ITEM 1A: RISK FACTORS
Not required of a smaller reporting company.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 1C: CYBERSECURITY
The Company considers cybersecurity a subset of information security, and as such, cybersecurity risks and controls are assessed in our information security risk assessment and managed in our Information & Cybersecurity Program & Policy ("ICPP"). The ICPP is developed and maintained utilizing the Federal Financial Institutions Examination Council ("FFIEC") Information Technology Examination Handbook, FDIC and NYSDFS guidance and regulations, and Gramm-Leach–Bliley Act, and represents the standards, policies, procedures, and guidelines defining the Company’s security requirements and related activities, which includes risk management and risk assessment practices. Management has designated the Information Security Officer ("ISO"), who has 15 years of experience, along with the Technology Steering Committee, with implementing and monitoring the ICPP. The Company’s Information Technology ("IT") department consists of the Chief Information Officer ("CIO"), who has 16 years of experience with the Company, and other key personnel who have years of experience and various certifications related to assessing and managing cybersecurity risk. Additionally, the Company has developed a comprehensive enterprise risk management program to monitor risks related to its operations, including cybersecurity risk, and the Company’s Chief Risk Officer has primary responsibility for the enterprise risk management program. Management also engages the services of third parties to assist the ISO with their tasks. The Company believes that risk management is a component of overall governance and that IT risk management is a component of overall risk management.
The Company recognizes that our overall security culture contributes to the effectiveness of our ICPP. The Company has developed an enterprise risk management program that identifies, prioritizes and provides a formal structure for the internal and external risks that impact the organization. The Board of Directors sets the tone and direction for the Company’s use of IT and has identified the Technology Steering Committee as having primary responsibility for oversight of the Company’s risk exposures and risk assessments and policies, including risks related to cybersecurity. The Board of Directors and Technology Steering Committee approve and periodically review and re-approve the policy and other IT related policies. While the Board of Directors may delegate the design, implementation, and monitoring of certain IT activities to the CIO or designee, the full Board of Directors remains responsible for overseeing IT strategies and policies, including cybersecurity. To help carry out their responsibilities, Directors, management, and all employees are periodically trained to understand IT activities and risks, including cybersecurity risks. Management, via the Technology Steering Committee and ISO, or combination, provides a status report to the Board of Directors at least annually, with more frequent communications as necessary. The report describes the overall status of the ICPP and material matters related to the program, including security breaches, cybersecurity assessments, cybersecurity awareness training for employees and the Board of Directors.
The Company utilizes third-party threat analysis tools such as penetration testing and vulnerability scanning to assist in understanding and supporting the measurement of information security related risks. Additionally, the Company uses a third-party tool to help management identify current cybersecurity risks and control maturity levels, and to evaluate overall cybersecurity preparedness. The Company conducts gap analysis and action plans designed to identify potential actions that improve our overall cybersecurity posture, and periodically reevaluates both cybersecurity risks and controls to assure they are commensurate with our size and complexity and are keeping pace with the overall cybersecurity threat environment.
Management also obtains, analyzes, and responds to information from various sources on cybersecurity threats and vulnerabilities that may affect the Company, while incorporating available information on cybersecurity events into our risk assessment. Additionally, management develops, maintains, and updates a repository of cybersecurity threat and vulnerability information that may be used in conducting risk assessments, and ultimately provide updates to the Board of Directors on cybersecurity risk trends. The Company has not experienced any cybersecurity incidents in the past that have individually or in the aggregate had a materially adverse effect on our business, financial condition or results of operations.
Additionally, the Company conducts due diligence in the selection and on-going monitoring of third-party service providers. Management is responsible for ensuring that such third parties use suitable information security controls when providing services to us. As part of the oversight of third-party service providers, management will determine whether cybersecurity risks are identified, measured, mitigated, monitored, and reported by such third parties.
