Accrued interest payable
Operating lease liabilities
Finance lease liabilities
Other liabilities
Total liabilities
Shareholders' equity:
Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,719,288 and 4,651,829 shares
issued and outstanding, respectively
Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 shares
issued and outstanding, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss
Unearned ESOP
Total Pathfinder Bancorp, Inc. shareholders' equity
Noncontrolling interest
Total equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
- 59 -
December 31,
2023
December 31,
2022
$
$
$
12,338
36,394
48,732
258,716
179,286
3,206
8,748
897,207
-
15,975
881,232
18,441
3,042
1,526
4,073
7,286
151
85
4,536
24,641
22,097
1,465,798
949,898
170,169
1,120,067
125,680
49,919
29,914
2,245
1,711
4,381
11,625
1,345,542
13,939
21,343
35,282
191,726
194,402
1,862
5,982
897,735
19
15,319
882,435
17,872
3,042
2,098
4,213
6,168
221
101
4,536
24,012
25,969
1,399,921
941,719
183,711
1,125,430
60,333
55,664
29,733
975
2,417
4,422
9,365
1,288,339
47
47
14
53,114
76,060
(9,605)
(135)
119,495
761
120,256
1,465,798
$
14
52,101
71,322
(12,172)
(315)
110,997
585
111,582
1,399,921
$
$
$
$
Pathfinder Bancorp, Inc.
Consolidated Statements of Income
For the year ended
December 31, 2023
December 31, 2022
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax-exempt
Dividends
Federal funds sold and interest earning deposits
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Interest on subordinated debt
Total interest expense
Net interest income
Provision for credit losses:
Loans
Held-to-maturity securities
Unfunded commitments
Total provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Gains (losses) on sales and redemptions of investment securities
Net realized (losses) gains on marketable equity securities
Gains on sales of loans and foreclosed real estate
Gains (losses) on sale of premises and equipment
Debit card interchange fees
Insurance agency revenue
Other charges, commissions & fees
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Building and occupancy
Data processing
Professional and other services
Advertising
FDIC assessments
Audits and exams
Insurance agency expense
Community service activities
Foreclosed real estate expenses
Other expenses
Total noninterest expense
Income before provision for income taxes
Provision for income taxes
Net income attributable to noncontrolling interest and
Pathfinder Bancorp, Inc.
Net income attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp Inc.
Voting Earnings per common share - basic and diluted
Series A Non-Voting Earnings per common share- basic and diluted
Dividends per common share (Voting and Series A Non-Voting)
The accompanying notes are an integral part of the consolidated financial statements.
- 60 -
$
47,348
$
17,500
1,947
573
295
67,663
23,265
2,688
850
1,941
28,744
38,919
2,991
(98)
37
2,930
35,989
1,249
630
307
62
(255)
181
-
616
1,304
1,096
5,190
15,920
3,563
2,018
2,019
671
885
735
1,033
200
111
2,240
29,395
11,784
2,362
9,422
129
9,293
1.51
1.51
0.36
$
$
$
$
$
$
$
$
38,322
11,225
1,173
229
149
51,098
7,072
310
564
1,749
9,695
41,403
2,754
-
-
2,754
38,649
1,126
589
363
(169)
352
137
(250)
867
1,128
1,771
5,914
16,022
3,380
2,042
1,528
905
606
688
906
267
78
2,452
28,874
15,689
2,656
13,033
101
12,932
2.13
2.13
0.36
Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the years ended
December 31, 2023
9,422
$
December 31, 2022
13,033
$
(In thousands)
Net Income
Other Comprehensive Income (Loss)
Retirement Plans:
Retirement plan net gains recognized in plan expenses
Plan gains (losses) not recognized in plan expenses
Net unrealized gains (losses) on retirement plans
Available-for-sale securities:
Unrealized holding gains (losses) arising during the period
Reclassification adjustment for net losses included in net income
Net unrealized gains (losses) on available-for-sale securities
Derivatives and hedging activities:
Unrealized holding (losses) gains arising during the period
Net unrealized (losses) gains on derivatives and hedging activities
Accretion of net unrealized losses on securities transferred to held-to-maturity(1)
Other comprehensive income (loss), before tax
Tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
Comprehensive income, attributable to noncontrolling interest
Comprehensive income attributable to Pathfinder Bancorp, Inc.
Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income
Retirement plan net gains recognized in plan expenses
Plan (gains) losses not recognized in plan expenses
Unrealized holding (gains) losses on available-for-sale securities arising during the period
Reclassification adjustment for net losses included in net income
Unrealized losses (gains) on derivatives and hedging arising during the period
Income tax effect related to other comprehensive income
$
$
$
$
$
222
257
479
1,538
1,932
3,470
(474)
(474)
-
3,475
(908)
2,567
11,989
129
11,860
(58)
(67)
(402)
(505)
124
(908)
$
$
$
$
$
2
(1,380)
(1,378)
(14,448)
160
(14,288)
906
906
(2)
(14,762)
3,858
(10,904)
2,129
101
2,028
-
363
3,775
(42)
(238)
3,858
(1) The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30,
2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the
date of transfer, and is an adjustment of yield.
The accompanying notes are an integral part of the consolidated financial statements.
- 61 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2023 and December 31, 2022
(In thousands, except share and per share data)
Balance, January 1, 2023
Net income
Other comprehensive income, net of tax
ESOP shares earned (24,442 shares)
Stock based compensation
Stock options exercised
Common stock dividends declared ($0.36 per
share)
Non-Voting common stock dividends declared
($0.36 per share)
Warrant dividends declared ($0.36 per share)
Adoption of ASU 2016-13 Current Expected
Credit Losses
Cumulative effect of affiliate capital allocation
Distributions from affiliates
Balance, December 31, 2023
Balance, January 1, 2022
Net income
Other comprehensive loss, net of tax
ESOP shares earned (24,442 shares)
Stock based compensation
Stock options exercised
Common stock dividends declared ($0.36 per
share)
Non-Voting common stock dividends declared
($0.36 per share)
Warrant dividends declared ($0.36 per share)
Cumulative effect of affiliate capital allocation
Distributions from affiliates
Balance, December 31, 2022
$
$
$
$
Non-
Voting
Common
Stock
Common
Stock
Additional
Paid in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Unearned
ESOP
Non-
controlling
Interest
Total
52,101 $ 71,322 $
(12,172) $
47 $
-
-
-
-
-
-
-
-
-
-
-
47 $
46 $
-
-
-
-
1
14 $
-
-
-
-
-
-
-
-
-
-
-
14 $
14 $
-
-
-
-
-
-
-
190
92
623
-
-
-
-
108
-
9,293
-
-
-
-
(1,680)
(497)
(45)
(2,134)
(199)
-
53,114 $ 76,060 $
51,044 $ 60,946 $
-
-
290
156
417
12,932
-
-
-
-
-
-
-
(1,646)
-
-
-
-
47 $
-
-
-
-
14 $
-
-
194
-
(497)
(45)
(368)
-
-
2,567
-
-
-
-
-
-
-
-
-
(9,605) $
(1,268) $
-
(10,904)
-
-
-
-
-
-
-
-
(315) $
-
-
180
-
-
-
-
-
-
-
-
(135) $
(495) $
-
-
180
-
-
585 $111,582
9,422
129
2,567
-
370
-
92
-
623
-
-
-
-
(1,680)
(497)
(45)
(2,134)
-
-
91
(44)
(44)
761 $120,256
346 $110,633
13,033
101
(10,904)
-
470
-
156
-
418
-
-
-
(1,646)
-
-
-
-
(315) $
(497)
-
(45)
-
-
174
(36)
(36)
585 $111,582
52,101 $ 71,322 $
(12,172) $
The accompanying notes are an integral part of the consolidated financial statements.
- 62 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
(In thousands)
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.
Adjustments to reconcile net income to net cash flows from operating activities:
2023
$
9,293
$
Provision for credit losses
Deferred income tax expense
Proceeds from sales of loans
Originations of loans held-for-sale
Realized (gains) losses on sales, redemptions and calls of:
Real estate acquired through foreclosure
Loans
Available-for-sale investment securities
Held-to-maturity investment securities
Premise and Equipment
Marketable securities
Impairment of asset
Depreciation
Amortization of mortgage servicing rights
Amortization of deferred loan fees and costs
Amortization of operating leases
Amortization of deferred financing from subordinated debt
Earnings on bank owned life insurance
Net amortization of premiums and discounts on investment securities
Amortization of intangible assets
Stock based compensation and ESOP expense
Net change in accrued interest receivable
Net change in other assets and liabilities
Net cash flows from operating activities
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale
Purchase of investment securities held-to-maturity
Purchase of Federal Home Loan Bank stock
Proceeds from redemption of Federal Home Loan Bank stock
Purchase of marketable securities
Proceeds from maturities and principal reductions of investment securities
available-for-sale
Proceeds from maturities and principal reductions of investment securities
held-to-maturity
Proceeds from sales, redemptions and calls of:
Available-for-sale investment securities
Held-to-maturity investment securities
Real estate acquired through foreclosure
Marketable securities
Net change in loans
Purchase of premises and equipment
Insurance proceeds from fixed assets
Disposal of premises and equipment
Proceeds from sale of premises and equipment
Net cash outflows from investing activities
- 63 -
2,930
(367)
5,785
(5,550)
35
(216)
(80)
19
-
255
-
1,397
(38)
(268)
(35)
181
(630)
1,785
16
462
(1,118)
1,576
15,432
(99,086)
(13,682)
(19,738)
16,972
(1,598)
19,960
28,138
17,396
288
320
-
(1,792)
(1,966)
-
-
-
(54,788)
2022
12,932
2,754
139
8,035
(7,404)
-
(137)
160
9
(130)
(352)
380
1,067
(11)
385
(372)
170
(589)
2,002
16
626
(1,648)
3,701
21,733
(52,375)
(62,566)
(15,896)
14,103
(1,628)
19,230
27,148
8,358
2,206
-
714
(66,302)
(1,898)
66
(3,311)
991
(131,160)
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money management
deposit accounts, MMDA accounts and escrow deposits
Net change in time deposits
Net change in brokered deposits
Net change in short-term borrowings
Payments on long-term borrowings
Proceeds from long-term borrowings
Proceeds from exercise of stock options
Cash dividends paid to common voting shareholders
Cash dividends paid to common non-voting shareholders
Cash dividends paid on warrants
Change in noncontrolling interest, net
Net cash inflows from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
CASH PAID DURING THE YEAR FOR:
Interest
Income taxes
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans
Transfer from net premises for held for sale investments
RESTRICTED CASH
Collateral deposits for hedge position included in cash and due from banks
The accompanying notes are an integral part of the consolidated financial statements.
(75,254)
74,902
(5,011)
65,347
(12,019)
6,274
623
(1,690)
(497)
(45)
176
52,806
13,450
35,282
48,732
27,474
3,159
333
-
-
$
$
5,337
(26,079)
90,826
47,833
(18,227)
9,293
418
(1,568)
(469)
(43)
239
107,560
(1,867)
37,149
35,282
1,754
3,218
252
3,042
1,600
$
$
- 64 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the “Company”) and its wholly
owned subsidiary, Pathfinder Bank (the “Bank”). The Company is a Maryland corporation headquartered in Oswego, New York. On
October 16, 2014, the Company completed its conversion from the mutual holding company structure and the related public offering
and is now a stock holding company that is fully owned by the public. As a result of the conversion, the mutual holding company and
former mid-tier holding company were merged into Pathfinder Bancorp, Inc. The primary business of the Company is its investment in
Pathfinder Bank (the "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. Although the Company owns, through its subsidiary PRMC, 51% of the
membership interest in FitzGibbons Agency, LLC (“FitzGibbons”), the Company is required to consolidate 100% of FitzGibbons within
the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling
interests within the consolidated financial statements.
The Company has seven branch offices located in Oswego County, four branch offices in Onondaga County and one limited purpose
office in Oneida County. The Company is primarily engaged in the business of attracting deposits from the general public in the
Company’s market area, and investing such deposits, together with other sources of funds, in loans secured by commercial real estate,
business assets, one-to-four family residential real estate and investment securities.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Management has identified the allowance
for credit losses, deferred income taxes, pension obligations, the annual evaluation of the Company’s goodwill for possible impairment
and the evaluation of investment securities for other than temporary 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, and as such, could be the most
subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic examinations by
the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances,
and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their
examinations.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located primarily in Oswego and Onondaga counties of New York State. A large
portion of the Company’s portfolio is centered in residential and commercial real estate. The Company closely monitors real estate
collateral values and requires additional reviews of commercial real estate appraisals by a qualified third party for commercial real estate
loans in excess of $400,000. All residential loan appraisals are reviewed by an individual or third party who is independent of the loan
origination or approval process and was not involved in the approval of appraisers or selection of the appraiser for the transaction, and
has no direct or indirect interest, financial or otherwise in the property or the transaction. Note 4 discusses the types of securities that
the Company invests in. Note 5 discusses the types of lending that the Company engages in.
Advertising
The Company generally follows the policy of charging the costs of advertising to expense as incurred. Expenditures for new marketing
and advertising material designs and/or media content, related to specifically-identifiable marketing campaigns are capitalized and
expensed over the estimated life of the campaign. Such periods of time are generally 12-24 months in duration and do not exceed 36
months.
- 65 -
Noncontrolling Interest
Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the minority owners of FitzGibbons.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits (with original maturity of three
months or less).
Investment Securities
The Company classifies investment securities as either available-for-sale or held-to-maturity. The Company does not hold any securities
considered to be trading. Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected as a
separate component of shareholders’ equity, net of the applicable income tax effect. Held-to-maturity securities are those that the
Company has the ability and intent to hold until maturity and are reported at amortized cost.
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums and
discounts on securities are amortized and accreted into income using the interest method over the period to maturity.
The Company records its investment in marketable equity securities (“MES”) at fair value. Changes in the fair value of MES are
recorded as additions to, or subtractions from, net income in the period that the change occurs. These changes in fair value are separately
disclosed as gains (losses) on equity securities on the Consolidated Statements of Income.
Note 4 to the consolidated financial statements includes additional information about the Company’s accounting policies with respect
to the impairment of investment securities.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according
to a predetermined formula. The stock is carried at cost.
Transfers of Financial Assets
Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company,
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Loans
The Company grants mortgage, commercial, municipal, and consumer loans to customers. Loans that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding unpaid principal balances, less the
allowance for credit losses plus net deferred loan origination costs. The ability of the Company’s debtors to honor their contracts is
dependent upon the real estate and general economic conditions in the market area. Interest income is generally recognized when income
is earned using the interest method. Nonrefundable loan fees received and related direct origination costs incurred are deferred and
amortized over the life of the loan using the interest method, resulting in a constant effective yield over the loan term. Deferred fees are
recognized into income and deferred costs are recorded to income immediately upon prepayment of the related loan.
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage
segment consists of one-to-four family first-lien residential mortgages and construction loans. Commercial loans consist of the following
classes: real estate, lines of credit, other commercial and industrial, and tax-exempt loans. Consumer loans include both home equity
lines of credit and loans with junior liens and other consumer loans.
Allowance for Credit Losses
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 ("ILM"). 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,
- 66 -
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 new items, 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.
At December 31, 2022 the Company calculated its ALLL utilizing the 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 specifically-identified 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 specifically-identified loans at December 31, 2022 was not affected
by the transition to the CECL methodology at January 1, 2023. See Note 6 of the accompanying financial statements for a further
discussion of this transition.
The January 1, 2023 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 in retained earnings on that date.
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 investment
securities portfolio classified as held-to maturity (HTM). The allowance is increased by the provision for credit losses, and decreased
by charge-offs, net of recoveries. 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).
The ACL is evaluated on a regular basis and established through charges to earnings in the form of a provision (benefit) for credit losses.
When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Portfolio Segmentation and “Pooled Loans” Calculation
Loans are pooled based on their homogeneous risk characteristics. Once loans have been segmented into pools, a loss rate is applied to
the amortized cost basis. The Company has divided its portfolio into discrete segments, as the loans within the segments have similar
characteristics. Characteristics considered include: purpose, tenor, amortization, repayment source, payment frequency, collateral and
recourse. The Company's identified portfolio segments include commercial loans/lines, commercial mortgages, consumer loans
residential lines of credit, and residential loans, as well as certain subcategories of these loan types.
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 expected future cash flows to the exposures at the projected point of loss occurrence, including estimates of borrower
prepayment activity, that are adjusted to present value and these discounted expected losses become the quantitatively-derived portion
of the ACL.
DCF analysis is reliant upon a variety of loan-level data, peripheral model outputs and key assumptions. The data fields required to
create the contractual portion of the forward-looking cash flow schedule relate to the terms of each loan and include information
regarding payment amount, payment frequency, interest rate, interest type, maturity date, amortization term, etc. Contractual terms must
be adjusted for prepayments to arrive at expected cash flows. The Company modeled amortizing/installment notes with a prepayment
rate, annualized to one-year. For loans where principal collection is dominated by borrower election, e.g., lines of credit, interest-only,
etc., and not by contractual obligation, the Company modeled a statistical tendency to repay as a curtailment rate, normalized to a one-
year rate.
- 67 -
The Company uses forecasts to predict how modeled economic factors will perform. The Company currently elects to forecast economic
factors over a period for which it can produce a reliable and defensible forecast from widely accepted economic forecast resources. After
the forecast period, the following eight quarters are reverted on a straight-line basis to the economic factor’s average. The Company
uses an eight-quarter straight-line reversion to reduce the potential for a spike impact on the model caused by a rapid reversion.
Additionally, as the Company is past its point of forecast, a straight-line reversion represents a most-likely scenario absent a reasonable
and supportable forecast.
In the Company’s analysis at the portfolio level, it found that the best model for predicting defaults considers economic metrics such as
the National Unemployment Rate, the U.S. Federal Housing Finance Agency National House Price Index and the U.S. Retail Sales
Index. With the large number of observations afforded by using peer data, the default curve is less sensitive to unusual loss events and
has a much smoother shape. These metrics are considered to be extremely strong predictors of defaults and explain almost all variation
in the default rate.
The reserve is calculated based on a life of loan basis. The life of loan is assumed with consideration of prepayments and contractual
maturity dates. If a given loan does not have a populated maturity date, based upon historical experience, the Company elected to
amortize the loan for a length of time equal to the average life of the loan’s segment before the remaining balance will balloon with the
exception of Commercial Demand Lines of Credit where the Company uses one year, reflecting the demand nature of these exposures.
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.
Specifically-Identified Loans
Excluded from pooled analysis are loans to be individually evaluated due to the assets not maintaining similar risk characteristics to
those in the designated pool segments. These loans are generally considered to be collateral dependent and, therefore, an analysis of the
collateral position versus the pooled loan discounted cash flow approach better reflects the potential loss. Specifically-identified
accounts include: loans over 90 days past due, loans to borrowers experiencing financial difficulty, loans placed on non-accrual status
and classified assets with exposure greater than $300,000 for residential and consumer loans, and $100,000 for commercial lines and
loans, commercial real estate and tax-exempt loans.
Held to Maturity (“HTM”) Debt Securities
The Company’s HTM debt securities are also required to utilize the current expected credit losses approach to estimate expected credit
losses. The Company’s HTM debt securities included securities that are issued by U.S. government agencies or U.S. government-
sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as
“risk free,” and have a long history of zero credit loss. The Company also carries a portfolio of HTM municipal bonds and privately
issued mortgage- and asset-backed securities. The Company measures its allowance for credit losses on HTM debt securities on a
collective basis by major security type. The estimate is based on historical credit losses, if any, adjusted for current conditions and
reasonable and supportable forecasts. The Company considers the nature of the collateral, potential future changes in collateral values
and available loss information.
