Pathfinder Bancorp, Inc. PBHC US Equity☆

ITEM 1A: RISK FACTORS

Not required of a smaller reporting company.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

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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, 2022. The aggregate net book value of the Bank's premises and equipment was $17.9 million at December 31, 2022. For additional information regarding the Bank's properties, see Notes 8 and 28 to the consolidated financial statements.

Location Opening Date Owned/Leased

Main Office 1874 Owned

214 West First Street

Plaza Branch 1989 Owned (1)

Mexico Branch 1978 Owned

Oswego East Branch 1994 Owned

34 East Bridge Street

Lacona Branch 2002 Owned

Fulton Branch 2003 Owned (2)

5 West First Street South

Central Square Branch 2005 Owned

Central Square, New York 13036

Cicero Branch 2011 Owned

Pike Block Branch 2014 Leased (3)

109 West Fayette Street

Clay Branch 2018 Leased (4)

Southwest Corridor Branch 2022 Leased (5)

506 West Onondaga Street

Utica Loan Production Office 2017 Leased (6)

258 Genesee Street

(1)

The building is owned; the underlying land is leased with an annual rent of $38,000.

(2)

The building is owned; the underlying land is leased with an annual rent of $37,000.

(3)

The premises are leased with an annual rent of $90,000.

(4)

The premises are leased with an annual rent of $74,000.

(5)

The premises are leased with an annual rent of $257,000.

(6)

The premises are leased with an annual rent of $16,000.

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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, 2022.

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 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, 2023.

The Company did not repurchase any shares of its common stock for the year ended December 31, 2022.

Equity Compensation Plan Information

The following table provides information as of December 31, 2022 with respect to shares of voting common stock that may be issued under the Company’s existing equity compensation plans.

Equity compensation plans approved by security holders 223,217 $ 10.94 10,408

Equity compensation plans not approved by stockholders N/A N/A N/A

Dividends and Dividend History

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

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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 to stock 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 6,032,112 and 5,983,467 shares of voting and non-voting common stock in aggregate outstanding at December 31, 2022 and December 31, 2021, respectively.

On June 1, 2016, Pathfinder Bank, a savings bank chartered by the NYSDFS, merged into Pathfinder Commercial Bank, a limited purpose commercial bank also chartered by the NYSDFS. Prior to the merger, Pathfinder Bank owned 100% of Pathfinder Commercial Bank. On that same date, NYSDFS expanded the powers that it had previously granted to Pathfinder Commercial Bank and chartered Pathfinder Commercial Bank as a fully-empowered commercial bank. Simultaneously, the entity that had operated as “Pathfinder Commercial Bank” changed its name to “Pathfinder Bank.” As a result of this charter conversion and accompanying name change, the entity now known as “Pathfinder Bank” became a commercial bank with the full range of powers granted under a commercial banking charter in New York State. The merger, which had no effect on the Company’s results of operations, converted the consolidated Bank from a savings bank to a commercial bank and was completed in order to better align the Bank’s organization certificate with its long-term strategic focus.

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 initially 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

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covenants of the purchasers and the Company that are customary in private placement transactions. The subscription agreements were also part of the Private Placement, and the term “Private Placement” includes both transactions.

In total, therefore, the Company issued 306,977 shares of Common Stock, 1,155,283 shares of Series B Preferred Stock and the Warrant at the conclusion of the Private Placement. The transaction raised $20.8 million in gross proceeds and the final net cash received from the Private Placement, after all issuance expenses, including placement fees and all other issuance/due diligence costs of $927,000 and $342,000, respectively, was $19.6 million. The fair value of the Warrant at the time of issuance was $373,000.

Pursuant to NASDAQ rules, Castle Creek could not convert the Series B Preferred Stock or, in the future, the non-voting common stock into Common Stock, or exercise the Warrant if doing so would cause Castle Creek, when combined with the purchases of certain directors and executive officers of the Company as well as other accredited investors in the Private Placement, to own more than 19.99% of the Common Stock outstanding immediately prior to the execution of the Securities Purchase Agreement (the “Exchange Cap”). The Company was required to request stockholder approval to eliminate the Exchange Cap no later than at the 2021 annual meeting of Company shareholders. In addition, at the same meeting, the Company was required to seek shareholder approval to create a class of non-voting convertible common stock. Castle Creek will need the approval or non-objection of the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services if it seeks to increase its ownership of shares of Common Stock in excess of 9.9% of the outstanding shares of Common Stock.

Holders of the Series B Preferred Stock were entitled to receive dividends if declared by the Company’s Board of Directors, in the same per share amount as paid on the Common Stock. No dividends would be payable on the Common Stock unless a dividend identical to that paid on the Common Stock was payable at the same time on the Series B Preferred Stock. The Series B Preferred Stock would rank, as to payments of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, pari passu with the Common Stock pro rata. Holders of Series B Preferred Stock had no voting rights except as was required by law. The Series B Preferred Stock was not redeemable by either the Company or by the holder.

As discussed above, pursuant to the Securities Purchase Agreement, on May 8, 2019, the Company issued a Warrant to Castle Creek to purchase 125,000 shares of non-voting common stock at an exercise price equal to $14.25 per share. At the same time, the Company entered into a Warrant Agreement with Castle Creek, to, among other things, authorize and establish the terms of the Warrant. The Warrant is exercisable at any time after May 8, 2019, and from time to time, in whole or in part, until May 8, 2026. However, the exercise of such Warrant remains subject to certain contractual provisions, and regulatory approval if Castle Creek’s ownership of Common Stock would exceed 9.9%. At December 31, 2022, 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. At December 31, 2022, Castle Creek elected to have an observer present at substantially all meetings of the Company’s 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.

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On November 13, 2020, the Company filed an amendment to the Articles Supplementary to the Articles of Incorporation of the Company designating the Series B Preferred Stock with the Maryland Department of Assessments and Taxation to increase the classified number of shares of the Series B Preferred Stock from 1,155,283 to 1,506,000 to allow for the additional issuance of Series B Preferred Stock to Castle Creek. There were no other changes made to the preferences, limitations, powers and relative rights of the Series B Preferred Stock.

On June 4, 2021, shareholders of the Company approved an amendment to the Company’s Articles of Incorporation to authorize Non-Voting Common Stock, and to eliminate the Exchange Cap. On June 9, 2021, the Company filed Articles Supplementary to the Articles of Incorporation of the Company (the “Articles Supplementary”) with the Maryland State Department of Assessments and Taxation creating a Class A Non-Voting Common Stock, par value $0.01 per share (“Non-Voting Common Stock”). The Articles Supplementary authorized 1,505,283 shares of the Non-Voting Common Stock which Castle Creek received in exchange for the Company’s outstanding Series B Preferred Stock on a one for one basis and allowed for the issuance of 125,000 shares of Non-Voting Common Stock that may be issued upon the exercise of the Warrant.

The preferences, limitations, powers and relative rights of the Non-Voting Common Stock are set forth in the Articles Supplementary, a summary of which follows:

Ranking: The Non-Voting Common Stock will rank, as to the payment of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, (i) pari passu with the Company’s Common Stock, and (ii) subordinate and junior to all other securities of the Company which, by their respective terms, are senior to the Non-Voting Common Stock or the Company’s Common Stock.

Dividend Rights: Holders of the Non-Voting Common Stock will be entitled to receive dividends when, as and if declared by the Company’s Board of Directors, in the same per share amount as paid on Company’s Common Stock. No dividends will be payable on the Company’s Common Stock unless a dividend identical to that paid on the Company’s Common Stock is payable at the same time on the Non-Voting Common Stock in an amount per share equal to the product of (i) the per share dividend declared and paid in respect of each share of the Company’s Common Stock and (ii) the number of shares of the Company’s Common Stock into which such share of Non-Voting Common Stock is then convertible (without regard to limitations on conversion of such Non-Voting Common Stock); provided that if any stock dividend is declared on the Company’s Common Stock, the holders of Non-Voting Common Stock will be entitled to receive such dividend payable in shares of Non-Voting Common Stock.

Voting: The holders of shares of Non-Voting Common Stock have no voting rights, except as may be required by Maryland law and as set forth in the Articles Supplementary. So long as any shares of Non-Voting Common Stock are issued and outstanding, the Company will not (including by means of merger, consolidation or otherwise) without obtaining the approval of the holders of a majority of the issued and outstanding shares of Non-Voting Common Stock:

•

alter or change the rights, preferences, privileges or restrictions provided for the benefit of the holders of the Non-Voting Common Stock so as to affect them adversely;

•

increase or decrease the authorized number of shares of Non-Voting Common Stock; or

•

enter into any agreement, merger or business combination, or engage in any other transaction, or take any action that would have the effect of adversely changing any preference or any relative or other right provided for the benefit of the holders of the Non-Voting Common Stock.

Redemption and Repurchase: The Non-Voting Common Stock is not redeemable by the Company or the holder. However, in the event that the Company offers to repurchase shares of the Company’s Common Stock, the Company must offer to repurchase shares of the Non-Voting Common Stock pro rata based upon the number of shares of the Company’s Common Stock such holders would be entitled to receive if such shares were converted into shares of the Company’s Common Stock immediately prior to such repurchase.