- 24 -
ITEM 2: PROPERTIES
The Company has seven offices located in Oswego County, five 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, 2024. The aggregate net book value of the Bank's premises and equipment was $19.0 million at December 31, 2024. 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
5 West First Street South
Central Square Branch 2005 Owned
Central Square, New York 13036
Cicero Branch 2011 Owned
Pike Block Branch 2014 Leased (2)
109 West Fayette Street
Clay Branch 2018 Leased (3)
Southwest Corridor Branch 2022 Leased (4)
506 West Onondaga Street
East Syracuse Branch 2024 Leased (5)
6611 Manlius Center Road
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 $40,000.
(2)
The premises are leased with an annual rent of $93,000.
(3)
The premises are leased with an annual rent of $77,000.
(4)
The premises are leased with an annual rent of $262,000.
(5)
The premises are leased with an annual rent of $946,000. The lease began in July 2024 in connection with the Company's acquisition of the East Syracuse branch. Lease expense for 2024 was $425,0000.
(6)
The premises are leased with an annual rent of $17,000.
- 25 -
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, 2024.
ITEM 4: MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s voting common stock trades on the NASDAQ Capital Market under the symbol “PBHC.”
There were 292 shareholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) as of March 24, 2025.
The Company did not repurchase any shares of its common stock for the year ended December 31, 2024.
Equity Compensation Plan Information
The following table provides information as of December 31, 2024 with respect to shares of voting common stock that may be issued under the Company’s existing equity compensation plans. See Note 15.
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
- 26 -
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
Throughout Management’s Discussion and Analysis (“MD&A”) the term, the “Company”, refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank (the “Bank”) and Pathfinder Statutory Trust II are wholly owned subsidiaries of Pathfinder Bancorp, Inc.; however, Pathfinder Statutory Trust II is not consolidated for reporting purposes (see Note 13 of the consolidated financial statements). Pathfinder Risk Management Company, Inc., and Whispering Oaks Development Corp. are wholly owned subsidiaries of Pathfinder Bank.
On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual holding company form of organization to the stock holding company form of organization (the “Conversion”). Following the completion of the Conversion, the Company was created substantially in its current form and Pathfinder Bancorp, MHC ceased to exist. The Company had 6,125,649 and 6,099,571 shares of voting and non-voting common stock in aggregate outstanding at December 31, 2024 and December 31, 2023, respectively.
Since the Conversion, we have substantially transformed our business activities from those of a traditional savings bank to those of a commercial bank. This transformation of activities has significantly affected the overall composition of our balance sheet. While not reducing our role as a leading originator of one-to-four family residential real estate loans within our marketplace, which had been our primary focus as a savings bank, we have substantially grown our commercial business and commercial real estate loan portfolios since the Conversion. As a commercial bank, we have been able to offer customized products and services to meet individual commercial customer needs and thereby more definitively differentiate our services from those offered by our competitors. As a result, we have been able to create a substantially more diversified loan portfolio than the one that was in place before the completion of the Conversion. When compared to the Bank’s loan portfolio composition prior to the Conversion, it is our view that our current asset portfolio (1) significantly improves upon the distribution of credit risk across a broader range of borrowers, industries and collateral types, and (2) is more likely to generate consistent net interest margin in a broader range of interest rate environments due to the portfolio’s increased percentage of shorter-term and/or adjustable-rate assets. In a concurrent effort, the Bank has been able to fund the majority of the high level of growth in our loan portfolios primarily with deposits gathered from our local community. We believe that we have gathered these deposits at a reasonable overall cost in terms of deposit interest rates, as well as at a reasonable overall level of related infrastructure and customer support service expenses.
On May 8, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Castle Creek Capital Partners VII, L.P. (“Castle Creek”), pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Common Stock”); (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Series B Preferred Stock”); and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of Common Stock at an exercise price equal to $14.25 per share (the “Warrant”), in a private placement transaction (the “Private Placement”) for gross proceeds of approximately $17.0 million. The Securities Purchase Agreement contains significant representations, warranties, and covenants of the Company and Castle Creek.
On May 8, 2019, the Company filed Articles Supplementary with the Maryland Department of Assessments and Taxation to issue 1,155,283 shares of Series B Preferred Stock to Castle Creek. Each share of the Series B Preferred Stock was convertible on a one-for-one basis into either (i) Common Stock under certain circumstances or (ii) non-voting common stock, par value $0.01 per share (which will also be convertible into Common Stock), subject to approval of the creation of such class of non-voting common stock by the Company’s stockholders.