Available for Sale (“AFS”) Debt Securities
For AFS securities in an unrealized loss position, the Company first assesses whether (i) it intends to sell, or (ii) it is more likely than
not that the Company will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any
previously recognized allowances are charged-off and the security’s amortized cost is written down to fair value through income. If
neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other
factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the
rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this
assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to
the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis,
a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than
the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other
comprehensive income. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.
AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed
uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
- 68 -
Accrued Interest Receivable
Accrued interest receivable balances are presented separately within other assets on the statement of financial condition. Accrued interest
receivable that is included in the amortized cost of financial receivables and debt securities are excluded from related disclosure
requirements. The Company does not measure an allowance for credit losses for accrued interest receivable as the Company writes off
accrued interest receivable, in a timely manner, by reversing interest income. For commercial loans, the write off typically occurs upon
becoming 90 days past due. For consumer loans, the write off typically occurs upon becoming 120 days past due. Historically, the
Company has not experienced uncollectible accrued interest receivable on its investment securities. However, the Company would
generally write off accrued interest receivable by reversing interest income if the Company does not reasonably expect to receive
payments. Due to the timely manner in which accrued interest receivables are written off, the amounts of such write offs are immaterial.
Reserve for Unfunded Commitments
The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet
commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for
commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (other liabilities in the
consolidated statements of financial condition), with adjustments to the reserve recognized as a provision for credit loss expense in the
consolidated statements of income. The Unfunded Reserve is determined by estimating expected future fundings, under each segment,
and applying the expected loss rates. Expected future fundings are based on historical averages of funding rates (i.e., the likelihood of
draws taken). Average funding rates are determined based on the most recent 20 quarters (5 years) of actual fundings on lines of credit.
The average funding rate for each segment is compared to the current funding rate on each line to determine the average fundings
available to be drawn. The fund up rate (the difference between the average funding rate and the current funding rate) for each segment
is then applied within the Current Expected Credit Losses (“CECL”) model to the unfunded commitment balance to estimate the
expected future fundings under each segment. The loss rate derived for each segment in the current CECL calculation is then applied to
the expected future fundings to derive the estimate of allowance for credit losses for unfunded commitments.
Income Recognition on Specifically-Identified and Nonaccrual Loans
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan
may be currently performing. A loan may remain on accrual status if it is either well secured or guaranteed and in the process of
collection. When a loan is placed on nonaccrual status, unpaid interest is reversed and recorded to interest income. Interest received on
nonaccrual loans, including specifically-identified loans, generally is either applied against principal or reported as interest income,
according to management’s judgment as to the collectability of principal. 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 six
months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Nonaccrual loans are restored
to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
For nonaccrual loans, when future collectability of the recorded loan balance is expected, interest income may be recognized on a cash
basis when payments are made. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash
basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest
receipts in excess of that amount are recorded as recoveries to the allowance for credit losses until prior charge-offs have been fully
recovered.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under standby letters
of credit. Such financial instruments are recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets, ranging up to 40 years for premises and leasehold improvements and 10 years for equipment.
Maintenance and repairs are recorded to operating expenses as incurred. The asset cost and accumulated depreciation are removed from
the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income.
Foreclosed Real Estate
Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained upon
completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed-in-
lieu of foreclosure or through a similar legal agreement. Properties acquired through foreclosure, or by deed-in-lieu of foreclosure, are
recorded at their fair value less estimated costs to sell. Fair value is typically determined based on evaluations by third parties. Costs
incurred in connection with preparing the foreclosed real estate for disposition are capitalized to the extent that they enhance the overall
fair value of the property. Any write-downs on the asset’s fair value less costs to sell at the date of acquisition are recorded to the
- 69 -
allowance for credit losses. Subsequent write downs and expenses of foreclosed real estate are included as a valuation allowance and
recorded in noninterest expense.
Goodwill and Intangible Assets
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is
evaluated annually or when there is a triggering event for impairment. Intangible assets, such as customer lists, are amortized over their
useful lives, generally 15 years.
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the time of transfer of the related loans and are amortized in
proportion to, and over the period of, estimated net servicing income or loss. The carrying value of the originated mortgage servicing
rights is periodically evaluated for impairment or between annual evaluations under certain circumstances.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-based
compensation issued. Compensation costs are recognized over the period that an employee provides service in exchange for the award.
Compensation costs related to the Employee Stock Ownership Plan are dependent upon the average stock price and the shares committed
to be released to plan participants through the period in which income is reported.
Retirement Benefits
The Company has a non-contributory defined benefit pension plan that covered substantially all employees. On May 14, 2012, the
Company informed its employees of its 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. The plan was frozen on June 30, 2012.
Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there will be no
future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen
accrued benefits as they continue to work. Pension expense under these plans is recorded to current operations and consists of several
components of net pension cost based on various actuarial assumptions regarding future experience under the plans.
Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net
periodic benefit cost are recognized in accumulated other comprehensive loss, net of tax effects, until they are amortized as a component
of net periodic cost. Plan assets and obligations are measured as of the Company’s statement of condition date.
The Company has unfunded deferred compensation and supplemental executive retirement plans for selected current and former
employees and officers that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code
restrictions. These plans are nonqualified under the Internal Revenue Code, and assets used to fund benefit payments are not segregated
from other assets of the Company, therefore, in general, a participant's or beneficiary's claim to benefits under these plans is as a general
creditor.
The Bank sponsors an Employee Stock Ownership Plan (“ESOP”) covering substantially all full time employees. The cost of shares
issued to the ESOP but not committed to be released to the participants is presented in the consolidated statement of condition as a
reduction of shareholders’ equity. ESOP shares are released to the participants on an annual basis in accordance with a predetermined
schedule. The Company records ESOP compensation expense based on the shares committed to be released and allocated to the
participant’s accounts multiplied by the average share price of the Company’s stock over the period. Dividends related to unallocated
shares are recorded as compensation expense.
Derivative Financial Instruments
Derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value. The accounting for changes
in the fair value of a derivative depends on whether or not the derivative has been designated and qualifies as part of a hedging
relationship. The Company acquires derivatives with the intent of designating and qualifying those instruments as part of hedging
relationships to other balance sheet assets or liabilities. The specific accounting treatment for increases and decreases in the value of
derivatives further depends upon the use of the specific derivatives. There are two primary types of interest rate derivatives that may be
employed by the Company:
•
Fair Value Hedge - As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value
over the course of their economic lives prior to maturity. When effectively hedged, this appreciation or depreciation will generally
be offset by fluctuations in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy
is referred to as a fair value hedge. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the
- 70 -
fair value of the hedged asset or liability are expected to substantially offset each other and these changes are recognized currently
in earnings.
•
Cash Flow Hedge - Cash flows related to floating rate assets and liabilities will fluctuate with changes in the underlying rate index.
When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be
offset by changes in cash flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow
hedge. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded
in other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any
ineffective portion of a cash flow hedge is recognized currently in earnings.
Income Taxes
The provision for income taxes is based on taxes currently payable or refundable and deferred income taxes on temporary differences
between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets
and liabilities are reported in the consolidated financial statements at currently enacted income tax rates applicable to the period in which
the deferred tax assets and liabilities are expected to be realized or settled.
Earnings Per Share
Basic net income per share was calculated using the two-class method by dividing net income (less any dividends on participating
securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted
earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is
calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially
dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially
dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares
held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings
per common share until they are committed to be released to plan participants. Note 3 provides more information related to earnings
per share.
Segment Reporting
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons Agency is
dissimilar in nature and management when compared to the Company’s other strategic business units which are judged to be similar in
nature and management. The Company has determined that the FitzGibbons Agency is below the reporting threshold in size in
accordance with Accounting Standards Codification 280. Accordingly, the Company has determined it has no reportable segments.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities are reported as a separate component of the equity section of the statement of condition, such items,
along with net income, are components of comprehensive income.
Accumulated other comprehensive loss represents the sum of these items, with the exception of net income, as of the balance sheet date
and is represented in the table below.
Accumulated Other Comprehensive Loss By Component:
Unrealized loss for pension and other postretirement obligations
Tax effect
Unrealized loss for pension and other postretirement obligations, net of tax
Unrealized loss on available-for-sale securities
Tax effect
Unrealized loss on available-for-sale securities, net of tax
Unrealized gain on hedging activities arising during the period
Tax effect
Unrealized gain on hedging activities, net of tax
Accumulated other comprehensive loss
Reclassifications
As of December 31,
2023
(2,806) $
733
(2,073)
(10,241)
2,677
(7,564)
45
(13)
32
(9,605) $
2022
(3,286)
859
(2,427)
(13,710)
3,583
(10,127)
517
(135)
382
(12,172)
$
$
Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the current year presentation. These
reclassifications had no effect on net income as previously reported.
- 71 -
Note 2: New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies promulgate GAAP
to regulate the standards of accounting in the United States. From time to time, the FASB issues new GAAP standards, known as
Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the
Company recognizes or reports within its consolidated financial statements. The following table provides a description of standards
that have not yet been adopted as of December 31, 2023, but could have an impact on the Company's consolidated financial statements
upon adoption.
Required Date
of Implementation
January 1, 2023
Standards Adopted as of December 31, 2023
Standard
Description
Measurement of
Credit Losses on
Financial Instruments
(ASU 2016-13:
Financial
Instruments—Credit
Losses [Topic 326]:
Measurement of
Credit Losses on
Financial
Instruments)
The amended guidance replaced the previously-required (through
December 31, 2022) incurred loss model for determining the
allowance for credit losses with the current expected credit loss
("CECL") model. The new guidance requires financial assets
measured at amortized cost to be presented at the net amount
expected to be collected. The allowance for credit losses now
represents a valuation account that is deducted from the amortized
cost basis of the financial assets to present their net carrying value
at the amount expected to be collected. The income statement will
now reflect 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 allowance, expected credit losses
over the contractual term of the financial asset(s) (taking into
account prepayments) will be estimated considering relevant
information about past events, current conditions, and reasonable
and supportable forecasts that affect the collectability of the
reported amount. The amended guidance also requires recording
an allowance for credit losses for purchased financial assets with a
more-than-insignificant amount of credit deterioration since
origination. The initial allowance for these assets will be added to
the purchase price at acquisition rather than being reported as an
expense. Subsequent changes in the allowance will be recorded
through the income statement as an expense adjustment. In
addition, the amended guidance requires credit losses relating to
financial assets, such as debt securities categorized as held-to-
maturity and noncancelable unfunded commitments to be recorded
through the allowance for credit losses.
Required Date
of Implementation
January 1, 2023
Standard
Description
Derivatives and
Hedging (Topic 815):
Fair Value Hedging -
Portfolio Layer
Method (ASU 2022-
01)
The amendments allow multiple hedged layers to be designated
for a single closed portfolio of financial assets or one or more
beneficial interests secured by a portfolio of financial instruments.
If multiple hedged layers are designated, the amendments require
an analysis to be performed to support the expectation that the
aggregate amount of the hedged layers is anticipated to be
outstanding for the designated hedge periods. Only closed
portfolios may be hedged under the portfolio layer method (that is,
no assets can be added to the closed portfolio once established),
however, designating new hedging relationships and
dedesignating existing hedging relationships associated with the
closed portfolio any time after the closed portfolio is established is
permitted.
Effect on Consolidated
Financial Statements
The Company adopted the new
guidance on January 1, 2023. On that
date, the Company recorded one-time
CECL transition adjustments, thereby
increasing the Company's allowance
for credit losses on loans by $1.9
million, decreasing the recorded book
value of held-to-maturity securities by
$450,000 and increasing other
liabilities by $552,000 for credit
losses associated with unfunded
contractual commitments on financial
assets. As a component of these
transition adjustments, the Company's
deferred tax asset balance (a
component of other assets on the
Statement of Financial Conditions)
increased by $754,000. These entries
resulted in a one-time reduction in the
Company's retained earnings (a
component of Shareholders' Equity)
of $2.1 million on the adoption date.
In accordance with the new guidance
these one-time transitional
adjustments were not recorded as a
component of the provision for credit
losses in the first quarter of 2023 and,
therefore, had no effect on reported
net income in that quarterly reporting
period.
Effect on Consolidated
Financial Statements
At January 1, 2023 the Company did
not have any designated hedging
relationships that would meet the
criteria of a multiple hedged layers
interest rate swap contract. Therefore
the adoption of this standard had no
impact on the Company’s
consolidated statements of condition
or income at the date of adoption.
During 2023, the Company entered
into an amortizing fixed-pay interest
rate swap with an initial notional
amount of $100.0 million and five
fixed pay interest rate swaps with an
aggregate notional amount of $50.0
million. Each of these transactions
would qualify as multiple hedged
layers fair value hedging contracts
under the new standard. See Note 21
within the consolidated financial
statements.
- 72 -
Standards Not Yet Adopted as of December 31, 2023
Description
Standard
Reference Rate
Reform (ASU 2020-
04: Facilitation of the
Effects of Reference
Rate Reform on
Financial Reporting
[Topic 848]: Deferral
of the Sunset Date of
Topic 848)
Standard
Income taxes (Topic
740): Improvements to
Income Tax
Disclosures 2023-09
The amendments provide optional expedients and exceptions for
applying generally accepted accounting principles (GAAP) to
contracts, hedging relationships, and other transactions affected by
reference rate reform. The amendments apply only to contracts,
hedging relationships, and other transactions that reference
LIBOR or another reference rate expected to be discontinued
because of reference rate reform. The amendments (1) apply to
contract modifications that replace a reference rate affected by
reference rate reform, (2) provide exceptions to existing guidance
related to changes to the critical terms of a hedging relationship
due to reference rate reform (3) provide optional expedients for
fair value hedging relationships, cash flow hedging relationships,
and net investment hedging relationships, and (4) provide a
onetime election to sell, transfer, or both sell and transfer debt
securities classified as held-to-maturity that reference a rate
affected by reference rate reform and that are classified as held-to-
maturity before January 1, 2020. In January 2021, the FASB
issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope.
ASU 2021-01 clarifies that certain optional expedients and
exceptions in ASC 848 for contract modifications and hedge
accounting apply to derivatives that are affected by the
discounting transition. ASU 2021-01 also amends the expedients
and exceptions in ASC 848 to capture the incremental
consequences of the scope clarification and to tailor the existing
guidance to derivative instruments affected by the discounting
transition.
Description
Amendments to ASC740 are being made to enhance the
transparency and decision usefulness of income tax disclosures.
The enhancements are made to provide information to better
assess how an entity's operations and related tax risks and tax
planning and operational opportunities affect its tax rate and
prospects for future cash flows. The objective of these disclosure
requirements is for an entity, particularly an entity operating in
multiple jurisdictions, to disclose sufficient information to enable
users of financial statements to understand the nature and
magnitude of factors contributing to the difference between the
effective tax rate and the statutory tax rate.
Required Date
of Implementation
Upon issuance, January 7,
2021, through December
31, 2024, as amended
by ASU 2022-06.
Effect on Consolidated
Financial Statements
The adoption of this ASU is not
expected to have a material impact to
the Company's consolidated
statements of condition or income.
Required Date
of Implementation
Public business entities
are required to apply this
guidance to annual periods
beginning after December
15, 2024.
Effect on Consolidated
Financial Statements
The adoption of this ASU is not
expected to have a material impact to
the Company's consolidated
statements of condition or income.
NOTE 3: EARNINGS PER SHARE
Following shareholder approval received on June 4, 2021, the Company converted 1,380,283 shares of its Series B Convertible Perpetual
Preferred Stock to an equal number of shares of its newly-created Series A Non-Voting Common Stock. The conversion, which was
effective on June 28, 2021, represented 100% of the Company's Convertible Perpetual Preferred Stock outstanding at the time of the
conversion and retired the Convertible Perpetual Preferred Stock in perpetuity.
The Company has voting common stock, non-voting common stock and a warrant that are all eligible to participate in dividends equal
to the voting common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s non-voting
common stock and warrant, are considered “participating securities.” The Company calculates net income available to voting common
shareholders using the two-class method required for capital structures that include participating securities.
In applying the two-class method, basic net income per share was calculated by dividing net income (less any dividends on participating
securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted
earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is
calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially
dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially
dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares
held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings
per common share until they are committed to be released to plan participants.
- 73 -
Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the
period presented. Anti-dilutive stock options, not included in the computation below, were $-0- for the years ended 2023 and 2022,
respectively.
The following table sets forth the calculation of basic and diluted earnings per share.
(In thousands, except share and per share data)
Net income attributable to Pathfinder Bancorp, Inc.
Series A Non-Voting Common Stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders-Voting
Net income attributable to Pathfinder Bancorp, Inc.
Voting Common Stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders-Series A Non-Voting
Basic and diluted weighted average common shares outstanding-Voting
Basic and diluted weighted average common shares outstanding-Series A Non-Voting
Basic and diluted earnings per common share-Voting
Basic and diluted earnings per common share-Series A Non-Voting
$
$
$
$
$
$
Years Ended
December 31,
2023
9,293
497
45
1,729
7,022
9,293
1,680
45
5,487
2,081
4,653
1,380
1.51
1.51
$
$
$
$
$
$
2022
12,932
497
45
2,667
9,723
12,932
1,646
45
8,298
2,943
4,559
1,380
2.13
2.13
- 74 -
NOTE 4: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Equity investment securities:
Common stock - financial services industry
Total
Total available-for-sale
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Less: Allowance for credit losses
Total held-to-maturity
December 31, 2023
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Amortized
Cost
$
$
$
$
82,588
34,588
11,008
20,251
25,446
13,058
81,812
268,751
206
206
268,957
3,760
16,576
45,427
16,860
6,974
13,221
76,819
179,637
351
179,286
$
$
$
$
754
145
276
-
57
116
128
1,476
-
-
1,476
-
28
9
-
15
-
120
172
-
172
$
(3,259) $
(1,809)
(365)
(359)
(1,085)
(995)
(3,845)
(11,717)
-
-
$
(11,717) $
$
(304) $
(1,874)
(3,281)
(1,180)
(665)
(1,293)
(3,178)
(11,775)
-
$
(11,775) $
80,083
32,924
10,919
19,892
24,418
12,179
78,095
258,510
206
206
258,716
3,456
14,730
42,155
15,680
6,324
11,928
73,761
168,034
-
168,034
- 75 -
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Equity investment securities:
Common stock - financial services industry
Total
Total available-for-sale
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total held-to-maturity
December 31, 2022
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Amortized
Cost
$
$
$
$
32,533
48,002
11,803
16,059
17,982
13,070
65,781
205,230
206
206
205,436
3,852
15,211
45,086
19,158
7,489
15,109
88,497
194,402
$
$
$
$
37
384
676
-
-
-
8
1,105
-
-
1,105
-
-
2
-
-
-
4
6
$
$
$
$
(3,206) $
(3,001)
(650)
(659)
(1,582)
(1,362)
(4,355)
(14,815)
-
-
(14,815) $
(280) $
(2,340)
(2,586)
(1,291)
(739)
(1,251)
(4,430)
(12,917) $
29,364
45,385
11,829
15,400
16,400
11,708
61,434
191,520
206
206
191,726
3,572
12,871
42,502
17,867
6,750
13,858
84,071
181,491
A substantial percentage of the Company’s investments in mortgage-backed securities include pass-through securities and collateralized
mortgage obligations issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. At December 31, 2023, the Company also
held a total of 119 private-label mortgage-backed securities, collateralized mortgage obligations or asset-backed securities with an
aggregate book balance of $195.7 million. At December 31, 2022, the Company also held a total of 100 private-label mortgage-backed
securities, collateralized mortgage obligations or asset-backed securities with an aggregate book balance of $169.8 million. These
investments are relatively short-duration securities with significant credit enhancements. The Company’s investments in state and
political obligation securities are generally municipal obligations that are categorized as general obligations of the issuer that are
supported by the overall taxing authority of the issuer, and in some cases are insured. The obligations issued by school districts are
generally supported by state administered insurance funds or credit enhancement programs.