Conversion: Each share of Non-Voting Common Stock will be convertible into one share of the Company’s Common Stock (i) at any time and from time to time at the request of the holder thereof or at the written request of the Company; provided that upon such conversion, the holder, together with all affiliates of the holder, will not own or control in the aggregate more than 9.9% of the Company’s Common Stock (or of any class of the Company’s voting securities), excluding for the purpose of this calculation any reduction in the ownership resulting from transfers by such holder of voting securities (which, for the avoidance of doubt, does not included the Non-Voting Common Stock); or (ii) automatically, without any further action of the part of the holder, on the date that the holder transfers such share of Non-Voting Common Stock to a non-affiliate of the holder in a permissible transfer.

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We have consistently maintained our historically strong presence in consumer deposit gathering and residential mortgage lending activities. Notwithstanding the retention of these business lines, we have strategically emphasized developing our business and commercial banking franchise by offering products that are attractive to small-to medium-sized businesses in our market area. We differentiate our commercial loan solutions and related services through the maintenance of high standards of customer service, solution flexibility and convenience. Highlights of our business strategy are as follows:

•

Continuing our emphasis on commercial business and commercial real estate lending. In recent years, we have successfully increased our commercial business and commercial real estate lending activities and portfolio size, consistent with safe and sound underwriting practices. In this regard, we have added, and will continue to add, personnel who are experienced in originating, underwriting and servicing commercial real estate and commercial business loans. We view the growth of our commercial business and commercial real estate loans as a means of further diversifying and increasing our interest income. In increasing our business banking activities, we seek to continuously deepen relationships with local businesses, which offer recurring and potentially increasing sources of both fee income and lower-cost transactional deposits. In that regard, our emphasis on commercial business and commercial real estate lending has complemented, and will continue to complement, our traditional one-to-four family residential real estate lending and consumer deposit gathering franchises.

•

Providing quality customer service. Our strategy emphasizes providing quality customer service and meeting the financial needs of our customer base by offering a full complement of loan, deposit, financial services and online banking solutions. Our competitive advantage is our ability to make decisions, such as approving loans, more quickly - and with greater flexibility in many cases - than our market competitors. Customers enjoy, and will continue to enjoy, access to senior executives and local decision makers at the Bank and the flexibility that such access brings to their businesses.

•

Optimizing our deposit mix. We seek to enhance the overall characteristics of our deposit base by emphasizing both consumer and business nonmaturity deposit gathering. During 2022, the Bank recorded an increase in consumer nonmaturity deposits of $38.5 million, or 13.3%, partially offset by a reduction in business nonmaturity deposits of $25.2 million, or 11.0%, and a $7.7 million, or 4.6%, reduction in municipal nonmaturity deposits. The increase in consumer nonmaturity deposits was due to the Bank’s continued focus on the gathering of these deposits, including our emphasis on noninterest-bearing transactional accounts. The decrease in business deposits during 2022 was primarily due to the withdrawal of significant deposits as well as the final closure of all deposit accounts by a single credit union customer upon that credit union's dissolution via merger. The decrease in municipal nonmaturity deposits is considered by management to be primarily cyclical in nature. We expect to make nonmaturity deposit gathering a point of significant organizational focus for the foreseeable future.

•

Continuing to grow our customer relationships and deposit base by expanding our branch network. As conditions permit, we will seek to expand our branch network through a combination of de novo branching and, potentially, acquisitions of branches and/or other financial services entities. We believe that as we expand our branch network, our customer relationships and deposit base will continue to grow. Our branch expansion focus will be primarily within Onondaga County, NY, which encompasses the greater Syracuse, NY area. We currently have four branches in Onondaga County, including the branches in the Southwest Corridor neighborhood adjacent to downtown, Syracuse, NY and in Clay, NY that we opened in the fourth quarters of 2022 and 2018, respectively. We continue to actively seek opportunities for an increased presence within that marketplace. This is consistent with our belief that we have already achieved meaningful brand recognition among potential customers there. In addition to the full-service branches located in Oswego and Onondaga Counties, in 2017 we opened a loan production office in Utica, located in Oneida County, NY, to increase our availability to potential commercial and business loan customers within that market area. We will continue to seek similar branch network expansion opportunities in the future.

•

Diversifying our products and services with a goal of increasing noninterest income over time. We have sought to reduce our dependence on net interest income by increasing fee-based income across a broad spectrum of loan and deposit products. It is expected that we will also benefit in the future from increased ancillary income for service activities related to new and existing customers utilizing those products. The Company's management continues to monitor the competitive environment for these types of noninterest income opportunities and to improve its product design and customer relationship optimization strategies. A significant number of product design changes were implemented in 2022 and have yielded the expected financial benefits and are expected to continue to do so in future periods. In recent years, we have also sought to increase the breadth of services that we provide to our customers. We offer property and casualty and life insurance through our subsidiary, PRMC, and its insurance agency subsidiary, the FitzGibbons Agency, LLC. Additionally, Pathfinder Bank’s investment services operations provide brokerage services to our customers for purchasing stocks, bonds, mutual funds, annuities, and long-term care insurance products. We intend to gradually increase our emphasis on the growth of these businesses. We believe that there will be resultant opportunities to cross-sell these products to our deposit and loan customers which will thereby increase our noninterest income over time.

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•

Investing in our banking platform and technologies. We have committed significant resources to establish a banking platform to accommodate future growth by upgrading our information systems and customer service technologies, maintaining a robust risk management and compliance staff, improving credit administration functionality, and upgrading our physical infrastructure. We believe that these investments will enable us to achieve operational efficiencies with minimal additional investments, while providing increased convenience for our customers.

•

Controlling the rate of growth in operating expenses. The Company has sought to reduce the rate of growth in its operating expenses relative to its rate of revenue growth and to thereby increase the Company’s overall profitability. In 2022, the Company’s efficiency ratio was 61.1%, a 2.0% decline from the 63.1% efficiency ratio in 2021, which is consistent with the implementation of these budgetary and expense control mechanisms.

•

Managing capital. The Company received $24.9 million in net proceeds from the sale of approximately 2.6 million shares of common stock as a result of the Conversion in October 2014. In October 2015, the Company executed the issuance of the $10.0 million non-amortizing Subordinated Debt and subsequently used those proceeds in February 2016 to substantially fund the full retirement of $13.0 million in SBLF Preferred stock. The Company received $19.6 million in net proceeds from the sale of 306,977 shares of common stock and 1,155,283 shares of preferred stock as a result of the Private Placement in May 2019. In October 2020, the Company executed the issuance of $25.0 million in non-amortizing Subordinated Debt. In April 2021, the Company retired the Subordinated Debt that it had issued in October 2015, thereby reducing its outstanding balance of Subordinated Debt from $39.4 million at December 31, 2020 to $29.6 million at December 31, 2021. Since year end 2014, we have therefore successfully leveraged the $44.5 million in net new equity capital and the net $25.0 million in Subordinated Debt by growing our consolidated assets by $838.9 million, or 149.5%, to $1.40 billion at December 31, 2022. It is our intent to balance our future growth with capital adequacy considerations in a manner that will continue to allow us to effectively serve all of our key stakeholders and maintain our “well capitalized” capital position.

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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

At or for the years ended December 31,

Year End

For the Year

Net income (loss) attributable to noncontrolling interest 101 103 96 10 (22 )

Convertible preferred stock dividends - 97 291 208 -

Per Share

Performance Ratios

Shareholders' Equity to total assets at end of year 7.93 8.58 7.94 8.27 6.88

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At December 31,

Asset Quality Ratios

Regulatory Capital Ratios (Bank Only)

Number of:

(a)

See table below for reconciliation of the non-GAAP financial measures.

(b)

The efficiency ratio is calculated as noninterest expense divided by the sum of net interest income and noninterest income, excluding net gains on sales, redemptions and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate.

NON-GAAP FINANCIAL INFORMATION

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, 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.