The Company also entered into subscription agreements dated as of May 8, 2019 (the “Subscription Agreements”) with certain directors and executive officers of the Company as well as other accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of Common Stock at $14.25 per share for gross proceeds of approximately $3.8 million, before payment of placement fees and related costs and expenses. The Subscription Agreements contain representations, warranties, and covenants of the purchasers and the Company that are customary in private placement transactions. The subscription agreements were also part of the Private Placement, and the term “Private Placement” includes both transactions.
In total, therefore, the Company issued 306,977 shares of Common Stock, 1,155,283 shares of Series B Preferred Stock and the Warrant at the conclusion of the Private Placement. The transaction raised $20.8 million in gross proceeds and the final net cash received from the Private Placement, after all issuance expenses, including placement fees and all other issuance/due diligence costs of $927,000 and $342,000, respectively, was $19.6 million. The fair value of the Warrant at the time of issuance was $373,000.
Pursuant to NASDAQ rules, Castle Creek could not convert the Series B Preferred Stock or, in the future, the non-voting common stock into Common Stock, or exercise the Warrant if doing so would cause Castle Creek, when combined with the purchases of certain directors and executive officers of the Company as well as other accredited investors in the Private Placement, to own more than 19.99% of the Common Stock outstanding immediately prior to the execution of the Securities Purchase Agreement (the “Exchange Cap”). The Company was required to request stockholder approval to eliminate the Exchange Cap no later than at the 2021 annual meeting of Company shareholders. In addition, at the same meeting, the Company was required to seek shareholder approval to create a class of
- 27 -
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, 2024, Castle Creek owned approximately 9.9% of the Company’s common voting stock. The Warrant will receive dividends equal to the amount paid on the Company’s common stock. The dividend payment shall be calculated on (1) the unexercised portion of the 125,000 notional shares encompassed within the terms of the Warrant, less (2) any exercised portion of the 125,000 shares, times (3) the amount of the quarterly dividend paid to common shareholders. Dividend payments, if declared on the Company’s common stock, will be made on the Warrant until its expiration date.
Following the Private Placement, the Company used the net cash received from the transaction to strengthen the Company’s general capital and liquidity positions, fund growth within our marketplace, purchase certain loan assets, and increase the regulatory capital position of the Bank. The Company will continue to use the additional capital raised through the Private Placement primarily to support the realization of continued growth opportunities within our marketplace and, to a lesser extent, for general corporate purposes.
Pursuant to the terms of the Securities Purchase Agreement, Castle Creek is entitled to have one representative appointed to the Company’s Board of Directors for so long as Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Voting Stock. If Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Voting Stock and does not have a board representative appointed to the Company’s Board of Directors, the Company will invite a person designated by Castle Creek to attend meetings of the Company’s Board of Directors as an observer. On June 30, 2023, the Company’s Board of Directors appointed Anthony R. Scavuzzo, a representative of Castle Creek, to the Board of Directors.
On November 13, 2020, the Company entered into an agreement (the “Exchange Agreement”) with Castle Creek providing for the exchange of 225,000 shares of the Company’s Common stock owned by Castle Creek for 225,000 shares of the Company’s Series B Preferred Stock. The exchange was consummated simultaneously with the execution and delivery of the Exchange Agreement. The Company and Castle Creek entered into the Exchange Agreement to enable the equity ownership of Castle Creek to comply with applicable banking laws and regulations.
As a result of the Exchange Agreement, on November 13, 2020, the Company issued to Castle Creek 225,000 shares of its Series B Preferred Stock in exchange for an equivalent number of shares of Company Common Stock held by Castle Creek in a transaction exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. Castle Creek was the only stockholder of the Series B Preferred Stock. The Company received no cash proceeds as a result of the exchange. In addition, the Company did not pay any commission or remuneration for the solicitation of the exchange.