The amortized cost and estimated fair value of debt investment securities at December 31, 2023 by contractual maturity are shown
below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Sub-total
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Available-for-Sale
Held-to-Maturity
Amortized
Cost
10,100 $
9,197
39,941
89,197
148,435
25,446
13,058
81,812
268,751
$
Estimated
Fair Value
10,358
8,741
36,586
88,133
143,818
24,418
12,179
78,095
258,510
$
$
Amortized
Cost
2,420
18,568
43,458
18,177
82,623
6,974
13,221
76,819
179,637
$
$
Estimated
Fair Value
2,402
18,173
39,368
16,078
76,021
6,324
11,928
73,761
168,034
$
$
- 76 -
The Company’s debt investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position, is as follows:
(Dollars in thousands)
Available-for-Sale Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
(Dollars in thousands)
Available-for-Sale Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Credit-related Impairment
Less than Twelve Months
December 31, 2023
Twelve Months or More
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
3
-
-
3
1
-
10
17
-
4
1
2
-
-
4
11
$
$
$
$
(13)
-
-
(65)
(14)
-
(274)
(366)
-
(2)
(61)
(8)
-
-
(38)
(109)
$
5,990
-
-
5,907
2,477
-
18,067
$ 32,441
$
$
-
575
439
2,877
-
-
5,827
9,718
3
20
5
10
15
11
33
97
2
14
39
8
7
10
43
123
$
(3,246)
(1,809)
(365)
(294)
(1,071)
(995)
(3,571)
$ (11,351)
$
(304)
(1,872)
(3,220)
(1,172)
(665)
(1,293)
(3,140)
$ (11,666)
$ 25,794
26,432
4,351
13,985
14,931
8,123
46,483
$ 140,099
$
3,456
12,718
33,532
10,652
4,942
11,928
60,260
$ 137,488
6
20
5
13
16
11
43
114
2
18
40
10
7
10
47
134
Less than Twelve Months
December 31, 2022
Twelve Months or More
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
-
10
7
5
10
6
15
53
2
7
31
6
10
10
38
104
$
$
$
$
-
(830)
(269)
(148)
(131)
(238)
(1,684)
(3,300)
(280)
(871)
(1,786)
(625)
(736)
(1,236)
(2,719)
(8,253)
$
-
12,601
5,720
5,473
2,747
4,009
20,429
$ 50,979
$
3,573
7,277
29,213
9,742
6,577
12,965
58,061
$ 127,408
3
17
2
5
5
6
19
57
-
7
9
3
1
1
8
29
$
(3,206)
(2,171)
(381)
(511)
(1,451)
(1,124)
(2,671)
$ (11,515)
$
$
-
(1,469)
(800)
(666)
(3)
(15)
(1,711)
(4,664)
$ 26,167
20,128
1,319
9,926
13,653
7,700
33,707
$ 112,600
$
-
5,077
6,803
3,674
107
892
12,532
$ 29,085
3
27
9
10
15
12
34
110
2
14
40
9
11
11
46
133
Total
Unrealized
Losses
$
(3,259)
(1,809)
(365)
(359)
(1,085)
(995)
(3,845)
$ (11,717)
$
(304)
(1,874)
(3,281)
(1,180)
(665)
(1,293)
(3,178)
$ (11,775)
Total
Unrealized
Losses
$
(3,206)
(3,001)
(650)
(659)
(1,582)
(1,362)
(4,355)
$ (14,815)
$
(280)
(2,340)
(2,586)
(1,291)
(739)
(1,251)
(4,430)
$ (12,917)
Fair
Value
$
31,784
26,432
4,351
19,892
17,408
8,123
64,550
$ 172,540
$
3,456
13,293
33,971
13,529
4,942
11,928
66,087
$ 147,206
Fair
Value
$
26,167
32,729
7,039
15,399
16,400
11,709
54,136
$ 163,579
$
3,573
12,354
36,016
13,416
6,684
13,857
70,593
$ 156,493
The Company conducts a formal review of investment securities on a quarterly basis for the presence of credit-related impairment. The
Company assesses whether credit-related impairment is present when the fair value of a debt security is less than its amortized cost basis
at the statement of condition date. Under these circumstances, impairment is considered to have occurred (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) the
present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires
that credit-related impairment is recognized in earnings while non-credit-related price depreciation for securities categorized as
available-for-sale not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related market price
depreciation is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of credit-
related impairment, when present, is made in the consolidated statement of income on a gross basis, including both the portion recognized
in earnings, as well as the portion recorded in OCI.
Management does not believe any unrealized losses in individual investment securities within the portfolio as of December 31, 2023
represent credit-related impairment. There were a total of 97 securities classified as available-for-sale with an aggregate amortized
historical cost of $151.4 million and an unrealized aggregate loss of $11.3 million, or -7.5%, that were in an unrealized loss position for
12 months or longer at December 31, 2023. In addition, there were123 securities classified as held-to-maturity with an aggregate
amortized historical cost of $149.2 million and an unrealized aggregate loss of $11.7 million, or -7.8%, that were in an unrealized loss
position for 12 months or longer at December 31, 2023. In total, therefore, at December 31, 2023 there were 220 securities with an
aggregate book value of $300.6 million and an aggregate fair value of $277.6 million, representing a loss of $23.0 million, or -7.7%,
that were in an unrealized loss position for 12 months or more on that date.
All of the securities which have been in an unrealized loss position for 12 months or more at December 31, 2023 have been individually
analyzed and none of the securities are considered to be impaired. These securities have unrealized losses primarily due to fluctuations
- 77 -
in general interest rates or changes in expected prepayments. In all cases, price improvement in future periods will be realized as the
issuances approach maturity. Of the 220 securities in an unrealized loss position for 12 months or more at December 31, 2023, 48
securities, with aggregate amortized cost balances of $76.7 million and representing 25.5% of the aggregate amortized cost of all
securities in an unrealized loss position for 12 months or more, are issued by the United States government or GSEs (collectively,
"government-issued securities") and are therefore either explicitly or implicitly guaranteed as to the timely payment of contractual
principal and interest These positions are deemed to have no credit impairment, thus, the disclosed unrealized losses relate primarily to
changes in prevailing interest rates.
The following table depicts a roll forward of the allowance for credit losses on held-to-maturity investment securities for the year ended
December 31, 2023:
(In thousands)
Balance, December 31, 2022
Adjustment for the adoption of ASU
2016-13
Provision for credit losses
Allowance on purchased financial
assets with credit deterioration
Charge-offs of securities
Recoveries
Balance, December 31, 2023
Government Issued
and Government
Sponsored
Enterprise
Securities
Mortgage and
Asset-backed
Securities
Securities
Issued By
State and
Political
Subdivisions
$
$
- $
-
-
-
-
-
- $
- $
40
(40)
-
-
-
- $
- $
1
1
-
-
-
2 $
Corporate
Securities
Total
- $
409
(59)
-
-
-
350 $
-
450
(98)
-
-
-
352
The Company monitors the credit quality of the debt securities categorized as held-to-maturity primarily through the use of credit ratings.
These assessments are made on a quarterly basis. The following table summarizes the amortized cost of debt securities categorized as
held-to-maturity at December 31, 2023, aggregated by credit quality indicators:
(In thousands)
AAA or equivalent
AA or equivalent, including securities issued by the United States Government or
Government Sponsored Enterprises
A or equivalent
BBB or equivalent
BB or equivalent
Unrated
Total
$
$
Additional Disclosures
42,476
49,479
19,021
16,304
983
51,374
179,637
Proceeds of $18.0 million and $11.0 million, respectively on sales and redemptions of securities for the years ended December 31, 2023
and 2022 resulted in net realized gains (losses) detailed below:
(In thousands)
Realized gains on investments
Realized losses on investments
$
$
2023
2,022
(1,960)
62
$
$
2022
37
(206)
(169)
As of December 31, 2023 and December 31, 2022, securities with a fair value of $110.3 million and $99.8 million, respectively, were
pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $114.3 million and
$38.1 million were pledged against certain borrowing arrangements.
Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, little or
no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or
originating, these types of investments.
- 78 -
NOTE 5: LOANS
Major classifications of loans are as follows:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Loans held-for-sale
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Paycheck Protection Program loans
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
Less net deferred loan fees
Less allowance for credit losses
Loans receivable, net
December 31,
2023
December 31,
2022
$
$
$
257,604
1,355
-
258,959
358,707
72,069
89,803
158
3,430
524,167
34,858
79,797
114,655
897,781
574
15,975
881,232
$
257,656
5,085
19
262,760
345,330
82,050
77,273
203
4,280
509,136
34,007
92,851
126,858
898,754
1,000
15,319
882,435
- 79 -
Future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by
type of loan and the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral
type within major categories as of December 31, 2023.
(Dollars in thousands)
Residential Mortgage Loans
Commercial Real Estate:
Multi Family (5 or More)
Mixed Use
Office Space
Hotels and Motels
1-4 Family
Retail Space
Recreation/ Golf Course/ Marina
Auto Dealership
Nursing Home
Self Storage/Mini Storage
Manufacturing/Industrial
Land
Warehouse
Assisted Living
Restaurant
Auto Repair
Hospitals
Property for Community Service
All Others
Total Commercial Real Estate Loans
Commercial and Industrial:
Secured Term Loans
Unsecured Term Loans
Secured Lines of Credit
Unsecured Lines of Credit
Total Commercial and
Industrial Loans
Tax Exempt Loans
Paycheck Protection Program Loans
Consumer:
Home Equity Lines of Credit
Vehicle
Consumer Secured
Consumer Unsecured
All Others
Total Consumer Loans
Net deferred loan fees
Unallocated allowance for
credit losses
Total Loans
Balance
258,959
Number
of Loans
2,522
75,741
50,022
38,824
29,524
25,089
22,721
19,290
13,259
11,900
11,892
9,634
7,550
7,304
7,180
5,793
5,696
4,755
3,121
9,412
358,707
78,928
10,875
48,569
23,500
161,872
3,430
158
34,858
11,032
29,523
37,767
1,475
114,655
574
(15,975)
882,380
66
59
70
9
167
47
19
10
2
3
17
9
13
1
23
13
3
3
25
559
384
89
264
148
885
10
5
1,026
1,417
545
1,940
596
5,524
-
-
9,505
$
$
$
$
$
$
$
$
$
$
Average
Loan
Balance
$
$
$
$
$
$
$
$
$
103
1,148
848
555
3,280
150
483
1,015
1,326
5,950
3,964
567
839
562
7,180
252
438
1,585
1,040
376
642
206
122
184
159
183
343
32
34
8
54
19
2
21
-
-
94
$
$
$
$
$
$
$
$
$
Minimum/
Maximum
Loan Balance
-
$
4,871
17
17
19
193
-
18
77
-
3,800
48
51
38
52
7,180
32
39
45
94
8
-
$
8,530
5,951
4,037
11,500
2,407
4,756
4,543
5,084
8,100
11,428
3,356
3,753
2,311
7,180
1,056
2,054
2,973
1,580
3,583
$ 11,500
-
-
-
-
-
6
4
-
-
8
-
-
-
-
-
$
$
$
$
$
$
4,019
920
5,000
3,000
5,000
2,215
77
985
410
42
54
88
985
-
-
Allowance
for Credit
Losses
Percent
of
Total
Loans
$
$
$
$
$
$
$
$
$
$
2,466
29%
1,214
802
622
473
402
364
309
213
191
191
154
121
117
115
93
91
76
50
151
5,751
1,471
203
2,211
1,070
4,955
1
-
657
297
794
1,015
40
2,802
-
8%
6%
4%
3%
3%
3%
2%
1%
1%
1%
1%
1%
1%
1%
1%
1%
1%
0%
1%
40%
9%
1%
5%
3%
18%
0%
0%
4%
1%
3%
5%
0%
13%
-
-
15,975
-
100%
From time to time, the Bank acquires diversified pools of loans, originated by unrelated third parties, as part of the Company’s overall
balance sheet management strategies. These acquisitions took place with nine separate transactions, that occurred between 2017 and
2019, with an additional six transactions occurring in 2021.
The following table summarizes the purchased loan pool positions, held by the Bank in purchased loans at year end (month and date of
acquisition in parentheses):
- 80 -
(In thousands, except number of loans)
Original
Balance
Current
Balance
December 31, 2023
Unamortized
Premium/
(Discount)
Number
of
Loans
Maturity
Range
Cumulative
net charge-
offs
Commercial and industrial loans (6/2019)
$
6,800 $
1,600 $
Home equity lines of credit (8/2019)
21,900
4,500
Unsecured consumer loan pool 2 (11/2019)
26,600
500
Residential real estate loans (12/2019)
Unsecured consumer loan pool 1 (12/2019)
4,300
4,500
5,400
1,000
Unsecured consumer installment loans pool 3 (12/2019)
10,300
500
-
108
2
284
-
17
Secured consumer installment loans pool 4 (12/2020)
14,500
10,600
(1,252)
Unsecured consumer loans pool 5 (1/2021)
Revolving commercial line of credit 1 (3/2021)
24,400
11,600
15,600
12,400
(450)
2
Secured consumer installment loans (11/2021)
Revolving commercial line of credit 2 (11/2021) paid in full
at 12/11/23
21,300
18,000
(2,923)
10,500
-
-
20
159
167
56
46
158
499
644
1
821
-
Unsecured consumer loans pool 6 (11/2021)
Total
22,200
18,200
$179,800 $ 87,400 $
(2,292)
(6,504)
522
3,093
2-6
years $
1-26
years
0-2
years
17-25
years
1-3
years
0-9
years
21-25
years
7-22
years
0-1 year
17-24
years
-
7-24
years
$
-
-
-
-
-
69
-
-
-
-
-
-
69
(In thousands, except number of loans)
Original
Balance
Current
Balance
December 31, 2022
Unamortized
Premium/
(Discount)
Number
of
Loans
Maturity
Range
Cumulative
net charge-
offs
Automobile loans (1/2017) paid in full at 6/30/23
$ 50,400 $
4,200 $
Commercial and industrial loans (6/2019)
Home equity lines of credit (8/2019)
6,800
2,100
21,900
6,000
Unsecured consumer loan pool 2 (11/2019)
26,600
1,500
Residential real estate loans (12/2019)
Unsecured consumer loan pool 1 (12/2019)
4,300
3,900
5,400
1,600
Unsecured consumer installment loans pool 3 (12/2019)
10,300
1,000
128
-
189
11
240
-
38
Secured consumer installment loans pool 4 (12/2020)
14,500
11,300
(1,484)
Unsecured consumer loans pool 5 (1/2021)
Revolving commercial line of credit 1 (3/2021)
24,400
11,600
17,300
11,400
(485)
14
Secured consumer installment loans (11/2021)
Revolving commercial line of credit 2 (11/2021) paid in full
at 12/11/23
21,300
19,700
(3,237)
10,500
15,000
23
537
22
143
320
49
50
354
518
678
1
850
1
Unsecured consumer loans pool 6 (11/2021)
Total
22,200
20,200
$230,200 $115,200 $
(2,441)
(7,004)
540
4,063
- 81 -
0-4
years $
3-7
years
1-27
years
0-2
years
16-22
years
1-4
years
0-9
years
23-24
years
8-24
years
0-1 year
18-25
years
0-1 year
8-24
years
247
-
-
-
-
-
63
-
-
-
-
-
-
310
$
As of December 31, 2023 and December 31, 2022, residential mortgage loans with a carrying value of $113.6 million and $110.3
million, respectively, have been pledged by the Company to the FHLBNY under a blanket collateral agreement to secure the Company’s
line of credit and term borrowings.
Risk Characteristics of Portfolio Segments
Each portfolio segment generally carries its own unique risk characteristics.
The residential mortgage loan segment is impacted by general economic conditions, unemployment rates in the Bank’s service area, real
estate values and the forward expectation of improvement or deterioration in economic conditions. First and second lien residential
mortgages, acquired via purchase are impacted by general economic conditions, unemployment rates in the general areas in which the
loan collateral is located, real estate values in those areas and the forward expectation of improvement or deterioration in economic
conditions.
The commercial loan segment is impacted by general economic conditions but, more specifically, the industry segment in which each
borrower participates. Unique competitive changes within a borrower’s specific industry, or geographic location could cause significant
changes in the borrower’s revenue stream, and therefore, impact its ability to repay its obligations. Commercial real estate is also subject
to general economic conditions but changes within this segment typically lag changes seen within the consumer and commercial
segment. Included within this portfolio are both owner occupied real estate, in which the borrower occupies the majority of the real
estate property and upon which the majority of the sources of repayment of the obligation is dependent upon, and non-owner occupied
real estate, in which several tenants comprise the repayment source for this portfolio segment. The composition and competitive position
of the tenant structure may cause adverse changes in the repayment of debt obligations for the non-owner occupied class within this
segment.
The consumer loan segment is impacted by general economic conditions, unemployment rates in the geographic areas in which
borrowers and loan collateral are located, and the forward expectation of improvement or deterioration in economic conditions.
Real estate loans, including residential mortgages, commercial real estate loans and home equity, comprised 72.7% and 71.4% of the
total loans held in the portfolio in 2023 and 2022, respectively. Loans secured by real estate generally provide strong collateral protection
and thus significantly reduce the inherent credit risk in the portfolio.
Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-prime
or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.
Description of Credit Quality Indicators
The Company utilizes an eight tier risk rating system to evaluate the quality of its loan portfolio. Loans that are risk rated “1” through
“4” are considered “Pass” loans. In accordance with regulatory guidelines, loans rated “5” through “8” are termed “criticized” loans
and loans rated “6” through “8” are termed “classified” loans. A description of the Company’s credit quality indicators follows.
For Commercial Loans:
1.
2.
3.
4.
Prime: A loan that is fully secured by properly margined Pathfinder Bank deposit account(s) or an obligation of the US
Government. It may also be unsecured if it is supported by a very strong financial condition and, in the case of a commercial
loan, excellent management. There exists an unquestioned ability to repay the loan in accordance with its terms.
Strong: Desirable relationship of somewhat less stature than Prime grade. Possesses a sound documented repayment source,
and back up, which will allow repayment within the terms of the loan. Individual loans backed by solid assets, character
and integrity. Ability of individual or company management is good and well established. Probability of serious financial
deterioration is unlikely.
Satisfactory: Stable financial condition with cash flow sufficient for debt service coverage. Satisfactory loans of average
strength having some deficiency or vulnerability to changing economic or industry conditions but performing as agreed
with documented evidence of repayment capacity. May be unsecured loans to borrowers with satisfactory credit and
financial strength. Satisfactory provisions for management succession and a secondary source of repayment exists.
Satisfactory Watch: A four is not a criticized or classified credit. These credits do not display the characteristics of a
criticized asset as defined by the regulatory definitions. A credit is given a Satisfactory Watch designation if there are
matters or trends observed deserving attention somewhat beyond normal monitoring. Borrowing obligations may be
handled according to agreement but could be adversely impacted by developing factors such as industry conditions,
operating problems, pending litigation of a significant nature or declining collateral quality and adequacy.
- 82 -
5.
6.
7.
8.
Special Mention: A warning risk grade that portrays one or more weaknesses that may be tolerated in the short term. Assets
in this category are currently protected but are potentially weak. This loan would not normally be booked as a new credit,
but may have redeeming characteristics persuading the Bank to continue working with the borrower. Loans accorded this
classification have potential weaknesses which may, if not checked or corrected, weaken the company’s assets, inadequately
protect the Bank’s position or effect the orderly, scheduled reduction of the debt at some future time.