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At or for the years ended December 31,

Per Share

Book value per common share

Total common equity

Tangible book value per common share

Performance Ratios

Efficiency ratio

Less : Gains/(Losses) on marketable securities 352 382 (629 ) 81 (62 )

Dividend payout ratio

Return on average common equity

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At or for the years ended December 31,

Regulatory Capital Ratios (Bank Only)

Total capital (to risk-weighted assets)

Unrealized Gain on available-for-sale securities - - - - -

Tier 1 capital (to risk-weighted assets)

Tier 1 capital (to adjusted assets)

Tier 1 Common Equity (to risk-weighted assets)

Paycheck Protection Program (“PPP”)

The Bank participated in all rounds of the PPP funded by the U.S. Treasury Department and administered by the SBA pursuant to the CARES Act and subsequent legislation. PPP loans have an interest rate of 1.0% and a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for qualifying expenses. The PPP ended in May 2021. Information related to the Company’s PPP loans are included in the following tables:

Unaudited For the years ended

(In thousands, except number of loans) December 31, 2022 December 31, 2021

Number of PPP loans originated in the year - 478

Funded balance of PPP loans originated in the year $ - $ 36,369

Number of PPP loans forgiven in the year 251 796

Balance of PPP loans forgiven in the year $ 13,091 $ 77,054

Deferred PPP fee income recognized in the year $ 707 $ 2,150

Unearned PPP deferred fee income at end of year $ 12 $ 716

(In thousands, except number of loans) Number Balance

Total PPP loans originated since inception 1,177 $ 111,721

Total PPP loans forgiven since inception 1,172 111,518

Total PPP loans remaining at December 31, 2022 5 $ 203

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CRITICAL ACCOUNTING ESTIMATES

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values, and information used to record valuation adjustments for certain assets and liabilities, are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses, deferred income tax assets and liabilities, pension obligations, the evaluation of investment securities for other than temporary impairment, 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 Loan Losses. The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on impaired 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 impaired 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, for all loans subject to a troubled debt restructuring agreement. In addition, an accruing substandard loan could be identified as being impaired. The measurement of impaired 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 for impairment based on the fair value of the collateral, less costs to sell. At December 31, 2022, the Bank’s position in impaired loans consisted of 81 loans totaling $20.2 million. Of these loans, 15 loans, totaling $1.5 million, were valued using the present value of future cash flows method; and 66 loans, totaling $18.7 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 incurred loss for each risk-rating category. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in this report.

As noted above, the allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable incurred losses in the Bank’s loan portfolio. Determining the amount of the ALLL 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 impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, consideration of current economic trends and conditions, and other qualitative and quantitative factors, all of which may be susceptible to significant change. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

In estimating the ALLL 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, 2022, the Bank held $508.5 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 56.6% of the Bank’s entire loan portfolio. The Bank allocated $12.8 million to the ALLL for these loans, including $7.9 million derived from the use of qualitative factors in the calculation. Given the concentration of ALLL 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 ALLL. The ALLL could increase (or decrease) by approximately $2.0 million, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ALLL for commercial loans. The sensitivity and related range of

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impacts for various judgments on the ALLL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2022 in the final recorded estimation of the ALLL on loans recognized on the Statement of Financial Condition.

If the assumptions underlying the determination of the ALLL prove to be incorrect, the ALLL may not be sufficient to cover actual loan losses and an increase to the ALLL 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 ALLL.

Management’s methodology and policy in determining the allowance for loan 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 loan 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.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s stated main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables (such as loans) and other financial assets in scope. The ASU requires entities to measure credit losses on most financial assets carried at amortized costs and certain other instruments using an expected credit loss model. Banks in the United States above $5.0 billion in assets generally adopted this new way of measuring loan losses called the “Current Expected Credit Loss” (“CECL”) model in 2020, with smaller public and private banks, such as Pathfinder, required to convert to this method in fiscal years beginning after December 15, 2022. The Company computed its Allowance for Loan Losses at December 31, 2022 using a methodology called the "Incurred Loss Model" ("ILM"), which remained applicable GAAP at that date. ILM (current GAAP) assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value. CECL requires that an estimate of loss for the entire life cycle of each asset with credit loss exposure be recorded at the funding date of that asset as a component of the reported Allowance for Credit Losses. For additional information regarding current expected credit losses, see Notes 2 and 6 to the consolidated financial statements.

The three major differences between CECL and ILM are: (1) CECL requires that reserves for the full, expected life of any asset with credit loss exposure be established at the funding date of the asset. The reserve must consider all expected credit and credit-related losses in aggregate to the asset's maturity (including prepayment projections) using a methodology that both a.) requires an evaluation of the Bank’s segmented internal credit dynamics (historical loss rate, underwriting standards, etc.); and b.) requires evaluations of the macroeconomic environment at funding and at the end of each subsequent reporting period; (2) CECL requires that a broader array of assets, in addition to outstanding loans, must be included in the CECL calculation than were includable under the ILM model; and (3) CECL requires substantially enhanced documentation and underlying assumption, input and calculation support, due to its more extensive modeling assumptions and inputs, as well as its more complex calculations, than were previously considered necessary under ILM.

Beginning on January 1, 2023, the Bank will have to account for all credit loss exposures using this CECL methodology. A nonrecurring adjustment from ILM to CECL was made on January 1, 2023, increasing the ALLL at December 31, 2022 by $2.2 million in determining the beginning ACL for the quarter ended March 31, 2023. This transition adjustment was booked to retained earnings in the first quarter of 2023 and therefore will be a subtraction from tangible book value (“TBV”), after tax effects of approximately $1.7 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 Investment Securities for Other-Than-Temporary-Impairment (“OTTI”). The Company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported net of tax as an adjustment to shareholders' equity and included

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in accumulated other comprehensive income (loss), except for the credit-related portion of debt security impairment losses and OTTI of equity securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt security (both available-for-sale and held-to-maturity) portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security before recovery of its amortized cost; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to whether OTTI is present. The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

Evaluation of Goodwill. Management performs an annual evaluation of the Company’s goodwill for possible impairment. Based on the results of the 2022 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2022. 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 impaired 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 23, 2022, 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, 2022. The dividend was paid on February 10, 2023 to shareholders of record on January 17, 2023.

EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS

The Company's total assets were $1.40 billion at December 31, 2022 as compared to $1.29 billion at December 31, 2021. The increase in total assets of $114.7 million, or 8.9%, was primarily the result of a $62.9 million increase in net loans receivable and a $33.5 million increase in held-to-maturity securities. All other assets, excluding cash and cash equivalents, increased by a net of $20.2 million. Cash and cash equivalents decreased by $1.9 million. The increase in total assets in 2022 was funded largely by a $70.1 million increase in deposits, specifically a $90.8 million increase in brokered deposits, partially offset by a $20.7 million decrease in customer deposits.

The Company reported net income of $12.9 million for 2022, an increase of $525,000, or 4.2%, as compared to net income of $12.4 million for 2021. Net income increased during 2022, as compared to the previous year, due to an increase in net interest income before the provision for loan losses of $3.1 million, and a decrease in income tax expense of $843,000. These increases were partially offset by a $1.7 million increase in provision for loan losses and a decrease in noninterest income of $317,000, combined with an increase in noninterest expenses for the year ended December 31, 2022 of $1.4 million. Basic and diluted earnings per share in 2022 were both $2.13 per share, as compared to $2.07 per share in 2021. Return on average assets decreased two basis points to 0.96% in 2022 from 0.98% in 2021. Return on average equity decreased 14 basis points to 11.77% in 2022 as compared to 11.91% in 2021. The decrease in return on average assets in 2022, as compared to the previous year, was primarily due to the increase in average asset growth outpacing the increase in net income. Average assets increased in 2022 by $84.4 million, or 6.7%, as the Company grew its total assets from $1.29 billion at December 31, 2021 to $1.40 billion at December 31, 2022. The decrease in return on average equity in 2022, as compared to the previous year, was primarily due to the increased growth in average equity outpacing the increase in net income.

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Net interest income, before provision for loan losses, increased $3.1 million, or 8.1%, to $41.4 million in 2022 on average interest earning assets of $1.28 billion, as compared to net interest income before provision for loan losses of $38.3 million in 2021 on average interest earning assets of $1.19 billion. Interest and dividend income increased $5.3 million in 2022 to $51.1 million, as compared to $45.8 million in 2021. The aggregate increase in the average balance of interest-earning assets of $87.4 million was partially enhanced by an increase of 14 basis points in the overall average yield earned on those assets. The $5.3 million increase in interest and dividend income was partially offset by an increase in interest expense of $2.2 million due to an increase in the average rate paid on interest-bearing liabilities of 15 basis points in 2022 as compared to 2021, enhanced by an increase in the average balance of interest-bearing liabilities of $75 million during the same time period.

The Company recorded a provision for loan losses of $2.8 million in 2022 as compared to $1.0 million in the prior year. The $1.8 million year-over-year increase in provision for loan 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 loan losses in 2022 reflected an increase in nonperforming loans of $723,000 at December 31, 2022, as compared to December 31, 2021. In addition, the provision for loan losses increased in 2022, as compared to the previous year, by an increase in outstanding loan balances of $65.3 million, or 7.8%, in 2022 as compared to 2021. The Company recorded $370,000 in net charge-offs in 2022 as compared to $866,000 in 2021. The ratio of net charge-offs to average loans therefore decreased to 0.04% in 2022 from0.10%in 2021.

Total noninterest income was $5.9 million in 2022, a decrease of $317,000, or 5.1%, from $6.2 million in 2021. This decrease was due in part from a $451,000 increase in net losses on sale of premises and equipment, a $206,000 increase in net losses on sales and redemptions of investment securities, and a $176,000 decrease in net gains on sales of loans and foreclosed real estate when compared to the prior year. The increased losses in net premises and equipment resulted primarily from a $379,000 impairment write down on a property that was reclassed from net premises and equipment to assets held for sale, see Note 25 to the consolidated financial statements. The decrease in net gains on sales of loans and foreclosed real estate was primarily due to twenty one fewer loans being sold into the secondary market in 2022 as compared to 2021. These decreases were partially offset by a gain on the sale of foreclosed real estate held by our subsidiary Whispering Oaks.