On November 13, 2020, the Company filed an amendment to the Articles Supplementary to the Articles of Incorporation of the Company designating the Series B Preferred Stock with the Maryland Department of Assessments and Taxation to increase the classified number of shares of the Series B Preferred Stock from 1,155,283 to 1,506,000 to allow for the additional issuance of Series B Preferred Stock to Castle Creek. There were no other changes made to the preferences, limitations, powers and relative rights of the Series B Preferred Stock.
On June 4, 2021, shareholders of the Company approved an amendment to the Company’s Articles of Incorporation to authorize Non-Voting Common Stock, and to eliminate the Exchange Cap. On June 9, 2021, the Company filed Articles Supplementary to the Articles of Incorporation of the Company (the “Articles Supplementary”) with the Maryland State Department of Assessments and Taxation creating a Class A Non-Voting Common Stock, par value $0.01 per share (“Non-Voting Common Stock”). The Articles Supplementary authorized 1,505,283 shares of the Non-Voting Common Stock which Castle Creek received in exchange for the Company’s outstanding Series B Preferred Stock on a one for one basis and allowed for the issuance of 125,000 shares of Non-Voting Common Stock that may be issued upon the exercise of the Warrant.
- 28 -
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.
- 29 -
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 year ended December 31,
Year End
For the Year
Convertible preferred stock dividends - - - 97 291
Per Share
Performance Ratios
Shareholders' Equity to total assets at end of year 8.24 8.15 7.93 8.58 7.94
- 30 -
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, 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.
- 31 -
At or for the year ended December 31,
Per Share
Book value per common share
Preferred stock - - - - 17,901
Total common equity
Tangible book value per common share
Performance Ratios
Efficiency ratio
Less: Gain on asset sale 3,169 - - - -
Dividend payout ratio
Return on average common equity
Average preferred stock - - - - 15,709
- 32 -
At or for the year ended December 31,
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to adjusted assets)
Tier 1 Common Equity (to risk-weighted assets)
CRITICAL ACCOUNTING ESTIMATES
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values, and information used to record valuation adjustments for certain assets and liabilities, are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for credit losses, deferred income tax assets and liabilities, pension obligations, the annual evaluation of the Company’s goodwill for possible impairment, and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available.
Allowance for Credit Losses. On January 1, 2023 the Company adopted the Current Expected Credit Loss ("CECL") model, as required under Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company adopted the standard, which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses on loans and unfunded commitments is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio and commitments to extend credit. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires
- 33 -
significant judgment on the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, and environmental factors, all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being individually evaluated which are on nonaccrual and have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The Company also establishes a specific allowance, regardless of the size of the loan, for modified loans due to borrowers experiencing financial difficulties. In addition, an accruing substandard loan could be identified as being individually evaluated. The measurement of individually evaluated loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured based on the fair value of the collateral, less costs to sell. At December 31, 2024, the Bank’s position in individually evaluated loans consisted of 45 loans totaling $20.0 million. Of these loans, 15 loans, totaling $3.0 million, were valued using the present value of future cash flows method; and 30 loans, totaling $17.0 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime loss for each risk-rating category. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in this report.
As noted above, the allowance for credit losses (“ACL”) represents management’s estimate of lifetime losses in the Bank’s loan portfolio. Determining the amount of the ACL requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, as correlated to historical economic metrics and in consideration of current economic trends and conditions, and other qualitative factors, all of which may be susceptible to significant change.
The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default and loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to future cash flows that are adjusted to present value and these discounted expected losses become the Allowance for Credit Losses.
Management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions, levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration, and changes in regulatory environment, management, markets and product offerings. The Company quarterly assesses the magnitude of QF adjustments necessary to be applied to the quantitatively-derived ACL in order to incorporate forward-looking projections in its final evaluation of current expected credit losses.
In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. At December 31, 2024, the Bank held $535.0 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 58.2% of the Bank’s entire loan portfolio. The Bank allocated $10.4 million to the ACL for these loans, including $4.3 million derived from the use of qualitative factors in the calculation. Given the concentration of ACL allocation to the total commercial loan portfolio and the significant judgments made by management in deriving the qualitative loss factors, management considers the impact that changes in judgments could have on the ACL. The ACL could increase (or decrease) by approximately $1.1 million, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2024 in the final recorded estimation of the ACL on loans recognized on the Statement of Financial Condition.