Substandard: The relationship is inadequately protected by the current net worth and cash flow capacity of the borrower,
guarantor/endorser, or of the collateral pledged. Assets have a well-defined weakness or weaknesses that jeopardize the
orderly liquidation of the debt. The relationship shows deteriorating trends or other deficient areas. The loan may be
nonperforming and expected to remain so for the foreseeable future. Relationship balances may be adequately secured by
asset value; however a deteriorated financial condition may necessitate collateral liquidation to effect repayment. This
would also include any relationship with an unacceptable financial condition requiring excessive attention of the officer due
to the nature of the credit risk or lack of borrower cooperation.
Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the
weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or improbable.
The possibility of some loss is extremely high, however its classification as an anticipated loss is deferred until a more exact
determination of the extent of loss is determined. Loans in this category must be on nonaccrual.
Loss: Loans are considered uncollectible and of such little value that continuance as bankable assets is not warranted. It is
not practicable or desirable to defer writing off this basically worthless asset even though partial recovery may be possible
in the future.
For Residential Mortgage and Consumer Loans:
Residential mortgage and consumer loans are assigned a “Pass” rating unless the loan has demonstrated signs of weakness as indicated
by the ratings below.
1.
2.
3.
Special Mention: All loans sixty days past due are classified Special Mention. The loan is not upgraded until it has been
current for six consecutive months.
Substandard: All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been current for
six consecutive months.
Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the
weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or improbable.
The possibility of some loss is extremely high.
The risk ratings for classified loans are evaluated at least quarterly for commercial loans or when credit deficiencies arise, such as
delinquent loan payments, for commercial, residential mortgage or consumer loans. See further discussion of risk ratings in Note 1.
The following tables present the classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of
special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:
- 83 -
(In thousands)
Commercial Real Estate:
Pass
Special Mention
Substandard
Doubtful
Total Commercial Real Estate
Commercial Lines of Credit:
Pass
Special Mention
Substandard
Doubtful
Total Commercial Lines of Credit
Other Commercial and Industrial:
Pass
Special Mention
Substandard
Doubtful
Total Other Commercial and
Industrial
Paycheck Protection Program Loans
Pass
Special Mention
Substandard
Doubtful
Total Paycheck Protection Program
Loans
Tax Exempt Loans
Pass
Special Mention
Substandard
Doubtful
Total Tax Exempt Loans
Term Loans By Origination Year
2023
2022
2021
2020
2019
Prior
Revolving
loans
converted
to term loans
Revolving
Loans
$ 43,823
-
3,006
-
46,829
$ 67,743
14,016
500
-
82,259
$ 55,395
-
2,339
-
57,734
$29,222
-
739
-
29,961
$51,270
-
396
-
51,666
$ 85,218
797
4,085
158
90,258
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
27,433
2,490
30
1,405
16,735
-
1,124
-
6,457
248
929
-
5,541
67
754
-
7,828
-
211
-
11,994
-
2,362
-
31,358
17,859
7,634
6,362
8,039
14,356
-
-
-
-
-
105
-
-
-
105
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
158
-
-
-
158
151
-
-
-
151
-
-
-
-
-
6
-
-
-
6
-
-
-
-
-
3,168
-
-
-
3,168
62,824
654
518
-
63,996
4,195
-
-
-
4,195
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,141
162
758
12
8,073
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
$332,671
14,813
11,065
158
358,707
69,965
816
1,276
12
72,069
80,183
2,805
5,410
1,405
89,803
158
-
-
-
158
3,430
-
-
-
3,430
- 84 -
2023
Term Loans By Origination Year
2022
2020
2021
2019
Prior
Revolving
Loans
Revolving
loans
converted
to term loans
$ 17,403
-
-
-
$ 31,591
-
-
-
$ 51,027
1,601
138
-
$39,454
566
209
154
$18,491
176
282
-
$ 94,594
349
1,168
401
$
17,403
31,591
52,766
40,383
18,949
96,512
1,355
-
-
-
1,355
8,317
-
-
-
-
-
-
-
-
-
-
-
-
-
1,880
-
-
-
1,404
-
66
-
8,317
1,880
1,470
-
-
-
-
-
853
-
-
-
853
-
-
-
-
-
559
-
-
-
559
-
-
-
-
-
2,228
6
49
-
18,177
20
601
-
2,283
18,798
$
-
-
-
-
-
-
-
-
-
-
68,434
24
-
-
68,458
(289)
$173,536
3,876
34
14
-
3,924
60
$137,573
3,103
14
8
-
3,125
(12)
$122,717
1,381
9
-
-
1,390
(82)
$79,176
1,536
4
-
-
1,540
93
$80,852
1,340
15
5
-
1,360
(344)
$207,593
-
-
-
-
-
-
$ 86,989
$
Total
$252,560
2,692
1,797
555
257,604
1,355
-
-
-
1,355
34,107
35
716
-
34,858
79,670
100
27
-
79,797
(574)
$897,207
-
-
-
-
-
-
-
-
-
-
689
9
-
-
698
-
-
-
-
-
-
8,771
(In thousands)
1-4 family first-lien residential
mortgages:
Pass
Special Mention
Substandard
Doubtful
Total 1-4 family first-lien
residential mortgages
Construction:
Pass
Special Mention
Substandard
Doubtful
Total Construction
Home Equity and Junior Liens:
Pass
Special Mention
Substandard
Doubtful
Total Home Equity and Junior
Liens
Other Consumer:
Pass
Special Mention
Substandard
Doubtful
Total Other Consumer
Net Deferred Loan Fees
Total loans
Nonaccrual and Past Due Loans
Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management
has serious doubts about further collectability of principal or interest, even though the loan may be performing.
Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment
due date.
- 85 -
An age analysis of loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of December 31,
2023 and 2022, are detailed in the following tables:
(In thousands)
Residential mortgage loans:
As of December 31, 2023
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
and Over
Total
Past Due
Current
Total Loans
Receivable
1-4 family first-lien residential mortgages
Construction
Loans held-for-sale
$
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Paycheck Protection Program loans
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
$
1,462
-
-
1,462
5,385
180
5,347
-
-
10,912
210
984
1,194
13,568
$
$
$
2,269
-
-
2,269
196
-
322
-
-
518
29
383
412
3,199
$
1,770
-
-
1,770
5,053
924
6,340
-
-
12,317
192
2,948
3,140
17,227
$
$
$
5,501
-
-
5,501
$ 252,103
1,355
-
253,458
10,634
1,104
12,009
-
-
23,747
431
4,315
4,746
33,994
348,073
70,965
77,794
158
3,430
500,420
34,427
75,482
109,909
$ 863,787
$
257,604
1,355
-
258,959
358,707
72,069
89,803
158
3,430
524,167
34,858
79,797
114,655
897,781
(In thousands)
Residential mortgage loans:
As of December 31, 2022
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
and Over
Total
Past Due
Current
Total Loans
Receivable
1-4 family first-lien residential mortgages
Construction
Loans held-for-sale
$
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Paycheck Protection Program loans
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
$
1,627
-
-
1,627
4,974
1,280
4,721
-
-
10,975
23
391
414
13,016
$
$
620
-
-
620
854
1,584
999
-
-
3,437
17
239
256
4,313
$
$
932
-
-
932
3,499
298
1,738
-
-
5,535
279
1,904
2,183
8,650
$
$
$
3,179
-
-
3,179
$ 254,477
5,085
19
259,581
9,327
3,162
7,458
-
-
19,947
319
2,534
2,853
25,979
336,003
78,888
69,815
203
4,280
489,189
33,688
90,317
124,005
$ 872,775
$
257,656
5,085
19
262,760
345,330
82,050
77,273
203
4,280
509,136
34,007
92,851
126,858
898,754
- 86 -
Nonaccrual loans as of December 31, 2023 and 2022, segregated by class of loan, were as follows:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total nonaccrual loans
December 31,
2023
December 31,
2022
$
$
1,770
1,770
$
5,053
924
6,340
12,317
192
2,948
3,140
17,227
$
1,112
1,112
3,504
332
1,884
5,720
279
1,904
2,183
9,015
There were no loans past due ninety days or more and still accruing interest at December 31, 2023 or 2022.
When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is
analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or
the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then
impairment is recognized as a component of the provision for credit losses, an associated increase to the allowance for credit losses or
as a charge-off to the allowance for credit losses in the current period.
- 87 -
Impaired Loans:
The following table summarizes impaired loans information by portfolio class at:
(In thousands)
With no related allowance recorded:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
With an allowance recorded:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Total:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Totals
December 31, 2022
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
$
$
1,048
5,283
2,218
2,780
182
450
2,625
3,059
1,998
536
1,498
7,908
5,277
4,778
718
20,179
$
$
1,048
5,386
2,218
2,829
182
450
2,625
3,066
1,998
536
1,498
8,011
5,284
4,827
718
20,338
$
$
The following table presents the average recorded investment in impaired loans for the year ended December 31:
(In thousands)
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Other consumer
Total
$
$
The following table presents the cash basis interest income recognized on impaired loans for the year ended December 31:
(In thousands)
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Other consumer
Total
$
$
- 88 -
-
-
-
-
-
91
346
2,957
1,285
114
91
346
2,957
1,285
114
4,793
2022
1,232
7,285
1,951
3,155
647
-
14,270
2022
65
247
143
304
6
-
765
The following table summarizes all activity related to the ACL from December 31, 2022 to December 31, 2023 and to the recorded PCL
for year ended December 31, 2023:
CECL
Transition
ILM
ALLL
December
31, 2022
Adjustment
January 1,
2023
CECL
Reserve
January
1, 2023
Q1
2023
Charge-
Offs
Q1 2023
Recoveries
Reserves
as of
March
31, 2023
Q2
2023
Charge-
Offs
Q1
2023
PCL
Q2 2023
Recoveries
Reserves
as of
June 30,
2023
Q3
2023
Charge-
Offs
Q2
2023
PCL
Q3 2023
Recoveries
Reserves
as of
Sept 30,
2023
Q4
2023
Charge-
Offs
Q3
2023
PCL
Q4 2023
Recoveries
Reserves
as of
Dec 31,
2023
Q4
2023
PCL
ACL - Loans
Specifically identified
Overdraft
Pooled under ILM
Pooled - quantitative
Pooled - qualitative
Purchased
Unallocated
Total ACL - Loans
ACL - Held-To-Maturity
Other Liabilities - Unfunded
Commitments
-
-
- $
- $ 533 $ 3,861 $
263 $
- $ 888 $ 4,486 $ 1,650 $
$
4,793 $
9,497
1,029
-
- $ 3,328 $
1,465
-
6,313
3,965
2,131
-
(9,497)
6,313
3,965
1,102
-
$ 15,319 $
1,883 $17,202 $
301
270
(397)
(15)
-
92
-
-
-
1,766
-
6,575
3,568
2,097
-
92 $ 692 $ 17,867 $
-
109
-
-
372 $
100
-
19
-
119 $
116
-
(135)
287
29
-
1,882
-
6,447
3,855
2,126
-
1,425
-
799
-
-
-
-
116
-
-
- $692 $ 3,528 $
-
-
45
-
-
-
457
-
5,710
3,944
2,126
-
-
-
17
89
-
-
- $
13
-
198
-
-
-
211 $
(80)
-
183
-
-
-
- $ 188 $ 3,716
364
-
-
-
6,203
508
3,566
(378)
2,126
-
-
-
103 $ 318 $ 15,975
116 $1,185 $ 18,796 $ 3,874 $
45 $798 $ 15,765 $
450
450
-
450
-
5
426
-
-
(74)
352
-
-
-
-
-
-
(29)
421
(16)
536
-
-
-
-
552
552
-
119 $
552
-
372 $
92 $ 692 $ 18,870 $
116 $1,140 $ 19,754 $ 3,874 $
45 $833 $ 16,758 $
30
566
-
211 $
-
23
589
103 $ 267 $ 16,917
$ 15,319 $
2,886 $18,205 $
Collateral Dependent Disclosures
The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing
financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types
of collateral that secure collateral dependent loans:
•
•
•
•
Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied
investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings,
warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-
owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities,
multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second
mortgage.
Home equity lines of credit are generally secured by second mortgages on residential real estate property.
Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some
consumer loans are unsecured and have no underlying collateral.
The following table details the amortized cost of collateral dependent loans:
(In thousands)
Commercial and industrial
Commercial real estate
Residential (1-4 family) first mortgages
Home equity loans and lines of credit
Consumer loans
Total loans
$
$
December 31, 2023
7,788
11,814
699
599
81
20,981
Paycheck Protection Program (“PPP”)
The Bank participated in all rounds of the PPP funded by the U.S. Treasury Department and administered by the U.S. SBA pursuant to
the CARES Act and subsequent legislation. The Bank received $4.0 million in fees from the SBA associated with PPP lending activities
during 2020 and 2021 and recognized $-0- and $707,000 of those fees in 2023 and 2022, respectively.
- 89 -
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
As discussed in Note 1, on January 1, 2023, the Bank accounted for all credit loss exposures using the CECL methodology. A
nonrecurring adjustment from ILM to CECL was made on January 1, 2023, increasing the ACL at January 1, 2023 by $2.1 million in
determining the beginning ACL for the quarter ended March 31, 2023. This transition adjustment was recorded in retained earnings on
January 1, 2023, and therefore will be a subtraction from tangible book value, after tax effects of approximately $1.7 million.
Changes in the allowance for credit losses for the year ended December 31, 2023, and information pertaining to the allocation of the
allowance for credit losses and balances of the allowance for credit losses and loans receivable based on individual and collective
impairment evaluation by loan portfolio class at the indicated dates, are summarized in the tables below. An allocation of a portion of
the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.
(In thousands)
Allowance for credit losses:
Beginning Balance
Adoption of New Accounting Standards
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Ending balance: related to loans
individually evaluated
Ending balance: related to loans
collectively evaluated
Loans receivables:
Ending balance
Ending balance: individually
evaluated
Ending balance: collectively
evaluated
Allowance for credit losses:
Beginning Balance
Adoption of New Accounting Standards
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: related to loans
individually evaluated
Ending balance: related to loans
collectively evaluated
Loans receivables:
Ending balance
Ending balance: individually
evaluated
Ending balance: collectively
evaluated
December 31, 2023
1-4 family
first-lien
residential
mortgage Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
Paycheck
Protection
Program
$
$
$
$
714
1,396
(121)
1
(382)
1,608
138
1,470
$ 257,604
$
1,675
$ 255,929
$
$
$
$
$
$
$
-
969
-
-
(111)
858
-
858
1,355
-
1,355
$
$
$
$
$
$
$
5,881
(1,744)
-
23
1,591
5,751
969
4,782
358,707
12,314
346,393
$
$
$
$
$
$
$
3,990
95
(1,247)
2
(1,166)
1,674
844
830
72,069
1,139
70,930
$
$
$
$
$
$
$
2,944
10
(2,862)
211
2,978
3,281
1,617
1,664
89,803
6,749
83,054
$
$
$
$
$
$
$
-
-
-
-
-
-
-
158
-
158
Tax exempt
Home equity
and junior liens
Other
consumer
$
$
$
$
$
$
$
3
14
-
-
(16)
1
-
1
3,430
-
3,430
$
$
$
$
$
$
$
741
(97)
(5)
-
18
657
148
509
34,858
710
34,148
$
$
$
$
$
$
$
1,046
1,243
(341)
118
79
2,145
-
2,145
79,797
-
79,797
$
$
$
$
$
$
$
Total
15,319
1,886
(4,576)
355
2,991
15,975
3,716
12,259
897,781
22,587
875,194
Changes in the allowance for loan losses under the ILM methodology for the year ended December 31, 2022, and information pertaining
to the allocation of the allowance for loan losses and balances of the allowance for loan losses and loans receivable based on individual
- 90 -
and collective impairment evaluation by loan portfolio class at the indicated dates, are summarized in the tables below. An allocation
of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.
(In thousands)
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
December 31, 2022
1-4 family
first-lien
residential
mortgage Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
Paycheck
Protection
Program
$
$
$
$
872
$
(29)
-
(129)
714
91
623
$
$
$
$
$
$
$ 257,656
$
1,498
$ 256,158
-
-
-
-
-
-
-
5,085
-
5,085
$
5,308
$
935
$
2,762
$
(48)
250
371
5,881
346
5,535
345,330
7,908
337,422
$
$
$
$
$
$
$
$
$
$
$
$
(51)
-
3,106
3,990
2,957
1,033
82,050
5,278
76,772
$
$
$
$
$
$
(486)
46
622
2,944
1,285
1,659
77,273
4,777
72,496
$
$
$
$
$
$
-
-
-
-
-
-
-
203
-
203
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated (1)
Total
3
-
-
-
3
-
3
4,280
-
4,280
$
$
$
$
$
$
$
$
$
$
$
$
774
-
-
(33)
741
114
627
34,007
718
33,289
$
$
$
$
$
$
1,297
(147)
95
(199)
1,046
-
1,046
92,851
-
92,851
$
$
$
$
$
$
984
-
-
(984)
-
-
-
19
-
19
$
$
$
$
$
$
12,935
(761)
391
2,754
15,319
4,793
10,526
898,754
20,179
878,575
(1)
The ending balance of the loans receivable for the unallocated portion of the allowance includes loans held-for-sale. At December 31, 2022, the
Bank had loans held-for-sale with a principal balance of $19,000. These loans were still part of the portfolio as of December 31, 2022. Based on
ASC 948, Mortgage Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to
the held-for-sale category at lower of cost or fair value.
The Company’s methodology for determining its allowance for credit losses includes an analysis of qualitative factors that are added to
the historical loss rates in arriving at the total allowance for credit losses needed for this general pool of loans. The qualitative factors
include:
•
•
•
Changes in national and local economic trends;
The rate of growth in the portfolio;
Trends of delinquencies and nonaccrual balances;
- 91 -
•
•
Changes in loan policy; and
Changes in lending management experience and related staffing.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant
information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation
inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes
available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the
allowance for credit losses analysis and calculation.
The allocation of the allowance for credit losses summarized on the basis of the Company’s CECL calculation methodology was as
follows:
(In thousands)
Specifically reserved
Historical loss rate
Qualitative factors
Total
Specifically reserved
Historical loss rate
Qualitative factors
Total
December 31, 2023
1-4 family
first-lien
residential
mortgage
137
1,537
(66)
1,608
Tax exempt
-
1
-
1
$
$
$
$
Construction
-
674
184
858
$
$
Home equity
and junior liens
458
$
190
9
657
$
$
$
$
$
Commercial
real estate
969
2,645
2,137
5,751
Commercial
lines of credit
844
$
209
621
1,674
$
Other
commercial
and industrial
1,617
$
1,026
638
3,281
$
Other
consumer
1,817
307
21
2,145
$
$
Total
5,842
6,589
3,544
15,975
The allocation of the allowance for loan losses summarized on the basis of the Company’s ILM calculation methodology was as follows:
1-4 family
first-lien
residential
mortgage
91
5
618
714
Tax exempt
-
-
3
3
$
$
$
$
December 31, 2022
Construction
-
-
-
-
$
$
Home equity
and junior liens
114
$
321
306
741
$
$
$
$
$
Commercial
real estate
346
(32)
5,567
5,881
Commercial
lines of credit
2,957
$
-
1,033
3,990
$
Other
consumer
-
708
338
1,046
$
$
Total
4,793
1,099
9,427
15,319
Other
commercial
and industrial
1,285
$
97
1,562
2,944
$
(In thousands)
Specifically reserved
Historical loss rate
Qualitative factors
Total
Specifically reserved
Historical loss rate
Qualitative factors
Total
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2023 and 2022,
the Bank serviced 518 and 503 residential mortgage loans for others, respectively. The unpaid principal balances of mortgage loans
serviced for others were $54.5 million and $52.2 million at December 31, 2023 and 2022, respectively. The balance of capitalized
servicing rights included in other assets at December 31, 2023 and 2022, was $330,000 and $368,000, respectively.