Noninterest income before recorded gains (losses), increased $546,000, or 10.3%, to $5.8 million in 2022 as compared to $5.3 million in 2021. The $713,000 increase in other charges, commissions and fees was primarily due to the receipt of Federal and New York historical tax credits in connection with the restoration of the newly opened Southwest Corridor branch of $521,000 and realized hedge income of $176,000 recorded in March of 2022. The $117,000 year-over-year increase in loan servicing fees was primarily due to increased fee collections in 2022. Fee collections of this type are generally related to commercial mortgage and commercial real estate loan activity and will vary from year to year based on a number of factors including the level of fee waivers and other concessions offered to customers as a part of refinancing negotiations. These increases were partially offset by a $338,000 decrease in services charges on deposit accounts when compared to the prior year.

Since 2016, the Company held a passive equity investment, acquired for $534,000, in an otherwise unaffiliated financial institution. The issuer of that originally-purchased common stock was acquired in June 2020 by another financial institution (the acquiring bank). Upon the closing of the transaction, the acquisition resulted in the Company receiving total cash and stock compensation of $911,000 for its equity investment, based on the closing stock price of the acquiring bank on June 30, 2020. As a result, during the second quarter of 2020, the Company recorded a net gain on sales and redemptions of investment securities of $115,000 and a gain on equity securities of $438,000. The Company retained its shares of the acquiring bank, valued at $677,000 at December 31, 2021. The investment was sold in its entirety in May of 2022. As a result of this sale, the Company recorded a net loss of $15,000 in 2022.

Net loan charge-offs to average loans were 0.04% for 2022, as compared to 0.10% for 2021. Nonperforming loans to total loans remained at 1.00% at December 31, 2022, compared to December 31, 2021. The allowance for loan losses to non-performing loans at December 31, 2022 was 169.93%, compared with 155.99% at December 31, 2021. Total nonperforming assets increased $944,000, or 11.4%, between December 31, 2021 and December 31, 2022, driven by an increase of $221,000 in foreclosed real estate, increases of $1.1 million and $221,000 in nonperforming consumer and residential real estate loans respectively, partially offset by a decrease of $577,000 in commercial and commercial real estate loans.

Management monitors its loan portfolio closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for loan losses at December 31, 2022. Overall the ratio of the allowance for loan losses to year end loans increased to 1.71% at December 31, 2022 from 1.57% at December 31, 2021.

Total past due loans measured as a percent of total loans, increased from 2.14% at December 31, 2021 to 3.21% at December 31, 2022, primarily due to an increase of $6.4 million in past due commercial loans, a $3.8 million increase in past due consumer loans, and a $911,000 increase in past due residential loans. The level of nonperforming loans increased in aggregate by $723,000 led by an increase of $1.1 million in consumer loans, a $221,000 increase in residential mortgage loans, partially offset by a $577,000 decrease in

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commercial and commercial real estate loans. Commensurate with the increase in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets increased to 0.66% at December 31, 2022 from 0.65% at December 31, 2021.

The Company’s shareholders’ equity increased $710,000, or 0.6%, to $111.0 million at December 31, 2022 from $110.3 million at December 31, 2021. This increase was primarily due to a $10.4 million increase in retained earnings, a $1.1 million increase in additional paid in capital and a $180,000 increase in ESOP shares earned. Comprehensive loss increased by $10.9 million, primarily as the result of unrealized losses on available for sale securities and retirement plans, partially offset by gains on derivatives and hedging activities during 2022. The increase in retained earnings resulted from $12.9 million in net income recorded in 2022. Partially offsetting this increase in retained earnings were $1.6 million for cash dividends declared on our voting common stock, $497,000 for cash dividends on our non-voting common stock, $45,000 for cash dividends declared on our issued warrant, and $368,000 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 loan losses, increased $3.1 million, or 8.12%, to $41.4 million in 2022 as compared to $38.3 million in the previous year. Our net interest margin for the year ended December 31, 2022 increased to 3.24% from 3.21% for the comparable prior year. The increase in net interest income was primarily due to a $5.2 million, or 11.5%, increase in interest and dividend income in 2022 to $51.1 million primarily as a result of the $87.4 million, or 7.34%, increase in the average balance of interest-earning assets and an increase in the average yield of interest-earning assets of 14 basis points. This increase in net interest income was partially offset by an increase in interest expense of $2.2 million, or 28.7%, during 2022, as compared to the previous year. The increase in interest expense was primarily due to an increase in the balance of average interest-bearing liabilities of $75.0 million and an increase in the average cost of interest-bearing liabilities of 15 basis points.

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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.

For the years ended December 31,

Average Average

Unaudited Average Yield / Average Yield /

(Dollars in thousands) Balance Interest Cost Balance Interest Cost

Interest-earning assets:

Noninterest-earning assets:

Net unrealized (losses) gains on available-for-sale securities (9,580 ) 1,482

Interest-bearing liabilities:

Noninterest-bearing liabilities:

Net interest rate spread 3.05 % 3.06 %

Net interest margin 3.24 % 3.21 %

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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,

Increase/(Decrease) Due to Increase/(Decrease) Due to

Total Total

Increase Increase

(In thousands) Volume Rate (Decrease) Volume Rate (Decrease)

Interest Income:

Interest Expense:

Money management accounts - 1 1 - (1 ) (1 )

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 $5.3 million, or 11.5%, to $51.1 million in 2022 as compared to $45.8 million in 2021 due principally to the $87.4 million, or 7.3%, increase in average interest-earning assets. The average balance of loans increased $36.3 million, or 4.4%, in 2022, as compared to the previous year. This increase primarily reflected the Company’s continued success in its expansion within the greater Syracuse market. The average yield earned on loans decreased of 0.03% in 2022, when compared to 2021. This modest decrease in loan yields was more than offset by a $36.3 million increase in the average balance of loans in 2022, therefore resulting in a $1.3 million increase in loan income recorded in 2022 as compared to 2021. The average balance of taxable investment securities increased $38.5 million, or 12.3%, when compared to the prior year. In addition, The average yields earned on taxable investment securities increased 51 basis points to 3.25% in 2022 as compared to 2.74% in 2021 as a result of the rising interest rate environment. In combination, these factors resulted in a $2.9 million increase in interest income associated with taxable investment securities in 2022, as compared to 2021.

Interest Expense

Changes in interest expense result from changes in the average balances of deposits and borrowings and the related average interest costs on those balances. Interest expense increased $2.2 million, or 28.7%, to $9.7 million in 2022, as compared to $7.5 million in the previous year. The increase in interest expense was primarily the result of an increase in interest paid on time and MMDA deposits of $1.3 million and $951,000, respectively. Increases between 2022 and 2021 in these deposits were primarily due to increases of 22 and 34 basis points on time and MMDA deposits, respectively, primarily due to the general increase in market interest rates during 2022.

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Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan 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 loan losses represents management’s estimate of the amount necessary to maintain the allowance for loan losses at an adequate level.

The Company recorded a provision for loan losses of $2.8 million in 2022 as compared to $1.0 million in the prior year. The $1.8 million year-over-year increase in the provision for loan losses was primarily due to the results of a loan portfolio evaluation that indicated the need for certain downgrades of four large commercial real estate and commercial loan relationships totaling approximately $12.0 million. The provision for loan losses in 2022 reflected an increase in nonperforming loans of $723,000 at December 31, 2022 as compared to December 31, 2021. In addition, the provision for loan losses increased in 2022, as compared to the previous year, by an increase in outstanding loan balances of $65.3 million or 7.8%, in 2022 as compared to 2021. The Company recorded $370,000 in net charge-offs in 2022 as compared to $866,000 in net charge-offs in 2021. The ratio of net charge-offs to average loans therefore decreased to 0.04% in 2022 from 0.10% in 2021.

Nonperforming loans to total loans remained constant at 1.00% at December 31, 2022 and 2021, respectively. The allowance for loan losses to non-performing loans at December 31, 2022 was 169.9%, compared with 156.0% at December 31, 2021. Total nonperforming loans increased $723,000, or 8.7%, between December 31, 2021 and December 31, 2022, driven by increases of $1.1 million in consumer loans and an increase of $221,000 in residential mortgage loans, partially offset by a $577,000 decrease in commercial and commercial real estate loans.

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.