If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual credit losses and an increase to the ACL may be necessary in future periods to allow for different assumptions or adverse developments. In addition, future problems with one or more individually evaluated loans or one or more individually evaluated borrower relationships could require a significant increase to the ACL.
Management’s methodology and policy in determining the allowance for credit losses can be found in Note 1 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The activity in the allowance for credit losses is depicted in supporting tables in Note 6 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
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
- 34 -
judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. For additional information regarding the Company's deferred income taxes, see Note 17 to the consolidated financial statements.
Pension Obligations. Pension and postretirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated financial statements contained herein.
Evaluation of Goodwill. Management performs an annual evaluation of the Company’s goodwill for possible impairment. Based on the results of the 2023 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2024. The evaluation approach is described in Note 10 of the consolidated financial statements contained herein.
Estimation of Fair Value. The estimation of fair value is significant to several of our assets; including investment securities available-for-sale, interest rate derivative (discussed in detail in Note 22 of the consolidated financial statements), intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.
Fair values for securities available-for-sale are obtained from an independent third party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of individually analyzed loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.
RECENT EVENTS
On July 19, 2024, the Bank completed the purchase and assumption of the East Syracuse, New York branch of Berkshire Bank. In connection with the purchase, the Bank assumed approximately $186 million in deposit liabilities and acquired approximately $30 million in loans.
On October 15, 2024, the Bank announced that it sold its interest in the FitzGibbons Agency to Marshall & Sterling Enterprises, Inc. The Bank received $1.2 million from the sale in October 2024, and per the closing agreement the Company expects to receive $1.6 million in September 2025. The Company recognized a pre-tax gain of $3.2 million and a net gain of $1.5 million in the fourth quarter of 2024, which are inclusive of the deferred income expected in September 2025.
On December 23, 2024, the Company announced that its Board of Directors had declared a cash dividend of $0.10 per share on the Company’s voting common and non-voting common stock, and a cash dividend of $0.10 per notional share for the issued Warrant relating to the fiscal quarter ended December 31, 2024. The dividend was paid on February 7, 2025 to shareholders of record on January 17, 2025.
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $3.4 million for 2024, a decrease of $5.9 million as compared to net income of $9.3 million in 2023. Net income decreased during 2024, as compared to the previous year, primarily due to an $8.1 million increase in provision for credit losses that reflected a comprehensive loan portfolio review that the Bank elected to undertake as part of its ongoing commitment to continuously improve its credit risk management approach, as well as a $5.0 million increase in noninterest expense that reflected transaction-related costs associated with the Company’s July 2024 East Syracuse branch acquisition and October 2024 insurance agency asset sale. The 2024 decrease in net income was partially offset by a $4.3 million increase in noninterest income, a $2.1 million increase in net interest income before provision for credit losses, a $2.0 million decrease in provision for income taxes, and a $1.3 million increase in net income attributable to the noncontrolling interest. Basic and diluted earnings per share in 2024 were both $0.54 per share, as compared to $1.51 per share in 2023.
Return on average assets decreased 44 basis points to 0.23% in 2024 from 0.67% in 2023. Return on average equity decreased 534 basis points to 2.75% in 2024 as compared to 8.09% in 2023. The decreases in return on average assets and return on average equity in 2024, as compared to the previous year, were both primarily due to the aforementioned decrease in net income. Average assets increased in 2024 by $60.7 million, or 4.4%, as the Company grew its total assets by $9.1 million from December 31, 2023 to $1.47 billion at December 31, 2024.
Net interest income before provision for credit losses increased $2.1 million, or 5.3%, to $41.0 million in 2024 on average interest earning assets of $1.37 billion, as compared to net interest income before provision for loan losses of $38.9 million in 2023 on average
- 35 -
interest earning assets of $1.32 billion. Interest and dividend income increased $10.7 million in 2024 to $78.4 million, as compared to $67.7 million in 2023. The income effects of the $53.4 million aggregate increase in the average balance of interest-earning assets were enhanced by an increase of 58 basis points in the overall average yield earned on those assets. These increases in interest income were partially offset by increases in interest expense, as interest expense increased $8.6 million due to an increase in the average rate paid on interest-bearing liabilities of 68 basis points in 2024 as compared to 2023, enhanced by an increase in the average balance of interest-bearing liabilities of $35.1 million during the same time period.