- 92 -
The following summarizes mortgage servicing rights capitalized and amortized:
(In thousands)
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
NOTE 8: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 is as follows:
(In thousands)
Land
Buildings
Furniture, fixtures and equipment
Construction in progress
Less: Accumulated depreciation
2023
46
84
2023
2,661
20,784
17,889
758
42,092
23,651
18,441
$
$
$
2022
64
75
2022
2,063
20,406
17,337
320
40,126
22,254
17,872
$
$
$
Depreciation expense in 2023 and 2022 was $1.4 million and $1.1 million, respectively.
NOTE 9: FORECLOSED REAL ESTATE
A summary of foreclosed real estate at December 31 is as follows:
(Dollars in thousands)
Foreclosed real estate
Number of
properties
4
December 31,
2023
151
$
Number of
properties
2
December 31,
2022
221
$
At December 31, 2023 and 2022, the Company reported $1.3 million and $542,000, respectively, in real estate loans in the process of
foreclosure.
NOTE 10: GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is
evaluated annually for impairment or between annual evaluations in certain circumstances. Management performs an annual assessment
of the Company’s goodwill to determine whether or not any impairment of the carrying value may exist.
Of the $4.5 million of goodwill carried on the Company’s books as of December 31, 2023, $3.8 million of this amount was due to prior
periods acquisitions of bank branches and $696,000, initially and currently classified as an identifiable intangible asset, was due to the
2013 acquisition of the FitzGibbons Agency by PRMC and the 2015 acquisition of the Huntington Agency.
In 2020, the Company retained expert, independent consultants to evaluate the recorded goodwill for impairment. The Company updated
those evaluations using internal modeling processes for the year ended December 31, 2023. The Company is permitted to assess market-
based, prospective analyses and other qualitative factors to determine if it is more likely than not that the fair value of the reporting unit
is less than the carrying value. Based on the results of the assessments made by management, with prior input from the retained
consultants, it was determined that the carrying value of goodwill in the amount of $4.5 million is not impaired as of December 31,
2023.
The identifiable intangible asset of $85,000 as of December 31, 2023 was due to the acquisition of the FitzGibbons and Huntington
Agencies and represents the amortized carrying amount of the customer lists intangible. The weighted average remaining amortization
period of this intangible asset is 3.18 years.
- 93 -
The gross carrying amount and annual amortization for this identifiable intangible asset are as follows:
(In thousands)
Gross carrying amount
Accumulated amortization
Net amortizing intangibles
$
$
December 31,
2023
243
(158)
85
$
$
2022
243
(142)
101
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
(In thousands)
2024
2025
2026
2027
2028
Thereafter
Total
NOTE 11: DEPOSITS
A summary of deposits at December 31 is as follows:
(In thousands)
Savings accounts
Time accounts
Time accounts in excess of $250,000
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
At December 31, 2023, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
2024
2025
2026
2027
2028
Thereafter
Total
$
$
16
16
16
16
16
5
85
2023
113,543
377,570
95,272
12,364
224,707
119,321
170,169
7,121
1,120,067
$
$
2022
134,880
314,109
71,696
16,107
270,326
127,395
183,711
7,206
1,125,430
$
$
$
$
324,531
75,882
44,404
9,581
17,950
494
472,842
- 94 -
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.
(In thousands)
Savings accounts
Time accounts
Time accounts of $250,000 or more
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
Nonbrokered
113,543
174,864
95,272
12,364
224,707
79,321
170,169
7,121
877,361
$
$
2023
Brokered
-
202,706
-
-
-
40,000
-
-
242,706
$
$
At December 31,
$
Total
113,543
377,570
95,272
12,364
224,707
119,321
170,169
7,121
$ 1,120,067
Nonbrokered
134,880
105,478
71,696
16,107
270,326
87,395
183,711
7,206
876,799
$
$
2022
Brokered
-
208,631
-
-
-
40,000
-
-
248,631
$
$
$
Total
134,880
314,109
71,696
16,107
270,326
127,395
183,711
7,206
$ 1,125,430
NOTE 12: BORROWED FUNDS
The composition of borrowings (excluding subordinated debt) at December 31 is as follows:
(In thousands)
Short-term:
FHLB advances
Total short-term borrowings
Long-term:
FHLB advances
Total long-term borrowings
2023
125,680
125,680
49,919
49,919
$
$
$
$
$
$
$
$
2022
60,333
60,333
55,664
55,664
The principal balances, interest rates and maturities of the outstanding long-term borrowings, all of which are at a fixed rate, at December
31, 2023 are as follows:
Term
(Dollars in thousands)
Advances with FHLB
Due within 1 year
Due within 2 years
Due within 10 years
Total advances with FHLB
Total long-term fixed rate borrowings
Principal
Rates
$
$
$
22,851
23,883
3,185
49,919
49,919
0.39 - 5.03%
0.52 - 4.92%
0.53 - 4.96%
At December 31, 2023, scheduled repayments of long-term debt are as follows:
(In thousands)
2024
2025
2026
Total
$
$
22,851
23,883
3,185
49,919
The Company has access to FHLBNY advances, under which it can borrow at various terms and interest rates. Residential mortgage
loans with a carrying value of $113.6 million, securities with a carrying value of $90.7 million and FHLB stock with a carrying value
of $8.7 million have been pledged by the Company under a blanket collateral agreement to secure the Company’s borrowings at
December 31, 2023. The total outstanding indebtedness under borrowing facilities with the FHLB cannot exceed the total value of the
assets pledged under the blanket collateral agreement. The Company has a $17.3 million line of credit available at December 31, 2023
with the Federal Reserve Bank of New York through its Discount Window and has pledged various corporate and municipal securities
against the line. The Company has $15.0 million in lines of credit available with two other correspondent banks. $10.0 million of that
line of credit is available on an unsecured basis and the remaining $5.0 million must be collateralized with investment securities. Interest
on the lines is determined at the time of borrowing.
- 95 -
NOTE 13: SUBORDINATED DEBT
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 investors. The 2020 Subordinated Debt has a
maturity date of October 15, 2030 and initially bears 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 Secured Overnight Financing Rate ("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 preferred stock 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 indebtedness of $1.6 million was recorded in both years ended December 31, 2023 and
December 31, 2022.
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 FRB. The capital securities of the trust are a pooled trust preferred fund of Preferred Term
Securities VI, Ltd., whose interest rate resets quarterly, and are indexed to the 3-month Secured Overnight Funding Rate ("SOFR") plus
1.91%. These securities have a five-year call provision. The Company paid $361,000 and $178,000 in interest expense related to this
issuance in 2023 and 2022, respectively. 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.
The composition of subordinated debt at December 31 is as follows:
(In thousands)
Subordinated debt
Junior subordinated debenture
Subordinated debt
Deferred Financing Charges
Total subordinated debt
2023
5,155
25,000
(241)
29,914
$
$
$
$
$
$
2022
5,155
25,000
(422)
29,733
The principal balances, interest rates and maturities of the subordinated debt at December 31, 2023 are as follows:
Term
(Dollars in thousands)
Subordinated debt:
Due within 8 years
Due within 15 years
Total subordinated debt
Principal
Rates
$
$
25,000
5,155 3-Month LIBOR + 1.65%
30,155
5.5%
Scheduled repayments of the subordinated debt at December 31, 2023 are as follows:
(In thousands)
2024
2025
2026
2027
2028
Thereafter
Total
$
$
-
25,000
-
-
-
5,155
30,155
- 96 -
NOTE 14: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering substantially all employees. The plan provides defined
benefits based on years of service and final average salary. On May 14, 2012, the Company informed its employees of its 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. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012
is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date. Participants as of
June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In addition, the
Company provides certain health and life insurance benefits for a limited number of eligible retired employees. The healthcare plan is
contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory. Employees with less than 14
years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.
The following tables set forth the changes in the plans’ benefit obligations, fair value of plan assets and the plans’ funded status as of
December 31:
(In thousands)
Change in benefit obligations:
Benefit obligations at beginning of year
Service cost
Interest cost
Plan participants' contribution
Actuarial (gain) loss
Benefits paid
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Plan participants' contribution
Employer contributions
Fair value of plan assets at end of year
Funded (unfunded) status - asset (liability)
Pension Benefits
Postretirement Benefits
2023
9,442
-
562
-
214
(632)
9,586
16,311
1,429
(632)
-
-
17,108
7,522
$
$
$
$
2022
2023
2022
12,720
-
465
-
(3,368)
(375)
9,442
20,531
(3,845)
(375)
-
-
16,311
6,869
$
$
$
136
-
8
5
(7)
(22)
120
-
-
16
6
(22)
-
(120) $
325
-
11
9
(164)
(45)
136
-
-
(45)
9
36
-
(136)
The funded status of the pension was recorded within other assets on the statement of condition. The unfunded status of the
postretirement plan is recorded within other liabilities on the statement of condition.
Amounts recognized in accumulated other comprehensive loss as of December 31 are as follows:
(In thousands)
Net loss (gain)
Tax Effect
Pension Benefits
Postretirement Benefits
2023
2,909
760
2,149
$
$
2022
3,389
886
2,503
$
$
$
$
2023
(103) $
(27)
(76) $
2022
(103)
(27)
(76)
Gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of assets are amortized over the average
remaining service period of active participants.
The Company utilized the actual projected cash flows of the participants in both plans for the years ended December 31, 2023 and
December 31, 2022. The following points address the approach taken.
1.
2.
3.
An analysis of the defined benefit pension plan’s expected future cash flows and high-quality fixed income investments
currently available and expected to be available during the period to maturity of the pension benefits yielded a single
discount rate of 5.94% at December 31, 2023.
An analysis of the postretirement health plan’s expected future cash flows and high-quality fixed-income investments
currently available and expected to be available during the period to maturity of the retiree medical benefits yielded a single
discount rate of 5.94% at December 31, 2023.
Each discount rate was developed by matching the expected future cash flows of the Bank to high quality bonds. Every
bond considered has earned ratings of at least AA by Fitch Group, AA by Standard & Poor’s, or Aa2 by Moody’s Investor
Services.
- 97 -
The accumulated benefit obligation for the defined benefit pension plan was $9.6 million and $9.4 million at December 31, 2023 and
2022, respectively. The postretirement plan had an accumulated benefit obligation of $120,000 and $136,000 at December 31, 2023
and 2022, respectively.
The significant assumptions used in determining the benefit obligations as of December 31, are as follows:
Weighted average discount rate
Rate of increase in future compensation levels
Pension Benefits
Postretirement Benefits
2023
5.94%
-
2022
6.09%
-
2023
5.94%
-
2022
6.09%
-
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plan. The
annual rates of increase in the per capita cost of covered medical and prescription drug benefits for future years were assumed to be
4.60% for 2023, gradually decreasing to 4.30% in 2028 and remain at that level thereafter.
The composition of the net periodic benefit plan (benefit) cost for the years ended December 31 is as follows:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of net losses
Amortization of unrecognized past service liability
Net periodic benefit plan (benefit) cost
Pension Benefits
Postretirement Benefits
$
2023
-
562
(965)
-
229
-
(174) $
$
2022
-
465
(1,068)
-
-
-
(603) $
2023
-
8
-
-
(5)
(2)
1
$
$
2022
-
11
-
-
7
(5)
13
$
$
The significant assumptions used in determining the net periodic benefit plan cost for years ended December 31, were as follows:
Weighted average discount rate
Expected long term rate of return on plan assets
Rate of increase in future compensation levels
Pension Benefits
Postretirement Benefits
2023
6.09%
6.00%
-
2022
6.09%
6.00%
-
2023
5.94%
-
-
2022
6.09%
-
-
The long term rate of return on assets assumption was set based on historical returns earned by equities and fixed income securities,
adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income
securities were assumed to earn real rates of return in the ranges of 6.5% to 8.5% and 2.0% to 4.0%, respectively. The long-term
inflation rate was estimated to be 2.5%. When these overall return expectations are applied to the plan’s target allocation, the expected
rate of return was determined to be in the range of 5.0% to 7.0%. Management chose to use a 6.00% expected long-term rate of return
in 2023 and a 6.0% expected long-term rate of return in 2024 reflecting current economic conditions and expected rates of return. Based
on the $17.1 million fair value of plan assets at December 31, 2023, each 50 basis point decrease in the expected long-term rate of return
would reduce after tax net income at a 2024 expected state and federal combined statutory tax rate of 26.1% by approximately $63,000.
The estimated net actuarial income that will be amortized from accumulated other comprehensive income into net periodic benefit plan
income during 2024 is $299,000. The estimated amortization of the unrecognized transition obligation and actuarial income for the
postretirement health plan in 2024 is $120,000. The expected net periodic benefit plan benefit for 2024 is estimated to be $299,000 for
both retirement plans in aggregate.
Plan assets are invested in three diversified investment portfolios of the Pentegra Retirement Trust (the “Trust”, formerly known as RSI
Retirement Trust), a private placement investment fund. The Trust has been given discretion by the Plan Sponsor to determine the
appropriate strategic asset allocation versus plan liabilities, as governed by the Trust’s Investment Policy Statement. The Plan is
structured to utilize a Liability Driven Investment (LDI) approach which seeks to fund the current and future liabilities of the Plan and
aims to mitigate funded status and contribution volatility.
The Plan’s asset allocation targets to hold 48% of assets in equity securities via investment in the Long-Term Growth – Equity Portfolio
(‘LTGE’), 16% in intermediate-term investment grade bonds via investment in the Long-Term Growth – Fixed-Income Portfolio
(‘LTGFI’), 35% in long duration bonds via the Liability Focused Fixed-Income Portfolio (‘LFFI’), and 1% in a cash equivalents
portfolio (for liquidity).
LTGE is a diversified portfolio that invests in a number of actively and passively managed equity-focused mutual funds and collective
investment trusts. The Portfolio holds a diversified mix of equity funds in order to gain exposure to the U.S. and non-U.S. equity
markets. LTGFI is a diversified portfolio that invests in a number of fixed-income mutual funds and collective investment trusts. The
Portfolio invests primarily in intermediate-term bond funds with a focus on Core Plus fixed-income investment approaches. LFFI is a
- 98 -
diversified high quality fixed-income portfolio that currently invests in passively managed collective investment trusts that hold long
duration bonds.
The investment objectives, investment strategies and risks of each of the daily valued and unitized Portfolios and the funds held within
the Portfolios are detailed in the Private Placement Memorandum and the Trust’s Investment Policy Statement.
The overall long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations and
to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow. The LTGE and LTGFI
Portfolios are designed to provide long-term growth of equity and fixed-income assets with the objective of achieving an investment
return in excess of the cost of funding the active life, deferred vested, and all 30-year term and longer obligations of retired lives in the
Trust. The LFFI Portfolio is designed to fund the Trust’s estimated retired lives class of liabilities for 30 years. Risk/volatility is further
managed by the distinct investment objectives of each of the Trust’s Portfolios.
Pension plan assets measured at fair value are summarized below:
(In thousands)
Asset Category:
Mutual Funds - Equity
Large-cap (a)
Mid-cap / Small-cap (a)
International Equity (a)
Equity -Total
Fixed Income Funds
Government Securities (b) (c)
Investment Grade Bonds (d) (e)
Fixed Income-Total
Cash Equivalents (f) (g)
Total
At December 31, 2023
Level 1
Level 2
Level 3
$
$
2,885
723
1,442
5,050
7,990
329
8,319
1,634
15,003
$
$
-
-
-
-
593
1,498
2,091
14
2,105
$
$
-
-
-
-
-
-
-
-
-
$
$
Total Fair
Value
2,885
723
1,442
5,050
8,583
1,827
10,410
1,648
17,108
*Includes cash equivalents investments in equity and fixed income strategies
a)
b)
c)
d)
e)
f)
g)
This category includes exchange-traded funds representing equity markets.
This category includes nominal U. S Treasuries.
This category includes U.S. Agencies and U.S. TIPS.
This category includes exchange traded funds with fixed income as the underlying exposure.
This category includes investment grade corporate bonds and municipal bonds.
This category includes a fully collateralized money market fund.
This category includes an ex-dividend that will be paid in cash and accrued interest for the money market fund.
- 99 -
(In thousands)
Asset Category:
Mutual Funds - Equity
Large-cap value (a)
Large-cap Growth (b)
Large-cap Core (c)
Mid-cap Value (d)
Mid-cap Growth (e)
Mid-cap Core (f)
Small-cap Value (g)
Small-cap Growth (h)
Small-cap Core (i)
International Equity (j)
Equity -Total
Fixed Income Funds
Fixed Income - US Core (k)
Intermediate Duration (l)
Long Duration (m)
Fixed Income-Total
Cash Equivalents-Money market*
Total
At December 31, 2022
Level 1
Level 2
Level 3
Total Fair
Value
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
54
54
$
$
1,659
1,239
993
384
309
340
179
413
268
2,199
7,983
2,007
3,347
2,568
7,922
352
16,257
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
1,659
1,239
993
384
309
340
179
413
268
2,199
7,983
2,007
3,347
2,568
7,922
406
16,311
*Includes cash equivalents investments in equity and fixed income strategies
a) This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70 stocks.
b) This category seeks long-term capital appreciation by investing primarily in large growth companies based in the U.S.
c) This fund tracks the performance of the S&P 500 index by purchasing the securities represented in the index in approximately
the same weightings as the index.
d) This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Value
Index.
e) This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Growth
Index.
f) This category seeks to track the performance of the S&P Midcap 400 Index.
g) This category consists of a selection of investments based on the Russell 2000 Value Index.
h) This category consists of a mutual fund invested in small capitalization growth companies along with a fund invested in a
selection of investments based on the Russell 2000 Growth Index.
i) This category consists of a mutual fund investing in readily marketable securities of U.S. companies with market
capitalizations within the smallest 10% of the market universe, or smaller than the 1000th largest US company.
j) This category invests primarily in medium to large non-US companies in developed and emerging markets. Under normal
circumstances, at least 80% of total assets will be invested in equity securities, including common stocks, preferred stocks,
and convertible securities.
k) This category currently includes equal investments in three mutual funds, two of which usually hold at least 80% of fund
assets in investment grade fixed income securities, seeking to outperform the Barclays US Aggregate Bond Index while
maintaining a similar duration to that index. The third fund targets investments of 50% or more in mortgage-backed securities
guaranteed by the US government and its agencies.
l) This category consists mostly of a fund which seeks to track the Barclays Capital US Corporate A or Better 5-20 Year, Bullets
only Index, along with a diversified mutual fund holding fixed income securities rated A or better.
m) This category consists of a fund that seeks to approximate the performance of the Barclays Capital US Corporate A or Better,
20+ Year Bullets Only Index over the long term.
- 100 -
For the fiscal year ending December 31, 2024, the Company expects to contribute approximately $13,000 to the postretirement plan.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from both retirement
plans:
(In thousands)
Years ending December 31:
2024
2025
2026
2027
2028
Thereafter
Pension
Benefits
Postretirement
Benefits
Total
$
$
462
482
603
625
685
3,651
$
13
13
12
12
12
51
475
495
615
637
697
3,702
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $449,000 and $433,000 for
2023 and 2022, respectively. In addition, the Company made $349,000 and $337,000 of safe harbor contributions to the plan in 2023
and 2022, respectively.
The Company maintains optional deferred compensation plans for its directors and certain executive officers, whereby fees and income
normally received are deferred and paid by the Company based upon a payment schedule commencing between the ages of 65 and 70
and continuing monthly for 10 years. At December 31, 2023 and 2022, other liabilities include approximately $3.3 million and $3.2
million, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2023 and
2022 amounted to approximately $341,000 and $355,000, respectively.