Years Ended December 31,

Earnings and gain on bank owned life insurance 589 559 30 5.4 %

Gains on marketable securities 352 382 (30 ) -7.9 %

Total noninterest income was $5.9 million in 2022, a decrease of $317,000, or 5.1%, from $6.2 million in 2021. This decrease was due in part from a $451,000 increase in net losses on sale of premises and equipment, a $206,000 increase in net losses on sales and redemptions of investment securities, and a $176,000 decrease in net gains on sales of loans and foreclosed real estate when compared to the prior year. The increased losses in net premises and equipment resulted primarily from a $379,000 impairment write down on a property that was reclassed from net premises and equipment to assets held for sale. The decrease in net gains on sales of loans and foreclosed real estate was primarily due to twenty one fewer loans being sold into the secondary market in 2022 as compared to 2021. These decreases were partially offset by a gain on the sale of foreclosed real estate held by our subsidiary Whispering Oaks. The decrease in sales of loans and foreclosed real estate was primarily due to twenty one fewer newly-originated 1-4 family residential mortgages being sold into the secondary market in 2022 as compared to 2021.

Noninterest income before recorded gains and losses, increased $546,000, or 10.3%, to $5.8 million in 2022 as compared to $5.3 million in 2021. The $713,000 increase in other charges, commissions and fees was primarily due to the receipt of Federal and New York historical tax credits in connection with the restoration of the newly opened Southwest Corridor branch of $521,000 and realized hedge income of $176,000 recorded in March of 2022. The $117,000 year-over-year increase in loan servicing fees was primarily due to

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increased fee collections in 2022. Fee collections of this type are generally related to commercial mortgage and commercial real estate loan activity and will vary from year to year based on a number of factors including the level of fee waivers and other concessions offered to customers as a part of refinancing negotiations. These increases were partially offset by a $338,000 decrease in services charges on deposit accounts when compared to the prior year.

Since 2016, the Company held a passive equity investment, acquired for $534,000, in an otherwise unaffiliated financial institution. The issuer of that originally-purchased common stock was acquired in June 2020 by another financial institution (the acquiring bank). Upon the closing of the transaction, the acquisition resulted in the Company receiving total cash and stock compensation of $911,000 for its equity investment, based on the closing stock price of the acquiring institution on June 30, 2020. As a result, during the second quarter of 2020, the Company recorded a net gain on sales and redemptions of investment securities of $115,000 and a gain on equity securities of $438,000. The Company retained its shares of the acquiring bank, valued at $677,000 at December 31, 2021. The investment was sold in its entirety in May, 2022. As a result of this sale, the Company recorded a net loss of $15,000 in 2022.

In addition, the Company held a fixed-income investment, previously categorized as available-for-sale, which was managed since its acquisition in 2017 by an external party. In August 2021, the investment, including all interest and dividends received from its issuer since its initial purchase date had substantially reached a breakeven position on a cash flow basis and was sold in its entirety. In 2021, dividend income related to this investment and the net improvement in the fair market value of this investment, recognized through earnings, were $78,000 and $387,000, respectively.

Noninterest Expense

The following table sets forth certain information on noninterest expense for the years indicated.

Years Ended December 31,

Foreclosed real estate expenses 78 46 32 69.6 %

Noninterest expense increased $1.4 million, or 5.0%, to $28.9 million in 2022 from $27.5 million in 2021. The increase in noninterest expenses in 2022, as compared to 2021, was primarily a result of an increase in salaries and employee benefits expense of $1.6 million, or 11.4%, that was primarily comprised of a $737,000, or 7.2%, increase in salaries due to the competitive market for talent, a $531,000 reduction in the level of deferred employee-related expenses related to loan origination volume declines following the cessation of the PPP, and a $370,000 increase in all other salaries and employee benefit expenses. Building and occupancy costs increased $259,000 in 2022 when compared to the prior year primarily due to the opening of the Company's new Southwest Corridor branch. The decrease of $513,000 in data processing expenses for 2022 is largely due to contract re-negotiations and timing of payments when compared to 2021. Advertising decreased $293,000 when compared to the same prior year period due to changes in management's strategic initiatives. The decrease in FDIC assessments in 2022 is primarily due to the change in fees calculated on total liabilities and insured deposits. Other expenses increased $532,000 in 2022 primarily due an increase in servicing fees for brokered deposits of $247,000, offset by mortgage recording tax refunds received in 2021 of $206,000, and $79,000 of other general expenses.

Income Tax Expense

The Company reported income tax expense of $2.7 million in 2022 and $3.5 million in 2021, a decrease of $800,000 when compared to the previous year. This decrease was primarily the result of anticipated federal and state historic rehabilitation credits.

The Company’s effective tax rate was 17.5% in 2022, as compared to 22.4% in 2021. The Company’s effective tax rate in 2022 was decreased from the federal statutory income tax rate of 21.0% primarily due to the effects of New York State taxation, net of federal tax benefit, partially offset by the effects of tax exempt income received in the form of interest on tax exempt loans and investment securities, historic tax credits, and the increase in the value of its bank owned life insurance.

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During 2022, the Company disposed of an equity security investment and realized a sale of real property that was held for investment, both resulting in a capital gain. These capital gains were able to fully offset prior capital loss carryforwards, thereby allowing the reversal of a valuation allowance recorded in the prior year.

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, 2022 were both $2.13, as compared to basic and diluted earnings per share of $2.07 for the year ended December 31, 2021. The increase in earnings per share between these two years was due to the increase in net income available to common shareholders between these two time periods. Further information on earnings per share can be found in Note 3 of this Form 10-K.

CHANGES IN FINANCIAL CONDITION

Total assets were $1.40 billion at December 31, 2022 as compared to $1.29 billion at December 31, 2021. The increase in total assets of $114.7 million, or 8.9%, was primarily the result of a $62.9 million increase in net loans receivable and a $33.5 million increase in held-to-maturity securities. All other assets, excluding cash and cash equivalents, increased by a net of $20.2 million. Cash and cash equivalents decreased by $1.9 million. The increase in total assets in 2022 was funded largely by a $70.1 million increase in deposits, specifically a $90.8 million increase in brokered deposits, partially offset by a $20.7 million decrease in customer deposits.

Investment Securities

The average investment portfolio represented 30.5% of the Company’s average interest-earning assets in 2022 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 primarily 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 over-collateralized pass-through securities as well as pass-through securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.

At December 31, 2022, available-for-sale investment securities increased 0.6% to $191.7 million and held-to-maturity investment securities increased 20.8% to $194.4 million as compared to December 31, 2021. 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:

Available-for-Sale Held-to-Maturity

Investment Securities:

Common stock - financial services industry 206 206 206 - - -

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The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2022. 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

More Than One More Than Five

One Year or Less to Five Years to Ten Years

Annualized Annualized Annualized

Amortized Weighted Amortized Weighted Amortized Weighted

(Dollars in thousands) Cost Avg Yield Cost Avg Yield Cost Avg Yield

Debt investment securities:

Mortgage-backed securities:

Residential mortgage-backed - US agency $ - 0.00 % $ - 0.00 % $ - 0.00 %

Other non-maturity investments:

More Than Ten Years Total Investment Securities

Annualized Annualized

Amortized Weighted Amortized Fair Weighted

(Dollars in thousands) Cost Avg Yield Cost Value Avg Yield

Debt investment securities:

Mortgage-backed securities:

Other non-maturity investments:

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HELD-TO-MATURITY

More Than One More Than Five

One Year or Less to Five Years to Ten Years

Annualized Annualized Annualized

Amortized Weighted Amortized Weighted Amortized Weighted

(Dollars in thousands) Cost Avg Yield Cost Avg Yield Cost Avg Yield

Debt investment securities:

US Treasury, agencies and GSEs $ - 0.00 % $ - 0.00 % $ 1,497 3.18 %

Mortgage-backed securities:

More Than Ten Years Total Investment Securities

Annualized Annualized

Amortized Weighted Amortized Fair Weighted

(Dollars in thousands) Cost Avg Yield Cost Value Avg Yield

Debt investment securities:

Mortgage-backed securities:

The yield information disclosed above does not give effect to changes in fair value that are reflected in accumulated other comprehensive loss in consolidated shareholders’ equity.

Loans Receivable

Average loans receivable represented 67.9%of the Company’s average interest earning assets in 2022 and account for the greatest portion of total interest income. At December 31, 2022, the Company had the largest portion of its loan portfolio in commercial loanproducts that represented 56.7%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 29.2% of total loans at December 31, 2022. The consumer loan products represents 14.1%of total loans at December 31, 2022. 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.

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The following table sets forth the composition of our loan portfolio, including net deferred costs, in dollar amount and as a percentage of loans.

December 31,

The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2022 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.

Real estate:

The following table sets forth fixed- and adjustable-rate loans at December 31, 2022 that are contractually due after December 31, 2023:

(In thousands) Due AfterOne Year

Interest rates:

Total loans receivable, including net deferred costs, increased $65.3 million, or 7.8%, to $897.8 million at December 31, 2022 when compared to $832.5 million at December 31, 2021, due to increases in commercial real estate loans, residential mortgage loans and commercial loans of $57.4 million, $15.3 million and $7.6 million, respectively. These increases in outstanding loan balances were partially offset by a decrease of $15.0 million in consumer loans. 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 increase in residential mortgage loans was primarily the result of increases in the percentage of originated loans allocated for addition to the Bank's portfolio as rates generally increased throughout 2022. The Company does not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential mortgages.