The Company recorded a provision for credit losses of $11.0 million in 2024 as compared to $2.9 million in the prior year. The $8.1 million year-over-year increase in provision for credit losses primarily resulted from a comprehensive loan portfolio review during 2024 that the Bank elected to undertake as part of its commitment to continuously improve its credit risk management approach. Additionally, the provision for credit losses in 2024 reflected an increase in nonperforming loans of $4.9 million at December 31, 2024, as compared to December 31, 2023. The Company recorded $10.2 million in total loan charge-offs in 2024 as compared to $4.2 million in 2023. The increase in charge-off activity in 2024, as compared to the previous year, was primarily related to the aforementioned comprehensive loan portfolio review during the third quarter. The charge-offs in 2024 involved loans for which the charged-off amounts had been fully reserved for in prior periods.
Total noninterest income was $9.6 million in 2024, an increase of $4.4 million, or 84.2%, from $5.2 million in 2023. This increase was primarily due to a gross, pre-tax gain of $3.2 million on the October 2024 sale of the Company’s insurance agency assets. The increase was also due in part to a $452,000 increase in net realized gains on marketable equity securities, a $259,000 increase in debit card interchange fees, a $224,000 increase in earnings and gain on bank owned life insurance, and a $187,000 increase in service charges on deposit accounts. All other components of noninterest income had an aggregate increase of $80,000.
Noninterest expenses totaled $34.4 million for 2024, which was an increase of $5.0 million, or 17.1%, from the $29.4 million reported for the previous year. This increase can be primarily attributed to expenses associated with the Company's growth activities, including the branch acquisition and operating costs related to the new East Syracuse location, and investments in technology to enhance digital banking services, which align with the Company’s long-term strategic plans.
Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a year-over-year increase of $1.9 million, primarily attributed to increased headcount including staff associated with the East Syracuse branch acquired in July 2024, higher salaries and benefits costs associated with merit increases, and wage inflation. Professional and other services expense increased $1.7 million in 2024, as compared to 2023. This increase was primarily attributed to branch acquisition-related expenses, as well as an increase in technology project implementation services and other outsourced consulting services. An increase of $555,000 in occupancy and equipment expenses contributed to the annual increase in overall noninterest expenses, reflecting the Bank's investment in physical infrastructure and branch network expansion. Other increases in overall noninterest expense included a $453,000 increase in data processing primarily related to the opening of the new East Syracuse branch, and a $248,000 increase in insurance agency expense primarily associated with transaction-related expenses related to the Company's insurance agency assets sale in October 2024.
Net loan charge-offs to average loans were 1.09% for 2024, as compared to 0.43% for 2023. Nonperforming loans to total loans increased to 2.40% at December 31, 2024, compared to 1.92% at December 31, 2023. The allowance for credit losses to non-performing loans at December 31, 2024 was 78.08%, compared with 92.73% at December 31, 2023. Total nonperforming assets increased $4.7 million, or 27.1%, between December 31, 2023 and December 31, 2024, largely driven by an increase of $5.9 million in nonperforming commercial and commercial real estate loans, in addition to an increase of $1.4 million in nonperforming residential real estate loans, offset by a decrease in nonperforming consumer loans of $2.4 million.
Management monitors its loan portfolio closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2024. Overall, the ratio of the allowance for credit losses to year end loans increased to 1.88% at December 31, 2024 from 1.78% at December 31, 2023.
Total past due loans measured as a percent of total loans, increased from 3.79% at December 31, 2023 to 3.81% at December 31, 2024, primarily due to increases of $2.0 million in past due commercial loans and $728,000 in past due residential loans, offset by a $1.7 million decrease in past due consumer loans. The level of nonperforming loans increased in aggregate by $4.9 million led by an increase of $5.9 million in nonperforming commercial and commercial real estate loans, in addition to an increase of $1.4 million in nonperforming residential real estate loans, and a decrease in nonperforming consumer loans of $2.4 million. Commensurate with the increase in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets increased to 1.50% at December 31, 2024 from 1.19% at December 31, 2023.