To assist in the funding of the Company’s benefits under the supplemental executive retirement plan and deferred compensation plans,
the Company is the owner of single premium life insurance policies on selected participants. At December 31, 2023 and 2022, the cash
surrender values of these policies were $24.6 million and $24.0 million, respectively.
The Bank adopted a Defined Contribution Supplemental Executive Retirement Plan (the “SERP”), effective January 1, 2014. The SERP
benefits certain key senior executives of the Bank who are selected by the Board to participate, including our named executive officers.
The SERP is intended to provide a benefit from the Bank upon retirement, death, disability or voluntary or involuntary termination of
service (other than “for cause”), subject to the requirements of Section 409A of the Internal Revenue Code. Accordingly, the SERP
obligates the Bank to make a contribution to each executive’s account on the last business day of each calendar year. In addition, the
Bank, may, but is not required to, make additional discretionary contributions to the executive’s accounts from time to time. All
executives currently participating in the plan, including the named executive officers, are fully vested in the Bank’s contribution to the
plan. In the event the executive is terminated involuntarily or resigns for good reason within 24 months following a change in control,
the Bank is required to make additional annual contributions the lesser of: (1) three years or (2) the number of years remaining until the
executive’s benefit age, subject to potential reduction to avoid an excess parachute payment under Code Section 280G. In the event of
the executive’s death, disability or termination within 24 months after a change in control, the executive’s account will be paid in a lump
sum to the executive or his beneficiary, as applicable. In the event the executive is entitled to a benefit from the SERP due to retirement
or other termination of employment, the benefit will be paid either in a lump sum or in 10 annual installments as detailed in his or her
participant agreement. At December 31, 2023 and 2022, other liabilities included $694,000 and $635,000, respectively, accrued under
this plan.
- 101 -
NOTE 15: STOCK BASED COMPENSATION PLANS
In May 2016, the Board of Directors of the Company approved the grant of stock option awards to its directors, executive officers,
senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of Shareholders on May 4,
2016 when 263,605 shares were authorized for award.
Activity in the stock option plans is as follows:
(Shares in thousands)
Outstanding at January 1, 2022
Granted
Newly vested
Exercised
Forfeited
Expired
Outstanding at December 31, 2022
Granted
Newly vested
Exercised
Forfeited
Expired
Outstanding at December 31, 2023
Options Outstanding
Shares Exercisable
Number of
Shares
264
-
-
(37)
(4)
-
223
-
-
(58)
-
-
165
Weighted
Average
Exercise Price
10.98
-
-
-
11.35
-
10.94
-
-
-
-
-
11.03
$
$
$
$
Number of
Shares
210
-
27
(37)
-
-
200
-
23
(58)
-
-
165
Weighted
Average
Exercise Price
11.05
-
10.73
-
-
-
10.98
-
-
-
-
-
11.03
$
$
$
$
The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value
of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option
holders exercised their options prior to the expiration date. The intrinsic value can change based on fluctuations in the market value of
the Company’s stock. The intrinsic value of the stock options was $626,000 and $1.8 million at December 31, 2023 and December 31,
2022, respectively.
At December 31, 2023 and 2022, the average remaining contractual life of outstanding options and shares exercisable was 3.5 years and
3.5 years, respectively.
Restricted Stock Unit Grants
In May 2016, the Board of Directors of the Company approved the grant of restricted stock units to its directors, executive officers,
senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of Shareholders on May 4,
2016 when 105,442 shares were authorized for award. A total of 31,635 restricted stock units were granted to the nine directors of the
Company and 8,436 restricted stock units, ("RSUs") in total, were granted to two officers. The units vest ratably over five years (20%
per year for each year of the participant’s service with the Company). In addition, on that date a total of 46,570 restricted stock units
were granted to the Chief Executive Officer, two executive officers and three senior officers. The units vested ratably over seven years
(approximately 14.28% per year for each year of the participant’s service with the Company) with the exception of one senior officer
whose units vested upon retirement on August 1, 2017.
In September 2020, the Board of Directors of the Company approved the grant of 1,000 restricted stock units to one officer. The units
vest ratably over three years (approximately 33.3% per year for each year of the participant’s service with the Company).
In October 2020, the Board of Directors of the Company approved the grant of 17,801 restricted stock units to three senior officers and
four officers. The units vest ratably over three years (approximately 33.3% per year for each year of the participant’s service with the
Company).
The compensation expense of the stock option awards and restricted stock units is based on the fair value of the instruments on the date
of grant. The Company recorded compensation expense in the amount of $92,000 and $157,000 in 2023 and 2022, respectively, and is
expected to record $-0- in expenses related to the RSUs in 2024 and 2025.
NOTE 16: EMPLOYEE STOCK OWNERSHIP PLAN
The Bank established the Pathfinder Bank Employee Stock Ownership Plan (“the Plan”, or "the ESOP") to purchase stock of the
Company for the benefit of its employees. In July 2011, the Plan received a $1.1 million loan from Community Bank, N.A., guaranteed
by the Company, to fund the Plan’s purchase of 125,000 shares of the Company’s treasury stock. The loan was being repaid in equal
quarterly installments of principal plus interest over ten years beginning October 1, 2011. Interest accrued at the Wall Street Journal
- 102 -
Prime Rate plus 1.00%, and was secured by the unallocated shares of the ESOP stock. This loan was refinanced in connection with the
Conversion and Offering that occurred on October 16, 2014.
In connection with the Conversion and Offering, the ESOP purchased 105,442 shares issued in the offering by obtaining a loan from
the Company which was used to purchase both the additional shares and refinance the remaining outstanding balance on the loan from
Community Bank N.A. There were 138,982.5 shares associated with the refinanced loan resulting in a total of 244,424.5 shares
associated with the new loan provided by the Company.
The ESOP loan from the Company has a ten year term and is being repaid in equal payments of principal and interest under a fixed rate
of interest equal to 3.25% which was the prime rate of interest on the date of the closing of the offering. This ESOP loan from the
Company, also referred to as an internally leveraged ESOP, does not appear as a liability on the Company’s Consolidated Statement of
Condition as of December 31, 2023 in accordance with ASC 718-40-25-9d.
In accordance with the payment of principal on the loan, a proportionate number of shares are allocated to the employees over the ten
year time horizon of the loan. Participants’ vesting interest in the shares of Company stock is at the rate of 20% per year. Compensation
expense is recorded based on the number of shares released to the participants times the average market value of the Company’s stock
over that same period. Dividends on unallocated shares, recorded as compensation expense on the income statement, are made available
to the participants' account. The Company recorded $379,000 and $489,000 in compensation expense in 2023 and 2022, respectively,
including $10,000 and $19,000 for dividends on unallocated shares in these same time periods. At December 31, 2023, there were
18,332 unearned ESOP shares with a fair value of $257,000.
NOTE 17: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
(In thousands)
Current
Deferred
The provision for income taxes includes the following
(In thousands)
Federal Income Tax
State Tax
$
$
$
$
2023
2,729
(367)
2,362
2023
2,295
67
2,362
$
$
$
$
2022
2,517
139
2,656
2022
2,342
314
2,656
- 103 -
The components of the net deferred tax asset (liability), included in other assets as of December 31, are as follows:
(In thousands)
Assets:
Deferred compensation
Allowance for credit losses
Postretirement benefits
Subordinated debt interest
Loan origination fees
Investment securities
Stock-based compensation
Lease Liabilities
Other
Total
Liabilities:
Prepaid pension
Cash flow hedges
Depreciation
Accretion
Intangible assets
Mortgage servicing rights
Right-of-use assets
Prepaid expenses and transaction fees
Total
Net deferred tax asset
2023
1,102
4,423
31
58
150
2,676
37
447
466
9,390
(1,966)
(17)
(1,675)
(214)
(1,004)
(86)
(398)
(101)
(5,461)
3,929
$
$
$
$
2022
1,051
4,004
36
37
261
3,583
71
632
322
9,997
(1,795)
(135)
(2,097)
(494)
(1,004)
(96)
(549)
(112)
(6,282)
3,715
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income
within the statutory carry back period. A valuation allowance is provided when it is more likely than not that some portion, or all of the
deferred tax assets, will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal
of the deferred tax liabilities, the level of historical taxable income and the projected future level of taxable income over the periods in
which the temporary differences comprising the deferred tax assets will be deductible.
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 their future tax consequences. This is attributable to the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis 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.
In 2023, the Company’s effective tax rate was 20.8%, as compared to 17.5% in 2022. A reconciliation of the federal statutory income
tax rate to the effective income tax rate for the years ended December 31, is as follows:
Federal statutory income tax rate
State tax, net of federal benefit
Tax-exempt interest income
Increase in value of bank owned life insurance less premiums paid
Change in valuation allowance
Federal credits
Other
Effective income tax rate - Pathfinder Bancorp, Inc.
Noncontrolling interest
Effective income tax rate
2023
21.0 %
0.4
(1.2)
(1.1)
-
(0.6)
1.5
20.0 %
0.8
20.8 %
2022
21.0 %
1.6
(1.3)
(0.8)
(0.4)
(0.6)
(2.5)
17.0 %
0.5
17.5 %
- 104 -
NOTE 18: COMMITMENTS AND CONTINGENCIES
The Company is 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. Such commitments
involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of condition. The
contractual amount of those commitments to extend credit reflects the extent of involvement the Company has in this particular class of
financial instrument. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit is represented by the contractual amount of the instrument. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments.
At December 31, 2023 and 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:
(In thousands)
Commitments to grant loans
Unfunded commitments under lines of credit
Unfunded commitments related to construction loans in progress
Standby letters of credit
$
Contract Amount
$
2023
41,878
157,150
4,342
1,657
2022
50,605
155,453
7,142
2,845
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some
of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter
party. Collateral held varies but may include residential real estate and income-producing commercial properties. Loan commitments
outstanding at December 31, 2023 with variable interest rates and fixed interest rates were approximately $151.0 million and $42.3
million, respectively. These outstanding loan commitments carry current market rates.
Unfunded commitments under standby letters of credit, revolving credit lines and overdraft protection agreements are commitments for
possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.
Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third
party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of
credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral
and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of
collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the
corresponding guarantees.
NOTE 19: DIVIDENDS AND RESTRICTIONS
The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company.
In addition to state law requirements and the capital requirements discussed in Note 20, regulatory matters, regulations and policies limit
the circumstances under which the Bank may pay dividends. The amount of retained earnings legally available under these regulations
approximated $41.4 million as of December 31, 2023. Dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. The Bank made no dividend
payments to the Company in the years ended December 31, 2023 or December 31, 2022.
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 December 31, 2023, 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 Action (“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. The capital conservation buffer requirement is now fully
- 105 -
implemented at 2.5% of risk-weighted assets. At December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios,
including the capital buffer requirements.
NOTE 20: REGULATORY MATTERS
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 (set forth
in the table below) 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 FDIC categorized the Bank as “well-capitalized”, under the
regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, the Bank must maintain total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. There are no conditions or events since that notification that
management believes have changed the Bank’s category.
As noted above, 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 if the buffer is not met. 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 December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
The Bank’s actual capital amounts and ratios as of December 31, 2023 and 2022 are presented in the following table.
(Dollars in thousands)
As of December 31, 2023:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Common Equity (to Risk-Weighted Assets)
Tier 1 Capital (to Assets)
As of December 31, 2022:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Common Equity (to Risk-Weighted Assets)
Tier 1 Capital (to Assets)
Minimum For
Capital Adequacy
Purposes
Amount
Ratio
Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions
Amount
Ratio
Minimum for
Capital Adequacy
With Buffer
Amount
Ratio
Actual
Amount
Ratio
$ 155,922
$ 142,927
$ 142,927
$ 142,927
$ 145,760
$ 133,683
$ 133,683
$ 133,683
15.05% $ 82,860
13.80% $ 62,145
13.80% $ 46,609
10.11% $ 56,548
15.14% $ 77,029
13.88% $ 57,772
13.88% $ 43,329
9.67% $ 55,314
8.00% $ 103,575
6.00% $ 82,860
4.50% $ 67,324
4.00% $ 70,685
8.00% $ 96,286
6.00% $ 77,029
4.50% $ 62,586
4.00% $ 69,142
10.00% $ 108,753
8.00% $ 88,038
6.50% $ 72,502
5.00% $ 70,685
10.00% $ 101,100
8.00% $ 81,843
6.50% $ 67,400
5.00% $ 69,142
10.50%
8.50%
7.00%
5.00%
10.50%
8.50%
7.00%
5.00%
The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary bank that supports growth
and expansion activities while at the same time 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, i.e. a leverage capital ratio
exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a total risk-based capital ratio exceeding 10%.
The Federal Reserve Board regulations previously required banks to maintain non-interest-earning reserves on deposit at the Federal
Reserve Bank (“FRB”), 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 the COVID-19 pandemic, 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.
NOTE 21: INTEREST RATE DERIVATIVES
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 and escrow provisions protecting the at-risk party. Based on
- 106 -
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.
As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively
hedged, this appreciation or depreciation will generally be offset by changes in the fair value of derivative instruments that are linked to
the hedged assets and liabilities. This strategy is referred to as a fair value hedge. In a fair value hedge, the fair value of the derivative
(the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s Consolidated
Statements of Condition with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair
value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to
the interest income or interest expense of the respective hedged item in the current period.
Cash flows related to floating rate assets and liabilities will fluctuate with changes in underlying rate indices. When effectively hedged,
the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of
the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the effective
portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified
into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on cash flow
hedges is recorded as an adjustment to the interest income or interest expense of the respective hedged item in the current period.
Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap (or
floor) contracts. The Company uses interest rate swaps, cap or floor contracts as part of its interest rate risk management strategies.
Interest rate swaps involve the receipt of variable (or fixed) amounts from a counterparty in exchange for the Company making fixed
(or variable) payments over the life of the agreements without the exchange of the underlying notional amount. An interest rate cap is
a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest
rate exceeds the contractually agreed upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in
interest rates above the strike price. Similarly, an interest rate floor is a derivative contract in which the buyer receives payments at the
end of each period in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit
from any rise in interest rates above the strike price.
The Company records various hedges in the Consolidated Statement of Condition at fair value. The Company’s accounting treatment
for these derivative instruments is based on the instruments hedge designation, either fair value or cash flow, determined at the inception
of each derivative instrument's contractual term. The following tables show the Company’s outstanding fair value hedges at December
31, 2023 and December 31, 2022:
Cumulative Amount
of Fair Value
Hedging Adjustment
Subtracted from
Carrying Amount of
the Hedged Assets at
December 31, 2023
Cumulative Amount
of Fair Value
Hedging Adjustment
Subtracted from
Carrying Amount of
the Hedged Assets at
December 31, 2022
Hedge-Adjusted
Carrying Amount of
the Hedged Assets at
December 31, 2022
Hedge-Adjusted
Carrying Amount of
the Hedged Assets at
December 31, 2023
(In thousands)
Line item on the balance sheet in which the hedged item is included:
Available-for-sale securities (1)
$
Loans receivable (2)
$
95,887
156,836
$
$
3,113
620
$
$
68,741
37,196
$
$
8,240
1,477
(1)
(2)
The $95.9 million carrying amount of hedged assets represents the hedge-adjusted amortized cost basis of specifically-identified high grade
municipal and GSE-backed securities designated as the underlying assets for the hedging relationships. The notional amount of the designated
hedges were $89.1 million and $66.8 million at December 31, 2023 and December 31, 2022, respectively. The fair value of the derivatives
(an unrealized gain, receivable from derivative counterparties), recorded in other assets, resulted in a net asset position of $3.1 million and
$8.2 million at December 31, 2023 and December 31, 2022, respectively. The Company’s participation in these fair value hedging
transactions increased interest income by $2.1 million and $565,000, in the years ended December 31, 2023 and 2022, respectively.
The $156.8 million carrying amount of hedged assets represents the hedge-adjusted amortized cost of a designated pool of residential
mortgages and the aggregate hedge-adjusted amortized cost of four specified purchased consumer loan pools. These pools of loans were
designated as the underlying assets for the hedging relationships in which the hedged underlying asset's notional amounts were the amortized
cost projected to be remaining at the end of the contractual term of the hedging instruments. The amount of the designated hedged items were
$141.0 million and $19.2 million at December 31, 2023 and December 31, 2022, respectively. At December 31, 2023, the fair value of the
derivatives recorded in other assets (an unrealized gain, receivable from derivative counterparties) resulted in a net asset position of $603,000,
recorded by the Company in other assets. The Company’s participation in these fair value hedging transactions increased interest income by
$2.3 million and $188,000, in the years ended December 31, 2023 and 2022, respectively. Details of the two hedging strategies are presented
below:
- 107 -
a. On April 7, 2023 the Bank entered into an amortizing swap transaction with an initial notional amount of $100.0 million whereby
the Bank will receive 3-month SOFR monthly based on the notional amount of the swap contract at the beginning of each month
until the swap transaction expires in 2035. The notional amount declines monthly according to a predetermined amortization
schedule and was $91.0 million at December 31, 2023. The Bank will pay a fixed rate of 3.208% to the contract's counterparty
throughout the life of the contract based on each month's beginning notional balance.
b. On December 7, 2023, the Bank entered into five fixed-pay interest rate swap contracts with a total notional amount of $50.0
million, whereby the Bank will receive 3-month SOFR monthly until the respective maturity dates of the contracts. The contracts
expire in annual increments on December 1 of 2025 ($5.0 million, fixed rate of 4.463%), 2026 ($5.0 million, fixed rate of 4.136%),
2027 ($10.0 million, fixed rate of 3.973%), 2028 ($15.0 million, fixed rate of 3.887%), and 2029 ($15.0 million, fixed rate of
3.845%). The fair value of these swap contracts, included as an addition to the carrying value of certain consumer loans was a
negative $721,000 (an amount payable to the swap counterparty) at December 31, 2023. This payable amount is included in the
loan related totals above.
In February 2020, the Company entered into an interest rate cap contract, designated as a cash flow hedging transaction at its inception,
in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rises in short-term interest rates above
the contractual level. The Company paid $228,000 in a one-time premium for the cap contract and has no further contractual obligations
to the contractual counterparty over the remaining life of the contract. The premium was expected to be amortized ratably over the
contractual term of the cap contract through its maturity date in February 2023. In September of 2021, the Company determined that
the specific underlying funding stream, for which the interest rate cap was originally intended to hedge, was no longer going to be a
continuing component of the Bank’s overall funding strategies. Therefore, although the cap contract continued to remain in force, it
was no longer considered to be a hedge against any specific funding liability and the Company re-designated the cap as a free-standing
derivative and marked the fair value of the cap to market during each reporting period through earnings. The re-designation of the
interest rate cap contract to a free-standing derivative resulted in the recognition of a $157,000 increase in interest expense in 2021, prior
to its re-designation. The cap contract was terminated in April 2022 resulting in a gain, recorded as other noninterest income, of $26,000.
In March 2020, the Bank entered into an interest rate swap contract with an unaffiliated counterparty that expired in May 2023. The
contract was designated as a cash flow hedge at its inception. The notional amount of the swap was $40.0 million and the Bank paid a
fixed rate of 1.39% to the counterparty and received a variable payment equivalent to the published three-month LIBOR index rate to
be paid by the swap counterparty through the expiration date of the contract. The hedged instrument was a planned series of 90-day
revolving borrowings totaling $40.0 million that were obtained in the brokered certificate of deposit market.