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Nonperforming Loans and Assets

The following table represents information concerning the aggregate amount of nonperforming assets:

December 31

Nonaccrual loans:

Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings (“TDR”), and foreclosed real estate (“FRE”). Loans are considered a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the categories of nonaccrual loans or accruing TDRs.

Management monitors its loan portfolios closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for loan losses at December 31, 2022. The ratio of the allowance for loan losses to year end loans was 1.71% and 1.55% at December 31, 2022 and December 31, 2021, respectively.

Total nonperforming assets increased $944,000, or 11.4%, between December 31, 2021 and December 31, 2022, driven by an increase of $221,000 in foreclosed real estate, increases of $1.1 million and $221,000 in nonperforming consumer and residential real estate loans respectively, partially offset by a decrease of $577,000 in commercial and commercial real estate loans. The $1.1 million increase in nonperforming consumer loans was due to increases of $1.1 million in purchased loans that are 90 days or greater past due. Of these loans, $489,000 relates to loans for which the Bank has full or partial recourse, or a significant secured collateral position. The decrease in nonperforming commercial and commercial real estate loans in 2022 was primarily due to the return of multiple relationships to accrual status during the year, primarily due to relationship-specific improvements in the credit profiles of those businesses and the charge-off of multiple relationships during the year in the amount of $586,000. These loans were initially placed on nonaccrual status during 2021. These relationships, which included loans collateralized by commercial real estate, made all required payments, as agreed, at December 31, 2022.

Management is monitoring these entities closely and has incorporated our current estimate of the ultimate collectability of these loans into the reported allowance for loan losses at December 31, 2022. 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 loan loss reserve. Management believes that the current level of the allowance for loan losses, at $15.3 million at December 31, 2022, 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.

Foreclosed Real Estate (“FRE”) balances increased by $221,000 at December 31, 2022, compared to $-0- 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 impaired 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

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nonaccrual status performed in accordance with their original terms, additional interest income of $476,000and $592,000 would have been recorded for the years ended December 31, 2022 and December 31, 2021, respectively.

The measurement of impaired 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 impaired loans when the receipt of contractual principal and interest is probable. At December 31, 2022 and December 31, 2021, the Company had $20.2 million and $11.4 million in loans, which were deemed to be impaired, having specific reserves of $4.8 million and $1.9 million, respectively. The $8.8 million year-over-year increase in impaired loans was principally due to increases of $5.1 million, $2.6 million, $750,000, $293,000 and $86,000 in impaired commercial lines of credit, other commercial and industrial, commercial real estate, residential mortgages, and home equity and junior liens, respectively.

The threshold for individually measuring impairment on commercial real estate or commercial loans remains at $100,000 and for residential mortgage loans remains at $300,000 at December 31, 2022. The thresholds described above do not apply to loans that have been classified as troubled debt restructurings, which are individually measured for impairment at the time that the restructuring is affected.

Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years.

Management has identified certain loans with potential credit profiles that may result in the borrowers not being able to comply with the current loan repayment terms and which may result in possible future impaired loan reporting. Potential problem loans decreased $5.1 million to $38.6 million at December 31, 2022, compared to $43.7 million at December 31, 2021. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. The decrease in potential problem loans was primarily due to a $3.1 million decrease in potential problem commercial real estate loans and a $3.1 million decrease in potential problem commercial and industrial loans and commercial lines. These decreases were partially offset by an increase in potential problem residential loans of $1.3 million. The decrease in potential problem commercial and industrial loans and commercial real estate loans in 2022 was a result of loan-specific and/or total relationship-specific improvements in the credit profiles of certain borrowers in 2022, as compared to the previous year. Management continues to monitor these loans and relationships closely.

Total potential problem loans, including impaired loans, were $38.6 million at December 31, 2022, were comprised of special mention, substandard and doubtful loans of $20.0 million, $17.0 million and $1.6 million, respectively. Total potential problem loans, including impaired loans, were $43.7 million at December 31, 2021, and were comprised of special mention, substandard and doubtful loans of $18.3 million, $23.8 million and $1.6 million, respectively. Special mention loans increased $1.8 million, while there were decreases in substandard loans of $6.8 million and doubtful loans of $84,000 at December 31, 2022 as compared to December 31, 2021. The decrease in loans classified as substandard was primarily due to a $5.3 million decrease in commercial real estate and a $3.7 million decrease in commercial and industrial loans in 2022, due to two relationships being removed from problem loan status, partially offset by a $2.0 million increase in commercial lines and a $275,000 increase in residential and consumer loans. These relationships, include secured loans (secured by third-party pledges, other governmental grants and/or business assets), unsecured loans, and loans collateralized by commercial real estate.

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 3.21% at December 31, 2022 as compared to 2.14% at December 31, 2021. This increase was due to an increase of $6.4 million in past due commercial loans, a $3.8 million increase in past due consumer loans, and a $911,000 increase in past due residential loans.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. At December 31, 2021, there were $17.9 million in loans past due including $5.2 million, $4.6 million and $8.0 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively.

The increase of $11.0 million in total loans past due at December 31, 2022, as compared to December 31, 2021, was primarily due to an increase of $7.8 million in loans 30-59 days past due and a $644,000 increase in 90 days and over past due, partially offset by a $304,000 decrease in loans 60-89 days past due. The increase in loans 30-59 days past due was primarily due to an increase of $7.3 million in commercial loans. At December 31, 2022, there were 61 loans with an outstanding aggregate balance of $13.0 million that were 30-59 days past due, while at December 31, 2021, there were 13 loans with an outstanding aggregate balance of $5.2 million. The decrease in loans 60-89 days past due was primarily due to a decrease of $458,000 in commercial loans. The increase in loans 90 days and over past due was primarily due to an increase of $476,000 in delinquent commercial loans.

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

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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 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 loan losses is adjusted, through the provision for loan 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 loan 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 Loan Losses

The allowance for loan losses is established through provision for loan losses and reduced by loan charge-offs net of recoveries. The allowance for loan losses represents the amount available for probable credit losses in the Company’s loan portfolio as estimated by management. In its assessment of the qualitative factors used in arriving at the required allowance for loan losses, management considers changes in national and local economic trends, including the COVID-19 pandemic, the rate of the portfolios’ growth, trends in delinquencies and nonaccrual balances, changes in loan policy, and changes in management experience and staffing. These factors, coupled with the recent historical loss experience within the loan portfolio by product segment support the estimable and probable losses within the loan portfolio.

The Company establishes a specific allocation for all commercial loans identified as being impaired 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 impaired 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, 2022, the Bank’s position in impaired loans consisted of 81 loans totaling $20.2 million. Of these loans, 15 loans, totaling $1.5 million, were valued using the present value of future cash flows method; and 66 loans, totaling $18.7 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 incurred 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 impaired loans if it is part of the total related credit to a previously identified impaired commercial loan. The Company also establishes a specific allowance, regardless of the size of the loan, for all loans subject to a troubled debt restructuring agreement.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s stated main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables (such as loans) and other financial assets in scope. The ASU requires entities to measure credit losses on most financial assets carried at amortized costs and certain other instruments using an expected credit loss model. Banks in the United States above $5.0 billion in assets generally adopted this new way of measuring loan losses called the “Current Expected Credit Loss” (“CECL”) model in 2020, with smaller public and private banks, such as Pathfinder, required to convert to this method in fiscal years beginning after December 15, 2022. The Company computed its Allowance for Loan Losses at December 31, 2022 using a methodology called the "Incurred Loss Model" ("ILM"), which remained applicable GAAP at that date. ILM (current GAAP) assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value. CECL requires that an estimate of loss for the entire life cycle of each asset with credit loss exposure be recorded at the funding date of that asset as a component of the reported Allowance for Credit Losses. For additional information regarding current expected credit losses, see Notes 2 and 6 to the consolidated financial statements.

The three major differences between CECL and ILM are: (1) CECL requires that reserves for the full, expected life of any asset with credit loss exposure be established at the funding date of the asset. The reserve must consider all expected credit and credit-related losses in aggregate to the asset's maturity (including prepayment projections) using a methodology that both a.) requires an evaluation of the Bank’s segmented internal credit dynamics (historical loss rate, underwriting standards, etc.); and b.) requires evaluations of the macroeconomic environment at funding and at the end of each subsequent reporting period; (2) CECL requires that a broader array of assets, in addition to outstanding loans, must be included in the CECL calculation than were includable under the ILM model; and (3)

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CECL requires substantially enhanced documentation and underlying assumption, input and calculation support, due to its more extensive modeling assumptions and inputs, as well as its more complex calculations, than were previously considered necessary under ILM.

Beginning on January 1, 2023, the Bank will have to account for all credit loss exposures using this CECL methodology. A nonrecurring adjustment from ILM to CECL was made on January 1, 2023, increasing the ALLL at December 31, 2022 by $2.2 million in determining the beginning ACL for the quarter ended March 31, 2023. This transition adjustment was booked to retained earnings in the first quarter of 2023 and therefore will be a subtraction from tangible book value (“TBV”), after tax effects of approximately $1.7 million.