The Company’s shareholders’ equity increased $2.0 million, or 1.7%, to $121.5 million at December 31, 2024 from $119.5 million at December 31, 2023. This increase was primarily due to a $1.8 million increase in retained earnings, a $461,000 decrease in accumulated other comprehensive loss, a $364,000 decrease in additional paid in capital, and a $135,000 increase in ESOP shares earned. The increase in retained earnings resulted from $3.4 million in net income recorded in 2024, and $863,000 from the deconsolidation of a subsidiary related to the insurance agency assets sale. Partially offsetting these increases in retained earnings were $1.9 million for cash dividends declared on our voting common stock, $552,000 for cash dividends declared on our non-voting common stock and $50,000 for cash
- 36 -
dividends declared on our issued warrant. Comprehensive loss decreased primarily as the result of a $363,000 gain on derivatives and hedging activities, an $82,000 adjustment to pension and post-retirement benefits, and a gain of $16,000 on available-for-sale securities.
Net Interest Income
Net interest income is the Company's primary source of operating income. It is the amount by which interest earned on interest-earning deposits, loans and investment securities exceeds the interest paid on deposits and borrowed money. Changes in net interest income and the net interest margin ratio resulted from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, and their respective yields and funding costs.
The following comments refer to the table of Average Balances and Rates and the Rate/Volume Analysis, both of which follow below.
Net interest income, before provision for credit losses, increased $2.1 million, or 5.3%, to $41.0 million in 2024 as compared to $38.9 million in the previous year. Our net interest margin for the year ended December 31, 2024 increased to 2.98% from 2.95% for the comparable prior year. The increase in net interest income was primarily due to an increase in interest and dividend income of $10.7 million, or 15.8%, offset by a lesser increase in interest expense of $8.6 million, or 30.0%. The $1.2 million increase in interest and dividend income was primarily driven by the $21.8 million increase in loan balances, combined with a 57 basis points increase in average yield. The increase in interest expense was the result of an increase in average balances of deposit accounts, as well as an increase in average cost of deposits resulting from the high interest rate environment and increased competition.
- 37 -
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 year ended December 31,
Average Average
Unaudited Average Yield / Average Yield /
(In thousands) Balance Interest Cost Balance Interest Cost
Interest-earning assets:
Noninterest-earning assets:
Net unrealized losses on available-for-sale securities (9,769 ) (13,600 )
Interest-bearing liabilities:
Noninterest-bearing liabilities:
Net interest rate spread 2.37 % 2.47 %
Net interest margin 2.98 % 2.95 %
- 38 -
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 (3 ) 1 (2 ) - 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 $10.7 million, or 15.8%, to $78.4 million in 2024 as compared to $67.7 million in 2023 due principally to the $53.4 million, or 4.0%, increase in average interest-earning assets and a 58 basis points increase in the average yield on average interest-earning assets. The average yield earned on loans increased 57 basis points in 2024, when compared to 2023, as a result of higher interest rates associated with variable rate loans. The average balance of loans increased $4.3 million, or 0.5%, in 2024, as compared to the previous year mostly due to the increase in average commercial real estate loans and home equity and junior liens. The average yield earned on taxable investment securities increased 66 basis points to 5.42% in 2024 as compared to 4.76% in 2023, primarily as a result of the higher interest rate environment in 2024. In addition, the average balance of taxable investment securities increased $43.9 million, or 11.6%, when compared to the prior year primarily due to increased purchases of securities in 2024 intended to take advantage of certain dynamics in the interest rate environment. In combination, these factors resulted in a $4.9 million increase in interest income associated with taxable investment securities in 2024, as compared to 2023.