On three occasions in May 2023, the Bank entered into fixed-pay interest rate swap contracts with a total notional amount of $40.0
million, whereby the Bank will receive 1-month SOFR monthly until the respective maturity dates of the contracts. The contracts were
designated as cash flow hedging transactions at their inception. The contracts expire in annual increments on May 1 of 2026 ($20.0
million, fixed rate of 3.663%), 2026 ($10.0 million, fixed rate of 4.287%), and 2027 ($10.0 million, fixed rate of 3.845%). The fair
value of these swap contracts, included as an addition to other comprehensive income was $45,000 (an amount that was receivable from
the swap's counterparty) at December 31, 2023. This receivable is included in the table below.
The following table shows the pre-tax position of the Company’s derivatives designated as cash flow hedges in OCI at December 31:
(In thousands)
Fair market value adjustment gain/(loss) - interest rate swap
Total gain (loss) in comprehensive income
(In thousands)
Balance as of January 1:
Amount of unrealized gains recognized in other
comprehensive income
Gain (loss) in other comprehensive income:
2023
45
45
$
$
2022
519
519
For the years ended
December 31, 2023
519
(474)
45
$
$
December 31, 2022
(387)
906
519
$
$
$
$
The amounts of hedge ineffectiveness, recognized during the year ended December 31, 2023 for cash flow hedges were not material to
the Company’s consolidated results of operations. A portion of, or the entire amount included in accumulated other comprehensive loss
would be reclassified into current earnings should a portion of, or the entire hedge, no longer be considered effective. Management
believes that the hedges will remain fully effective during the remaining term of the respective hedging contracts. The changes in the
fair values of the interest rate hedging agreements primarily result from the effects of changing market index interest rates and the
reduction of the time each quarter between the measurement date and the contractual maturity date of the hedging instrument.
The Company manages its potential credit exposure on interest rate swap transactions by entering into bilateral credit support agreements
with each contractual counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold
- 108 -
amounts. At December 31, 2023 the Company was in a net receivable position with its swap counterparty (a large regional bank) and
was therefore not required to place collateral funds in escrow.
NOTE 22: FAIR VALUE MEASUREMENTS
Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following
fair value hierarchy:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the
measurement date.
Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in
active markets.
Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of
unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.
The Company used the following methods and significant assumptions to estimate fair value:
Investment securities: The fair values of securities available-for-sale are obtained from an independent third party and are based on
quoted prices on nationally recognized securities exchanges where available (Level 1). If quoted prices are not available, fair values are
measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without
relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party
pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices
or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value
ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order
to determine fair value at the reporting date.
The Bank holds two corporate investment securities with an aggregate amortized historical cost of $4.1 million and an aggregate fair
market value of $4.3 million as of December 31, 2023. The securities had a valuation that is determined using published net asset values
(NAV) derived by an analysis of the security’s underlying assets. The securities are comprised primarily of broadly-diversified real
estate loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable through tender offers
made by their respective issuers, the liquidation value of the securities may be below their stated NAVs and also subject to restrictions
as to the amount of securities that can be redeemed at any single scheduled redemption. The Company anticipates that these securities
will be redeemed by their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies
employed by the management of these investments.
The Company also holds two limited partnership investments managed by an unrelated third party with an aggregate fair market value
of $3.2 million. The investments are funds comprised of marketable equity securities, primarily focused on community banks and
financial technology companies. These investments are recorded at fair value at the end of each reporting period using Level 1 valuation
techniques. Unrealized changes in the fair value of these investments are recorded as components of periodic net income in the period
in which the changes occur.
Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are
calculated based on a discounted cash flow model. All future floating rate cash flows are projected and both floating rate and fixed rate
cash flows are discounted to the valuation date. The benchmark interest rate curve utilized for projecting cash flows and applying
appropriate discount rates is built by obtaining publicly available third party market quotes for various swap maturity terms.
Individually evaluated loans: Specifically-identified loans are those loans in which the Company has measured impairment based on the
fair value of the loan’s collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon
market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted
cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach,
the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed,
to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from
the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised
values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for
- 109 -
similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Specifically-identified loans are subject to
nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for credit losses is
allocated to specifically-identified loans if the value of such loans is deemed to be less than the unpaid balance.
The following tables summarize assets measured at fair value on a recurring basis as of December 31, segregated by the level of valuation
inputs within the hierarchy utilized to measure fair value:
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Equity investment securities:
Common stock - financial services industry
Other Securities:
Corporate issuances measured at NAV
Total available-for-sale securities
Marketable equity securities measured at NAV
Interest rate swap derivative fair value hedges (unrealized gain
carried as receivable from derivative counterparties)
Interest rate swap derivative cash flow hedges (unrealized gain
carried as receivable from derivative counterparties)
December 31, 2023
Level 1
Level 2
Level 3
$
$
$
$
-
-
-
-
-
-
-
-
206
-
206
-
-
$
$
$
$
$
80,083
32,924
6,576
19,892
24,418
12,179
78,095
254,167
-
-
254,167
-
$
$
$
5,160
$
45
$
Total Fair
Value
80,083
32,924
6,576
19,892
24,418
12,179
78,095
254,167
206
4,343
258,716
3,206
5,160
45
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
- 110 -
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Equity investment securities:
Common stock - financial services industry
Other Securities:
Corporate issuances measured at NAV
Total available-for-sale securities
Marketable equity securities measured at NAV
Interest rate swap derivative fair value hedges (unrealized gain
carried as receivable from derivative counterparties)
Interest rate swap derivative cash flow hedges (unrealized gain
carried as receivable from derivative counterparties)
December 31, 2022
Level 1
Level 2
Level 3
$
$
$
$
$
-
-
-
-
-
-
-
-
206
-
206
-
-
$
$
$
$
$
$
29,364
45,385
7,066
15,400
16,400
11,708
61,434
186,757
-
-
186,757
-
$
$
$
$
9,717
$
519
$
Total Fair
Value
29,364
45,385
7,066
15,400
16,400
11,708
61,434
186,757
206
4,763
191,726
1,862
9,717
519
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
The following tables summarize assets measured at fair value on a nonrecurring basis as of December 31, segregated by the level of
valuation inputs within the hierarchy utilized to measure fair value:
(In thousands)
Individually evaluated loans
Foreclosed real estate
(In thousands)
Impaired loans
Foreclosed real estate
$
$
Level 1
-
-
Level 1
-
-
$
$
December 31, 2023
Level 2
-
-
$
Level 3
9,722
151
December 31, 2022
Level 2
-
-
$
Level 3
2,328
221
$
$
Total Fair
Value
9,722
151
Total Fair
Value
2,328
221
- 111 -
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for
which Level 3 inputs were used to determine fair value.
Valuation
Techniques
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
Range
(Weighted Avg.)
At December 31, 2023
Individually evaluated
loans
Foreclosed real estate
Appraisal of collateral
Appraisal of collateral
Discounted Cash Flow
Costs to Sell
10% - 75% (21%)
21% - 24% (22%)
Valuation
Techniques
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
At December 31, 2022
Impaired loans
Foreclosed real estate
Appraisal of collateral
(Sales Approach)
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Costs to Sell
Appraisal Adjustments
Costs to Sell
Range
(Weighted Avg.)
5% - 35% (17%)
7% - 14% (12%)
15% - 15% (15%)
6% - 9% (8%)
Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of
condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due
diligence procedures over third-party pricing service providers in order to support their use in the valuation process.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value
at the reporting date.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent
weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not
necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair
value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these
financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent
to the respective reporting dates may be different than the amounts reported at each period-end.
FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that
represents the Company’s exit price or the price at which these instruments would be sold or transferred.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation
is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree
of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be
meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and
assumptions:
Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.
Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.
Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for
example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted
cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar
credit quality. Loan value estimates include judgments based on expected prepayment rates. The measurement of the fair value of
loans, including individually evaluated loans, is classified within Level 3 of the fair value hierarchy.
Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level
1.
Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and
certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are
- 112 -
estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of
deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are
classified within Level 2 of the fair value hierarchy.
Borrowings – Fixed/variable term structures are valued using a replacement cost of funds approach. These borrowings are discounted
to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a
call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained
and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These
measurements are classified as Level 2 within the fair value hierarchy.
Subordinated debt – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes
observations of recent highly-similar transactions which result in a Level 2 classification.
The carrying amounts and fair values of the Company’s financial instruments as of December 31 are presented in the following table:
(In thousands)
Financial assets:
Cash and cash equivalents
Investment securities - available-for-sale
Investment securities - available-for-sale
Investment securities - marketable securities
Investment securities - held-to-maturity
Federal Home Loan Bank stock
Net loans
Accrued interest receivable
Interest rate derivative cash flow hedge
receivable/(payable)
Interest rate derivative fair value hedges receivable -
AFS investments
Interest rate derivative fair value hedges receivable -
loans
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA
Time Deposits
Borrowings
Subordinated debt
Accrued interest payable
Fair Value
Hierarchy
December 31, 2023
Carrying
Amounts
Estimated
Fair Values
December 31, 2022
Carrying
Amounts
Estimated
Fair Values
NAV
NAV
$
$
1
2
2
2
3
1
2
2
2
1
2
2
2
1
$
$
48,732
254,167
4,343
3,206
179,286
8,748
881,232
7,286
45
3,113
2,047
607,301
512,766
175,599
29,914
2,245
$
$
48,732
254,167
4,343
3,206
168,034
8,748
823,052
7,286
45
3,113
1,477
607,301
517,514
174,071
28,026
2,245
$
$
35,282
186,757
4,763
1,862
194,402
5,982
882,435
6,168
519
8,240
1,477
699,624
425,806
115,997
29,733
975
35,282
186,757
4,763
1,862
181,491
5,982
844,892
6,168
519
8,240
1,477
699,624
393,676
112,877
27,378
975
- 113 -
NOTE 23: PARENT COMPANY – FINANCIAL INFORMATION
The following represents the condensed financial information of Pathfinder Bancorp, Inc. as of and for the years ended December 31:
Statements of Condition
(In thousands)
Assets
Cash
Investments
Investment in bank subsidiary
Investment in non-bank subsidiary
Premise and equipment, net
Assets held-for-sale
Other assets
Total assets
Liabilities and Shareholders' Equity
Accrued liabilities
Subordinated debt
Shareholders' equity
Total liabilities and shareholders' equity
Statements of Income
(In thousands)
Income
Dividends from non-bank subsidiary
Dividends from marketable equity security
(Loss) gain on marketable securities
Impairment on premise and equipment
Operating, net
Total income
Expenses
Interest
Operating, net
Total expenses
Loss before taxes and equity in undistributed net
income of subsidiaries
Tax benefit
Loss before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Net income
2023
2022
$
$
$
$
5,336
3,206
138,704
155
-
3,042
607
151,050
880
29,914
120,256
151,050
2023
11
-
(255)
-
192
(52)
1,941
724
2,665
(2,717)
557
(2,160)
11,453
9,293
$
$
$
$
9,638
1,862
126,733
155
9
3,042
735
142,174
859
29,733
111,582
142,174
2022
5
15
352
(380)
128
120
1,749
1,299
3,048
(2,928)
528
(2,400)
15,332
12,932
- 114 -
Statements of Cash Flows
(In thousands)
Operating Activities
Net Income
Equity in undistributed net income of subsidiaries
Stock based compensation and ESOP expense
Amortization of deferred financing from subordinated loan
Gains on marketable securities
Impairment of fixed asset
Net change in other assets and liabilities
Net cash used in operating activities
Investing Activities
Purchase of investments
Proceeds from sales of marketable equity securities
Disposal of premises and equipment
Transfer of fixed asset to held-for-sale
Proceeds from insurance claim for premises and equipment
Purchase of premises and equipment
Net cash used in investing activities
Financing activities
Proceeds from exercise of stock options
Cash dividends paid to common shareholders
Cash dividends paid to non-voting common shareholders
Cash dividends paid on warrants
Net cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2023
2022
$
$
9,293
(11,453)
462
181
254
-
152
(1,111)
(1,598)
-
-
-
-
9
(1,589)
623
(1,684)
(497)
(45)
(1,603)
(4,302)
9,638
5,336
$
$
12,932
(15,332)
626
170
(352)
380
375
(1,201)
(1,628)
714
(3,311)
3,042
60
(9)
(1,132)
418
(1,568)
(469)
(43)
(1,662)
(3,995)
13,633
9,638
NOTE 24: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively
referred to as “related parties”). None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem
loans at December 31, 2023 or 2022.
The following represents the activity associated with loans to related parties during the years ended:
(In thousands)
Balance at the beginning of the year
Originations and related party additions
Principal payments and related party removals
Balance at the end of the period
December 31,
2023
32,531
4,360
(4,149)
32,742
$
$
December 31,
2022
22,427
15,278
(5,174)
32,531
$
$
Deposit accounts of related parties at December 31, 2023 and 2022 were $20.0 million and $19.5 million, respectively.
NOTE 25: ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities held for sale represent land, buildings and land improvements less accumulated depreciation that are being held
with a specific intention to sell at some future date. The Company records assets and liabilities held for sale in accordance with ASC
360, Property, Plant, and Equipment, at the lower of the individual asset's carrying value or estimated fair value, less estimated cost to
sell. Fair value is based on the estimated proceeds from the sale for an individual asset utilizing recent purchase offers, market
comparables and/or data obtained from reliable commercial real estate appraisals. Management's estimate as to fair value is regularly
reviewed and subject to changes in the commercial real estate markets and other factors.
The Company holds a real estate parcel, including a partially-developed mixed use commercial structure, with a carrying value of
$3.4 million. The asset has been classified as held-for-sale and is under contract as of the filing date. It is the Company's intention to
complete the sale of this asset during 2024. For the year ended December 31, 2022, the Company recorded an impairment charge of
$379,000 on this asset to reflect its estimated realizable value upon sale.
- 115 -
NOTE 26: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are
summarized in the table below.
(In thousands)
Beginning balance
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Ending balance
(In thousands)
Beginning balance
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Ending balance
For the year ended December 31, 2023
Unrealized
Gain on
Derivatives
and
Hedging
Activities
Unrealized Loss
on Available-
for-Sale
Securities
Unrealized Gain on
Securities Transferred
to Held-to-Maturity
(10,127) $
1,136
1,427
(7,564) $
382 $
(350)
-
32 $
For the year ended December 31, 2022
Unrealized
Gain on
Derivatives
and
Hedging
Activities
Unrealized Loss
on Available-
for-Sale
Securities
Unrealized Gain on
Securities Transferred
to Held-to-Maturity
428 $
(10,673)
118
(10,127) $
(286) $
668
-
382 $
Net
Unrealized
Loss on
Retirement
Plans
(2,427) $
190
164
(2,073) $
$
$
Net
Unrealized
Loss on
Retirement
Plans
(1,412) $
(1,017)
2
(2,427) $
$
$
Total
- $(12,172)
976
-
-
1,591
- $ (9,605)
Total
2 $ (1,268)
(2)
(11,024)
120
-
- $(12,172)
The following table presents the amounts reclassified out of each component of AOCI for the indicated annual period:
(In thousands)
Details about AOCI (1) components
Retirement plan items
Retirement plan net losses
recognized in plan expenses (2)
Tax effect
Available-for-sale securities
Realized losses on sale of securities
Tax effect
Amount Reclassified
from AOCI (1)
(Unaudited)
For the years ended
Affected Line Item in the Statement of Income
December 31, 2023
December 31, 2022
Salaries and employee benefits
Provision for income taxes
Net Income
Net gains on sales and redemptions
of investment securities
Provision for income taxes
Net Income
$
$
$
$
(222)
58
(164)
(1,932)
505
(1,427)
$
$
$
$
(2)
-
(2)
(160)
42
(118)
(1) Amounts in parentheses indicates debits in net income.
(2)
These items are included in net periodic pension cost.
See Note 14 for additional information.
- 116 -
NOTE 27: NONINTEREST INCOME
The Company has included the following table regarding the Company’s noninterest income for the years ended December 31, 2023
and 2022:
(In thousands)
Service charges on deposit accounts
Insufficient funds fees
Deposit related fees
ATM fees
Total service charges on deposit accounts
Fee Income
Insurance agency revenue
Investment services revenue
ATM fees surcharge
Banking house rents collected
Total fee income
Card income
Debit card interchange fees
Merchant card fees
Total card income
Mortgage fee income and realized gain on sale of loans
and foreclosed real estate
Loan servicing fees
Net gains on sales of loans and foreclosed real estate
Total mortgage fee income and realized gain on sale of
loans and foreclosed real estate
Total
Earnings and gains on bank owned life insurance
Net (losses) gains on sale and redemption of investment
securities
Net realized (losses) gains on marketable equity securities
Net (losses) gains on sale of premises and equipment
Other miscellaneous income
Total noninterest income
$
$
For the years ended
December 31, 2023
December 31, 2022
686
436
127
1,249
1,304
454
225
207
2,190
616
60
676
307
181
488
4,603
630
62
(255)
-
150
5,190
$
$
569
390
167
1,126
1,128
446
229
229
2,032
867
70
937
363
137
500
4,595
589
(169)
352
(250)
797
5,914
The following is a discussion of key revenues within the scope of ASC 606:
•
•
•
Service charges on deposit accounts – Revenue is earned through insufficient funds fees, customer initiated activities or passage
of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized at the time the transaction is
executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees are earned
over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.
Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking
house rents collected. The Company earns investment advisory fee income by providing investment management services to
customers under investment management contracts. As the direction of investment management accounts is provided over
time, the performance obligation to investment management customers is satisfied over time, and therefore, revenue is
recognized over time.
Card income – Card income consists of interchange fees from consumer debit card networks and other related services.
Interchange rates are set by unaffiliated card processing networks. Interchange fees are based on purchase volumes transacted
and certain other factors and are recognized as transactions occur.
• Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and
realized gain on sale of loans and foreclosed real estate is earned through the origination of residential and commercial mortgage
loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of SBA loans, and sales
of foreclosed real estate, and is earned as the individual transactions occur.
- 117 -
NOTE 28: LEASES
The Company has operating and finance leases for certain banking offices and land under noncancelable agreements. Our leases have
remaining lease terms that vary from less than one year up to 30 years, some of which include options to extend the leases for various
renewal periods. All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal
options will be exercised.
The components of lease expense are as follows:
(In thousands)
Operating lease cost
Finance lease cost
Supplemental cash flow information related to leases was as follows:
(In thousands)
Cash paid for amount included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Supplemental balance sheet information related to leases was as follows:
(In thousands, except lease term and discount rate)
Operating Leases:
Operating lease right-of-use assets
Operating lease liabilities
Finance Leases:
Finance lease right-of-use assets
Finance lease liability
Weighted Average Remaining Lease Term:
Operating Leases
Finance Leases
Weighted Average Discount Rate:
Operating Leases
Finance Leases
Maturities of lease liabilities were as follows:
Twelve Months Ending December 31,
(In thousands)
2024
2025
2026
2027
2028
Thereafter
Total minimum lease payments
For the years ended
$
December 31, 2023
219
435
$
December 31, 2022
227
111
$
$
$
For the years ended
December 31, 2023
December 31, 2022
$
201
435
125
211
111
90
December 31, 2023
December 31, 2022
1,526
1,711
4,073
4,381
$
$
2,098
2,417
4,213
4,422
17.22 years
27.35 years
18.28 years
28.35 years
3.88%
9.40%
3.85%
9.41%
$
$
164
166
167
177
161
5,256
6,091
The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $206,000 and
$228,000 for the years ended December 31, 2023 and 2022, respectively. All lease agreements are accounted for as operating leases.
- 118 -
NOTE 29: SUBSEQUENT EVENTS
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.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
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.
ITEM 9B: OTHER INFORMATION
During the fourth quarter of 2023, none of our directors or officers adopted or terminated any contract, instruction or written plan for
the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any
“non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.