The allowance for loan losses at December 31, 2022 and 2021 was $15.3 million and $12.9 million respectively, or 1.71% and 1.57% of total year end loans on those dates, respectively. The Company recorded $370,000 in net charge-offs in 2022, as compared to $866,000 in net charge-offs in 2021. The ratio of net charge-offs to average loans decreased to 0.04% in 2022 from 0.10% in 2021.

For further discussion of our allowance for loan losses procedures, please see “Business-Allowance for Loan 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 loan 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.

of the Loans to of the Loans to of the Loans to of the Loans to of the Loans to

(1)

Includes loans held-for-sale at December 31, 2022, 2021, 2020 and 2019. There were no loans classified as held for sale at December 31, 2018.

The following table sets forth the allowance for loan losses for the years indicated:

Recoveries of loans previously charged-off:

Commercial real estate and loans 296 70 4 1 66

Residential real estate - - 2 2 21

Loans charged off:

Net charge-offs to average loans outstanding 0.04 % 0.10 % 0.08 % 0.09 % 0.22 %

Allowance for loan losses to year-end loans 1.71 % 1.57 % 1.55 % 1.11 % 1.18 %

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The following table sets forth the loan net charge-off ratios for the years indicated:

Allowance for loan losses to year-end loans 1.71 % 1.57 %

Allowance for loan losses to nonperforming loans 169.93 % 155.99 %

Nonaccrual Loans to total loans 1.00 % 1.00 %

Allowance for loan losses to nonaccrual loans 169.93 % 155.99 %

Net charge-offs to average loans outstanding

Commercial real estate and loans 0.03 % 0.15 %

Consumer and home equity 0.01 % 0.13 %

Residential real estate 0.00 % 0.01 %

Total charged-off 0.04 % 0.10 %

Bank Owned Life Insurance

The Company held $24.0 million and $23.4 million in bank owned life insurance at December 31, 2022 and 2021, respectively. Bank owned life insurance increased $589,000, or 2.5%, to $24.0 million at December 31, 2022, as compared to December 31, 2021. The increase was primarily due to an increase in the cash value of the policies recorded as income in 2022.

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 $89.0 million, or 8.6%, in 2022. For the year ended December 31, 2022, 63.3% 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 provide the Company with a lower cost of funds than time deposits. The Company will continue to emphasize retail and business core deposits by providing depositors with a full range of deposit product offerings and will maintain its recent focus on deposit gathering within the Syracuse market.

At December 31, 2022, business deposits and municipal deposits decreased $25.2 million and $7.7 million, respectively, and consumer deposits increased $12.4 million, when compared to December 31, 2021. Noninterest-bearing deposits, which are primarily demand deposits, were $183.7 million at year end, compared with $191.9 million on December 31, 2021. The increase in consumer deposits during the year ended December 31, 2022, reflected the Bank’s increased market penetration among non-business customers, particularly in Onondaga County. The decrease in business deposits was primarily due to the deposits from a large credit union being withdrawn when the credit union was sold. Additionally, increases in business deposits from the activity of PPP loans generated in 2021 did not recur in 2022. The decrease in municipal deposits in 2022, as compared to the previous year, resulted from transitory factors and cyclical activity among a small number of the Bank’s largest municipal depositors.

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. Total deposits of $1.06 billion at December 31, 2021 consisted in part of $157.8 million in brokered money market and certificates of deposit accounts. Brokered deposits represented 15.0% of all deposits at December 31, 2021.

The following table sets forth our deposit composition in dollar amount and as a percentage of total deposits.

December 31,

The Company has deposits that exceeds the FDIC insurance limit of $250,000 of $501.2 million at December 31, 2022 and $492.0 million at December 31, 2021. At December 31, 2022, time deposit accounts in excess of $250,000 totaled $71.7 million, or 18.6% of

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time deposits and 6.4% of total deposits. At December 31, 2021, these deposits totaled $67.5 million, or 21.0% 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, 2022:

(In thousands)

Remaining Maturity:

Three months or less $ 21,710

Three through six months 9,190

Six through twelve months 11,276

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:

Average interest rate during the year 2.48 % 0.28 % 1.65 %

Average interest rate at the end of the period 3.86 % 1.28 % 0.26 %

The following table represents information regarding long-term borrowings for the years ended December 31:

Average interest rate during the year 0.96 % 1.34 % 2.08 %

Average interest rate at the end of the period 1.39 % 1.12 % 1.60 %

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 Federal Reserve. 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 U.S. dollar-denominated (“USD”) LIBOR rate plus 1.65%. These securities have a five-year call provision. The Company paid $178,000 and $94,000 in interest expense related to this issuance in 2022 and 2021, respectively. The Company guarantees all of these securities.

In December 2020 the United Kingdom’s Financial Conduct Authority (“FCA”), the organization responsible for regulating LIBOR, stated that it would (i) cease publishing indices at December 31, 2020 for one-week and two-month USD LIBOR after December 31, 2021, and (ii) cease publishing of all other tenors of USD LIBOR (specifically, one, three, six and 12-month tenors) after June 30, 2023. The Alternative Reference Rates Committee (the “ARRC”), formed by the Federal Reserve Board and the Federal Reserve Bank of New York, was charged with developing an alternative rate that will replace USD LIBOR. The ARRC subsequently identified the Secured SOFR as the rate that represents best practice for use in USD LIBOR derivatives and other financial contracts. U.S. banking regulators also encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and, in any event, by December 31, 2021. Management has analyzed the Company’s aggregate exposure to instruments that are indexed to USD LIBOR (including the Company’s acquired loan participations, fixed-income investments, hedging instruments and the Floating-Rate Debentures) and concluded that the adoption of SOFR will not materially impact the Company or the results of its operations.

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The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Condition at December 31, 2022 and 2021. 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 at its discretion.

On October 15, 2015, the Company executed a $10.0 million non-amortizing Subordinated Debt (the 2015 Subordinated Debt) with an unrelated third party that was scheduled to mature on October 1, 2025. The Company had the right to prepay the 2015 Subordinated Debt on the first day of any calendar quarter after October 15, 2020 without penalty. The effective annual interest rate charged to the Company was be 6.25% through the maturity date of the 2015 Subordinated Debt. In the first quarter of 2021, the Company exercised its existing contractual option and issued a Notice of Redemption (“NOR”) to the holders of the 2015 Subordinated Debt, which was scheduled to mature on October 1, 2025. With the issuance of this NOR, the Company redeemed the $10.0 million 2015 Subordinated Debt, plus accrued interest on April 1, 2021. Interest expense, related to this borrowing, of $-0- and $156,000 was recorded in the years ended December 31, 2022 and 2021, respectively.

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, any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company, when applicable. 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 of $1.6 million and $1.5 million was recorded for the years ended December 31, 2022 and 2021, respectively, related to this transaction.

Capital

The Company’s shareholders’ equity increased $710,000, or 0.6%, to $111.0 million at December 31, 2022 from $110.3 million at December 31, 2021. This increase was primarily due to a $10.4 million increase in retained earnings, a $1.0 million increase in additional paid in capital and a $180,000 increase in ESOP shares earned, offset by a $10.9 million increase in comprehensive loss. The increase in retained earnings resulted from $12.9 million in net income recorded in 2022. Partially offsetting this increase in retained earnings were $1.6 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 $368,000 for the cumulative effect of affiliate capital allocation. Comprehensive loss increased primarily as the result of increased losses on available for sale securities of $10.6 million and a $1.0 million adjustment to pension and post retirement, partially offset by a $669,000 gain 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, 2022, 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.

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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, 2022, 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. 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, 2022, the Bank exceeded all current regulatory required minimum capital ratios, including the capital buffer requirements.

LIQUIDITY

Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements.

The Company's liquidity has been enhanced by its ability to borrow from the FHLBNY, whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, or the sale of loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans.

For the year ended December 31, 2022, cash and cash equivalents decreased by $1.9 million. The Company reported net cash flows from financing activities of $107.6 million generated principally by a $47.8 million increase in short term borrowings and a $90.8 million increase in brokered deposits, offset by a decrease in customer deposits of $20.7 million, a decrease in net proceeds from long-term borrowings of $8.9 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 $2.1 million.Additionally, $21.7 million was provided through operating activities generated principally by net income and proceeds from loan sales. These cash flows were primarily invested in: $114.9 million in purchases of investment securities in 2022, and $66.3 million net increases in loans outstanding.

Certificates of deposit due within one year of December 31, 2022 totaled $216.2 million, representing 56.0% of certificates of deposit at December 31, 2022, a decrease from 57.9% at December 31, 2021. 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, 2023.

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, 2022 and 2021, the Company had cash and cash equivalents of $35.3 million and $37.1 million, respectively.

The Bank has a number of existing credit facilities available to it. At December 31, 2022, total credit available under the existing lines of credit was approximately $163.4 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2022, the Company had $116.0 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 $47.4 million available.

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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, 2022, management reported to the Board of Directors that the Bank was in compliance with its liquidity policy guidelines.

Due to a variety of macroeconomic and bank-specific factors, there was a small number of large bank failures in the first quarter of 2023 that resulted in those banks being placed into receivership by the FDIC. These failures were highly-publicized and created significant concerns related to 'systemic' risk within the banking sector. It was generally understood that those particular failures resulted primarily from imprudent depositor concentrations, a loss of large-balance depositor confidence in those institutions and, consequently, unsustainably large depositor withdrawals. In an effort to increase depositor confidence across the United States’ banking system, the Federal Reserve Board, pursuant to section 13(3) of the Federal Reserve Act, authorized all 12 Reserve Banks to establish the Bank Term Funding Program (“BTFP”) to make available additional funding to eligible depository institutions, such as the Bank, in order to help assure those institutions have the ability to meet the liquidity needs of all of their depositors.

The BTFP will be an additional source of liquidity provided against any insured depository institution’s high‐quality securities, eliminating an eligible depository institution’s need to quickly sell those securities in times of liquidity stress. Significant features of the BTFP include the following:

•

Advances can be requested under the Program until at least March 11, 2024;

•

There is no limit to the number or size of advances in the aggregate. Eligible depository institutions may borrow up to the value of eligible collateral they pledge. The collateral valuation will be at par value. Therefore, there will be no market value ‘haircut’ adjustments applied to qualifying collateral and available margin to participating financial institutions will consequently be 100% of par value;

•

Borrowers may prepay advances (including for purposes of refinancing) at any time without penalty;

•

Advances will be made available to eligible depository institutions for a term of up to one year;

•

The rate for term advances will be the one-year overnight index swap rate plus 10 basis points and will be fixed for the term of the advance on the day the advance is made;

•

Advances made under the Program are made with recourse beyond the pledged collateral to the eligible depository institution;

The BTFP will be an additional source of potential liquidity for the Bank until the date of the Program's termination. The BTFP may be accessed by the Bank if management determines that there is a potential or realized short-term liquidity requirement for which this facility should be used to support the Bank's operations. Management could also electively choose to use the facility in certain other circumstances to create other financial or operational benefits at the time that the BTFP line is accessed. As of the date of this filing, the BTFP has not been accessed by the Bank.

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, 2022, the Bank had $216.0 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.

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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Pathfinder Bancorp, Inc.

Page

Management’s Report on Internal Control over Financial Reporting 62

Report of Independent Registered Public Accounting Firm 64

Consolidated Statements of Condition – December 31, 2022 and 2021 66

Consolidated Statements of Income – Years ended December 31, 2022 and 2021 67

Notes to Consolidated Financial Statements 72

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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, 2022. The term “disclosure controls and procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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

In connection with the filing of the Annual Report on Form 10-K as of December 31, 2022, our CEO and CFO concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022 at a reasonable assurance level.

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, 2022, 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.

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Changes in Internal Control over Financial Reporting

There were no changes made in our internal controls during the year ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

/s/ James A. Dowd /s/ Walter F. Rusnak

James A. Dowd Walter F. Rusnak

Oswego, New York

March 31, 2023

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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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2022, 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.

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 Loan Losses

As described in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses is management’s estimate of losses inherent in the loan portfolio as of the date of the statement of condition and it is recorded as a reduction to loans. The allowance for loan losses was $15.3 million at December 31, 2022, which consists of three components (i) specific reserves based on probable losses on specific loans (“specific reserves”), and (ii) a general allowance based on historical loan loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company (“general reserves”). The specific reserve component relates to loans that are classified as impaired and is established when the collateral value or discounted cash flows of the impaired loan are lower than the carrying value of the loan. The general reserve component of the allowance for loan losses covers pools of loans, by loan class, and is based on a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, known information about individual loans and other factors.

Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. The qualitative adjustment for the general reserve includes management’s consideration of changes in national and local economic trends, the rate of growth in the portfolio, trends of delinquencies and nonaccrual balances, changes in loan policy, and changes in lending management experience and related staffing.

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The qualitative adjustment contributes significantly to the general reserve component of the allowance for loan losses. Management’s identification and analysis of these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan losses. We identified the estimate of the qualitative adjustments of the general reserve for the allowance for loan losses as a critical audit matter as they represent a significant portion of the total general reserve and because management’s estimate relies on a qualitative analysis to determine a quantitative adjustment which required especially subjective auditor judgment.

The primary procedures we performed to address this critical audit matter included performing substantive testing, including evaluating management’s judgments and assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, which consisted of the following:

•

Assessing management’s methodology and considering whether relevant risks were reflected in the modeled provision and whether adjustments to modeled calculations were appropriate.

•

Evaluating the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors and considering whether the sources of data and factors that management used in forming the assumptions are relevant, reliable, and sufficient for the purpose based on the information gathered.

•

Evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the general reserve qualitative adjustments for consistency with each other, the supporting data, relevant historical data, and industry data.

•

Assessing whether historical data is comparable and consistent with data of the current year and considering whether the data is sufficiently reliable. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period.

•

Analytically evaluating the qualitative adjustment in the current year compared to prior years for directional consistency and reasonableness.

•

Evaluated whether management’s judgments and assumptions adequately contemplated the impact of COVID-19 on management’s quantitative and qualitative assessment.

•

Testing the calculations used by management to translate the assumptions and key factors into the allowance estimated amount.

We have served as the Company’s auditor since 2011.

/s/ BONADIO & CO., LLP

Bonadio & Co., LLP

Pittsford, New York

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Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

December 31, December 31,

(In thousands, except share and per share data) 2022 2021

ASSETS:

Marketable securities, at fair value 1,862 677

Federal Home Loan Bank stock, at cost 5,982 4,189

Loans held-for-sale 19 513

Assets held-for-sale 3,042 -

Operating lease right-of-use assets 2,098 2,136

Finance lease right-of-use assets 4,213 -

Foreclosed real estate 221 -

LIABILITIES AND SHAREHOLDERS' EQUITY:

Deposits:

Accrued interest payable 975 106

Shareholders' equity:

Accumulated other comprehensive loss (12,172 ) (1,268 )

Total Pathfinder Bancorp, Inc. shareholders' equity 110,997 110,287

Noncontrolling interest 585 346

The accompanying notes are an integral part of the consolidated financial statements.

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Pathfinder Bancorp, Inc.

Consolidated Statements of Income

For the years ended

(In thousands, except per share data) December 31, 2022 December 31, 2021

Interest and dividend income:

Debt securities: - -

Federal funds sold and interest earning deposits 149 9

Interest expense:

Interest on short-term borrowings 310 10

Interest on long-term borrowings 564 1,018

Interest on subordinated debt 1,749 1,790

Net interest income after provision for loan losses 38,649 37,273

Noninterest income:

Service charges on deposit accounts 1,126 1,464

Earnings and gain on bank owned life insurance 589 559

Net (losses) gains on sales and redemptions of investment securities (169 ) 37

Gains on marketable securities 352 382

Net gains on sales of loans and foreclosed real estate 137 313

Net (losses) gains on sale of premises and equipment (250 ) 201

Debit card interchange fees 867 923

Other charges, commissions & fees 1,771 1,058

Noninterest expense:

Professional and other services 1,528 1,627

Insurance agency expense 906 825

Community service activities 267 220

Foreclosed real estate expenses 78 46

Net income attributable to noncontrolling interest 101 103

Net income attributable to Pathfinder Bancorp Inc. $ 12,932 $ 12,407

Voting Earnings per common share - basic and diluted $ 2.13 $ 2.07

Series A Non-Voting Earnings per common share- basic and diluted $ 2.13 $ 2.07

Dividends per common share (Voting and Series A Non-Voting) $ 0.36 $ 0.28

The accompanying notes are an integral part of the consolidated financial statements.

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Pathfinder Bancorp, Inc.

Consolidated Statements of Comprehensive Income

For the years ended

Other Comprehensive Income

Retirement Plans:

Retirement plan net gains recognized in plan expenses 2 105

Plan (losses) gains not recognized in plan expenses (1,380 ) 818

Net unrealized (losses) gains on retirement plans (1,378 ) 923

Available-for-sale securities:

Unrealized holding losses arising during the period (14,448 ) (535 )

Net unrealized losses on available-for-sale securities (14,288 ) (554 )

Derivatives and hedging activities:

Unrealized holding gains arising during the period 906 921

Net unrealized gains on derivatives and hedging activities 906 921

Other comprehensive (loss) income, before tax (14,762 ) 1,311

Other comprehensive (loss) income, net of tax (10,904 ) 968

Comprehensive income, attributable to noncontrolling interest $ 101 $ 103

Comprehensive income attributable to Pathfinder Bancorp, Inc. $ 2,028 $ 13,375

Tax Effect Allocated to Each Component of Other Comprehensive Income

Retirement plan net gains recognized in plan expenses $ - $ (27 )

Plan losses (gains) not recognized in plan expenses 363 (215 )

Unrealized holding losses arising during the period 3,775 140

Income tax effect related to other comprehensive income $ 3,858 $ (343 )

(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.