ITEM 9C: DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
Information concerning the directors of the Company is incorporated herein by reference to Proposal 1 of the Company’s
Proxy Statement for the Annual Meeting of Shareholders.
- 119 -
(b)
(c)
(d)
Information concerning the officers and directors compliance with Section 16(a) of the Securities Exchange Act is
incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the
caption “Delinquent Section 16(a) Reports”.
Information concerning the Company’s Code of Ethics is incorporated herein by reference to the Company’s Proxy
Statement for the Annual Meeting of Shareholders under the caption “Code of Ethics”.
Information concerning the Company’s Audit Committee and “financial expert” thereof is incorporated herein by reference
to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the caption “Audit Committee”.
(e)
Set forth below is information concerning the Executive Officers of the Company at December 31, 2023.
Name
James A. Dowd, CPA
Ronald Tascarella
Walter F. Rusnak, CPA, CGMA
Daniel R. Phillips
William O' Brien
Robert Butkowski
Age
56
65
70
59
58
48
Positions Held With the Company
President and Chief Executive Officer
Executive Vice President, Chief Banking Officer
Senior Vice President, Chief Financial Officer
Senior Vice President, Chief Information Officer
Senior Vice President, Chief Risk Officer and Corporate Secretary
Senior Vice President, Chief Operating Officer
ITEM 11: EXECUTIVE COMPENSATION
(a)
(b)
Information with respect to management compensation and transactions required under this item is incorporated by reference
hereunder in the Company's Proxy Materials for the Annual Meeting of Shareholders under the caption "Compensation
Committee".
Information concerning director compensation is incorporated herein by reference to the Company’s Proxy Statement for the
Annual Meeting of Shareholders under the caption “Directors Compensation”.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting
of Shareholders under the caption "Voting Securities and Principal Holders Thereof."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting
of Shareholders under the captions “Independence and Diversity of Directors” and "Transactions with Certain Related Persons”.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent registered public accounting firm is Bonadio & Co., LLP, Syracuse, NY, Auditor Firm ID 1884. The information
required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Shareholders
under the caption "Audit and Related Fees".
- 120 -
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
(a)(2)
(b)
2.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
Financial Statements - The Company’s consolidated financial statements, for the years ended December 31, 2023 and
2022, together with the Report of Independent Registered Public Accounting Firm are filed as part of this Form 10-K
report. See “Item 8: Financial Statements and Supplementary Data.”
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is
inapplicable or has been included in “Item 7: Management Discussion and Analysis.”
Exhibits
Purchase and Assumption Agreement dated as of March 4, 2024, by and between Berkshire Bank and Pathfinder Bank
(Incorporated herein by reference to Exhibit 1.1 to Pathfinder Bancorp, Inc.'s Current Report on Form 8-K, file no. 001-
36695, filed on March4, 2024).
Articles of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to Pathfinder
Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, originally filed on June 11, 2014)
Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to Pathfinder Bancorp, Inc.’s
Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. designating the Company’s Series B
Convertible Perpetual Preferred Stock, par value $0.01 per share (Incorporated herein by reference to Exhibit 3.1 to
Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on May 9, 2019)
Amendment to the Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. designating the
Series B Convertible Perpetual Preferred Stock, $0.01 par value per share (Incorporated by reference to Exhibit 3.1 to
Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on November 17, 2020)
Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. creating Class A Non-Voting Common
Stock, par value $0.01 per share (Incorporated by reference to Exhibit 3.1 to Pathfinder Bancorp Inc.’s Current Report on
Form 8-K, file no. 001-36695, filed on June 10, 2021)
Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 4 to Pathfinder Bancorp,
Inc.’s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
Indenture between Pathfinder Bancorp, Inc., a federal corporation, and Wilmington Trust Company, as trustee, dated
March 22, 2007 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-
K, file no. 001-36695, filed on October 22, 2014)
Supplemental Indenture between Pathfinder Bancorp, Inc. and Wilmington Trust Company, as trustee, dated October 16,
2014 (Incorporated herein by reference to Exhibit 4.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no.
001-36695, filed on October 22, 2014)
Warrant Agreement, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, L.P., dated May 8,
2019 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no.
001-36695, filed on May 9, 2019)
Description of Common Stock (Incorporated herein by reference to Exhibit 4.5 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2019 file no 000-36695, filed on March 23, 2020)
Indenture, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and UMB Bank, National Association,
as trustee (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file
no. 001-36695, filed on October 15, 2020)
Form of 5.50% Fixed-to-Floating Rate Subordinated Note due 2030 of Pathfinder Bancorp, Inc. (included in Exhibit 4.6)
2003 Executive Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.3 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
- 121 -
10.2
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
2003 Trustee Deferred Fee Plan (Incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and James A. Dowd effective February 24,
2014 (Incorporated by reference to Exhibit 10.15 to Pathfinder Bancorp, Inc.’s Current Report Form 8-K, file no. 000-
23601, filed on February 25, 2014)
Amended and Restated Declaration of Trust among Pathfinder Bancorp, Inc., a federal corporation, as Sponsor,
Wilmington Trust Company, as Delaware and Institutional Trustee, and the administrative trustees of the Pathfinder
Statutory Trust II (Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form
8-K, file no. 001-36695, filed on October 22, 2014)
Amendment two to the Trustee Deferral Fee Plan (Incorporated by reference to Exhibit 10.17 to Pathfinder Bancorp, Inc.’s
Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Amendment one to the Executive Deferral Compensation Plan (Incorporated by reference to Exhibit 10.18 to Pathfinder
Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Amendment one to the Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.19 to Pathfinder
Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Subordinated Loan Agreement (Incorporated herein by reference to Pathfinder Bancorp, Inc.’s Current Report on Form 8-
K, file no. 001-36695, filed on October 19, 2015)
2016 Pathfinder Bancorp, Inc. Equity Incentive Plan (Incorporated by reference to Appendix A to Pathfinder Bancorp,
Inc.’s Proxy Statement, file no. 001-36695, filed on March 29, 2016.
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Ronald Tascarella effective February
24, 2014 (Incorporated by reference to Exhibit 10.14 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no.
001-36695, filed on March 30, 2018).
Senior Executive Split Dollar Life Insurance Plan (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s
Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
Change of Control Agreement between Pathfinder Bank and James A. Dowd (Incorporated by reference to Exhibit 10.2
to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
Change of Control Agreement between Pathfinder Bank and Ronald Tascarella (Incorporated by reference to Exhibit 10.3
to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
Securities Purchase Agreement, by and between Pathfinder Bancorp, Inc. and the Purchasers Identified on the Signature
Pages Thereto, dated May 8, 2019 (Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current
Report on Form 8-K, file no. 001-36695, filed on May 9, 2019)
Registration Rights Agreement, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, L.P.,
dated May 8, 2019 (Incorporated herein by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form
8-K, file no. 001-36695, filed on May 9, 2019)
Form of Subordinated Note Purchase Agreement, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc.
and the Several Purchasers (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on
Form 8-K, file no. 001-36695, filed on October 15, 2020)
Form of Registration Rights Agreement, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and the
Several Purchasers (Incorporated by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K,
file no. 001-36695, filed on October 15, 2020)
- 122 -
10.20
10.21
10.22
14
21
23
31.1
31.2
32
97
101
104
Exchange Agreement, dated as of November 13, 2020, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital
Partners VII, LP. (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K,
file no. 001-36695, filed on November 17, 2020)
Separation Agreement and General Release by and Between Pathfinder Bancorp, Inc. and Thomas W. Schneider, Dated
September 28, 2022 (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp Inc.'s Current Report on Form 8-K,
file no. 001-36695, filed on October 7, 2022).
Amendment to the Registration Rights Agreement (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.'s
Current Report on Form 8-K, file no. 001-36695, filed on May 8, 2023).
Code of Ethics (Incorporated by reference to Exhibit 14 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2003, file no. 000-23601, filed on March 31, 2004)
Subsidiaries of Registrant
Consent of Bonadio & Co., LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Policy Relating to Recovery of Erroneously Awarded Compensation
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition as of
December 31, 2023 and 2022, (ii) the Consolidated Statements of Income for the years ended December 31, 2023 and
2022, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2023 and 2022, (iv)
the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2023 and 2022, (v)
the Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022, and (vi) the Notes to the
Consolidated Financial Statements
Cover Page Interactive Data File (embedded within the Inline XBRL document)
ITEM 16: FORM 10-K SUMMARY
None.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 22, 2024
Pathfinder Bancorp, Inc.
By: /s/ James A. Dowd
James A. Dowd
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
By:
/s/ James A. Dowd
James A. Dowd, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 22, 2024
By: /s/ Walter F. Rusnak
Walter F. Rusnak, Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 22, 2024
- 123 -
By:
/s/ Lloyd Stemple
Lloyd Stemple, Director
Date: March 22, 2024
By:
/s/ John P. Funiciello
John Funiciello, Director
Date: March 22, 2024
By:
/s/ David A. Ayoub
David A. Ayoub, Director
Date: March 22, 2024
By:
/s/ Adam C. Gagas
Adam C. Gagas, Director
Date: March 22, 2024
By: /s/ William A. Barclay
William A. Barclay, Director
Date: March 22, 2024
By: /s/ Chris R. Burritt
Chris R. Burritt, Director
Date: March 22, 2024
By: /s/ John F. Sharkey
John F. Sharkey, Director
Date: March 22, 2024
By: /s/ Melanie Littlejohn
Melanie Littlejohn, Director
Date: March 22, 2024
By:
/s/ Meghan Crawford-Hamlin
Meghan Crawford-Hamlin, Director
Date: March 22, 2024
By: /s/ Eric Allyn
Eric Allyn, Director
Date: March 22, 2024
- 124 -
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
Name
Pathfinder Bank
Pathfinder Statutory Trust II
State of Incorporation
New York (direct)
Delaware (direct)
Whispering Oaks Development Corp.
New York (indirect)
Pathfinder Risk Management Company Inc.
New York (indirect)
FitzGibbons Agency, LLC (1)
New York (indirect)
(1) Pathfinder Bancorp, Inc. indirectly owns 51% of FitzGibbons Agency, LLC
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons
Agency is dissimilar in nature and management when compared to the Company’s other strategic business units which are
judged to be similar in nature and management. The Company has determined that the FitzGibbons Agency is below the
reporting threshold in size in accordance with Accounting Standards Codification 280. Accordingly, the Company has
determined it has no reportable segments.
EXHIBIT 23: CONSENT OF BONADIO & CO., LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Pathfinder Bancorp, Inc.
Oswego, New York
We consent to the incorporation by reference in the registration statements on Forms S-8 (No. 333-202081 and 333-224388) of
our report dated March 22, 2024 of Pathfinder Bancorp, Inc. relating to the consolidated financial statements, which report appears
in this Annual Report on Form 10-K as of December 31, 2023 and 2022 and for the years then ended.
/s/ Bonadio & Co., LLP
Bonadio & Co., LLP
Syracuse, New York
March 22, 2024
EXHIBIT 31.1: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, President and Chief Executive Officer, certify that:
1.
2.
3.
4.
I have reviewed this Annual report on Form 10-K of Pathfinder Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the consolidated financial statements, and other financial information included in this report,
fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
March 22, 2024
/s/ James A. Dowd
James A. Dowd
President and Chief Executive Officer
EXHIBIT 31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Walter F. Rusnak, Senior Vice President, Chief Financial Officer, certify that:
1.
2.
3.
4.
I have reviewed this Annual report on Form 10-K of Pathfinder Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly
present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
March 22, 2024
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, Chief Financial Officer
EXHIBIT 32 Section 1350 Certification of the Chief Executive and Chief Financial Officers
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
James A. Dowd, President and Chief Executive Officer, and Walter F. Rusnak, Senior Vice President, Chief Financial Officer of
Pathfinder Bancorp, Inc. (the "Company"), each certify in his capacity as an officer of the Company that he has reviewed the
Annual Report of the Company on Form 10-K for the year ended December 31, 2023 and that to the best of his knowledge:
1.
2.
the report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and
the information contained in the report fairly presents, in all material respects, the consolidated financial condition and
results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended
by Section 906 of the Sarbanes-Oxley Act of 2002.
March 22, 2024
March 22, 2024
/s/ James A. Dowd
James A. Dowd
President and Chief Executive Officer
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, Chief Financial Officer
CORPORATE INFORMATION
PATHFINDER BANCORP, INC.
BOARD OF DIRECTORS (1)
Chris R. Burritt, Chairman
Eric Allyn
David A. Ayoub, CPA
William A. Barclay
Meghan Crawford-Hamlin
James A. Dowd, CPA
John P. Funiciello
Adam Gagas
Melanie Littlejohn
Tony Scavuzzo, CFA
John F. Sharkey, III
Lloyd “Buddy” Stemple
PATHFINDER EXECUTIVE OFFICERS
James A. Dowd, CPA
President and Chief Executive Officer
Ronald Tascarella
Executive Vice President,
Chief Banking Officer
Robert G. Butkowski
Senior Vice President,
Chief Operating Officer
William D. O’Brien
Senior Vice President,
Chief Risk Officer,
Corporate Secretary
Daniel R. Phillips
Senior Vice President,
Chief Information Officer
Walter F. Rusnak, CPA, CGMA
Senior Vice President,
Chief Financial Officer
PATHFINDER OFFICERS
Regina E. Bass
First Vice President,
Corporate Controller
Cassandra M. Gehrig
First Vice President, Brand,
Marketing, & Communications
Lisa A. Kimball
First Vice President,
Internal Audit Manager
Joseph P. McManus
First Vice President,
Chief Technology Officer
Paloma Sarkar
First Vice President,
Enterprise Risk Manager
Ronald G. Tascarella
First Vice President,
Chief Lending Officer
William “Wink” Doolittle
Vice President, Special Assets Officer
Craig Fitzpatrick
Vice President, Financial Advisor
Shari L. Gordon
Vice President,
Information Security Officer
Alison X. Ha
Vice President,
Business Development Officer
Jessica L. Hammond
Vice President,
Fraud and Security Officer
Karri L. Hibbert
Vice President, Facilities Manager
Stephanie A. Magrisi
Vice President,
Corporate Asset Liability Manager
Mary S. McConkey
Vice President,
Electronic Commerce Manager
Joseph Pedrotti
Vice President,
Senior Commercial Lender
Reyne J. Pierce
Vice President,
Team Leader Consumer
Lending Manager
April L. Phillips
Vice President,
Operations Manager
Joseph Serbun
Vice President,
Special Assets Manager
Nicholas E. Tryniski
Vice President,
Senior Credit Manager
Heather Vashaw
Vice President,
Human Resources
Jennifer Wright
Vice President,
Business Deposit Manager
John M. Andrews
Assistant Vice President,
Treasury Management Officer
Tiffany A. Barrett
Assistant Vice President,
Technology Project Manager
Sarah J. Bixler
Assistant Vice President,
Senior Branch Analyst
Beth K. Alfieri
Vice President,
Senior Business Development Officer
William F. Bower
Vice President,
Business Development Officer
Theresa L. Colburn
Vice President,
Compliance/BSA Officer/OFAC
Joleen M. DiBartolo
Vice President,
Residential Mortgage Team Leader
Joy E. Campbell
Assistant Vice President,
Business Development Officer
Cal Corriders
Assistant Vice President,
Community Development Officer
Tonya Crisafulli
Assistant Vice President,
Executive Assistant
Sydney F. DiPierro
Assistant Vice President,
Lending Quality Control Manager
Ben J. Driscoll
Assistant Vice President,
Computer Systems Analyst
Brandon J. Fink
Assistant Vice President,
Lending Process Administrator
Anthony Gentile
Assistant Vice President,
Internal Audit
Matthew J. Hughes
Assistant Vice President,
Commercial Lender
Laurie L. Lockwood
Assistant Vice President,
Assistant Controller
Natalie Metz
Assistant Vice President,
Senior Managerial Accountant
Michelle L. Nelson
Assistant Vice President,
ACH Operations Manager
Jessica Ortiz
Assistant Vice President,
Fair Lending/Community
Reinvestment Act Officer
Tina M. Sawyer
Assistant Vice President,
Digital Banking Manager
Mackenzie R. Tryniski
Assistant Vice President,
Business Development Officer
BANKING OFFICERS
Daniel J. Capella
Residential Mortgage Lender
Sharon Marziale
Residential Mortgage Lender
PATHFINDER BRANCH MANAGERS
Randall A. Barnard
Assistant Vice President
James F. Bligh
Assistant Vice President
David D. Cavallaro
Assistant Vice President
Jennifer R. Kaljeskie
Assistant Vice President
Colleen A. McCraith
Assistant Vice President
Craig J. Nessel
Assistant Vice President
Ruth E. Scheppard
Assistant Vice President
Amy J. Shaw
Assistant Vice President
ANNUAL MEETING
June 6, 2024, 10:00am
Bayshore Grove
78 Bayshore Drive
Oswego NY 13126
CORPORATE HEADQUARTERS
214 West First Street
Oswego, NY 13126
(315) 343-0057
STOCK LISTING
The NASDAQ Capital Market
Symbol: PBHC Listing: PathBcp
SPECIAL COUNSEL
Luse Gorman, PC
5335 Wisconsin Avenue N.W.
Suite 780
Washington, D.C. 20015
INDEPENDENT AUDITORS
Bonadio & Co., LLP
432 North Franklin Street, Suite 60
Syracuse, NY 13204
TRANSFER AGENT
Computershare
480 Washington Blvd, 29th Floor
Jersey City, NJ 07310
INVESTOR RELATIONS
James A. Dowd
President and Chief Executive Officer
Walter F. Rusnak
Senior Vice President,
Chief Financial Officer
GENERAL INQUIRIES AND REPORTS
A copy of the Bank’s 2023 Annual
Report to the Securities and
Exchange Commission, Form 10-K,
may be obtained without charge by
written request of shareholders to:
William O’Brien
Senior Vice President,
Chief Risk Officer,
Corporate Secretary
Pathfinder Bank
214 West First Street
Oswego, NY 13126
A copy of this Annual Report on Form
10K and our 2024 Annual Proxy State-
ment, is also available free of charge
on our website at: www.pathfinder-
bank.com/annualmeeting
The public may read and copy any
materials the Company files with the
SEC at the SEC’s Public Reference
Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public
may obtain information on the opera-
tion of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
The Company’s filings are also avail-
able electronically free of charge at
the SEC website: http://www.sec.gov
and at the Company’s website:http://
www.pathfinderbank.com
FDIC DISCLAIMER
This Annual Report has not been
reviewed or confirmed for accuracy
or relevance by the FDIC.
(1) Information concerning the
principal occupation of the Directors
is available in the Company’s Proxy
Statement
MAIN OFFICE
214 West First Street
Oswego
(315) 343-0057
PLAZA OFFICE
State Route 104 East
Oswego
(315) 343-4483
CENTRAL SQUARE OFFICE
3025 East Avenue
Central Square
(315) 676-2265
FULTON OFFICE
5 West First Street South
Fulton
(315) 592-9545
LACONA OFFICE
1897 Harwood Drive
Lacona
(315) 387-3437
MEXICO OFFICE
3361 Main Street
Mexico
(315) 963-7248
DOWNTOWN DRIVE-THRU
34 East Bridge Street
Oswego
(315) 343-2577
CICERO OFFICE
6194 State Route 31
Cicero
(315) 752-0033
SYRACUSE OFFICE
109 West Fayette Street
Syracuse
(315) 207- 8020
UTICA LOAN OFFICE
200 Genesee Street
Utica
(315) 343-0057
CLAY OFFICE
3775 Route 31
Liverpool
(315) 593-4400
SOUTHWEST CORRIDOR
OFFICE
506 West Onondaga Street
Syracuse
(315) 413-7714
pathfinderbank.com