Interest Expense
Interest expense increased $8.6 million, or 30.0%, to $37.4 million in 2024, as compared to $28.7 million in the previous year. The year-over-year increase in interest expense was primarily driven by the higher interest rate environment in 2024 and continued competition for deposits. The average rate paid on interest-bearing deposits increased by 90 basis points to 4.16% in 2024 as compared to 3.26% in the previous year. The average cost of all interest-bearing liabilities increased from 2.65% in 2023 to 3.33% in 2024. In addition, the year-over-year increase in interest expense resulted from increases in the average balances of deposits and borrowings. The average balance of total interest-bearing liabilities increased $35.1 million, or 3.2%, in 2024, as compared to 2023, and the average balance of all deposits increased by $37.5 million, or 3.3% in 2024, as compared to the previous year, primarily due to the East Syracuse branch acquisition.
- 39 -
Provision for Credit Losses
We establish a provision for credit losses, which is recorded to operations, at a level management believes is appropriate to absorb lifetime credit losses in the loan portfolio. In evaluating the level of the allowance for credit losses, management considers historical loss experience, the types and amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses at an adequate level.
The Company recorded a provision for credit losses of $11.0 million in 2024 as compared to $2.9 million in the prior year. The $8.1 million year-over-year increase in provision for credit losses was primarily due to a comprehensive loan portfolio review during 2024 that the Bank elected to undertake as part of its commitment to continuously improve its credit risk management approach. The Company recorded $9.8 million in net charge-offs in 2024 as compared to $4.2 million in net charge-offs in 2023. The ratio of net charge-offs to average loans therefore increased to 1.09% in 2024 from 0.47% in 2023. Further information on earnings per share can be found in Note 1 to the consolidated financial statements of this Form 10-K.
Nonperforming loans to total loans increased to 2.40% at December 31, 2024 as compared to 1.92% at December 31, 2023. The allowance for credit losses to non-performing loans at December 31, 2024 was 78.1%, compared with 92.7% at December 31, 2023.
Noninterest Income
The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions and net gains or losses on sales of securities, loans, and foreclosed real estate.
The following table sets forth certain information on noninterest income for the years indicated.
For the years ended,
Earnings and gain on bank owned life insurance 854 630 224 35.6 %
Gains on sales and redemptions of investment securities (71 ) 62 (133 ) -214.5 %
Gain on sales of loans and foreclosed real estate 187 181 6 3.3 %
Loss on sale of premises and equipment (13 ) - (13 ) 100.0 %
Non-recurring gain on lease renegotiations 245 - 245 100.0 %
Gains (losses) on marketable equity securities 197 (255 ) 452 -177.3 %
Total noninterest income was $9.6 million in 2024, an increase of $4.4 million, or 84.2%, from $5.2 million in 2023. This increase was primarily due to a gross, pre-tax gain of $3.2 million on the October 2024 sale of the Company’s insurance agency assets. The increase was also due in part to a $452,000 increase in net realized gains on marketable equity securities, and a non-recurring gain of $245,000 during the first quarter of 2024 related to refunds received from cumulative lessor related pass-through operating expense charges for a single leased branch location.
Noninterest income before recorded gains and losses, increased $645,000, or 12.4%, to $5.8 million in 2024 as compared to $5.2 million in 2023. Factors contributing to this year-over-year increase included a $259,000 increase in debit card interchange fees due to an increase in transactional revenues volume, as well as a $224,000 increase in earnings and gain on bank owned life insurance ("BOLI") which was primarily attributable to the recording of a $175,000 third quarter net death benefit on BOLI. Additionally, the $138,000 increase in other charges, commissions and fees can be mostly attributed to New York State cumulative mortgage recording tax refunds recorded in the first quarter of 2024 in the amount of $141,000 and other miscellaneous fees.
- 40 -
Noninterest Expense
The following table sets forth certain information on noninterest expense for the years indicated.
For the years ended,
Foreclosed real estate expenses 102 111 (9 ) -8.1 %
Noninterest expenses totaled $34.4 million for 2024, which was an increase of $5.0 million, or 17.1%, from the $29.4 million reported for the previous year. This increase can be primarily attributed to expenses associated with the Company's growth activities, including branch acquisition and operating costs related to the new East Syracuse location, and investments in technology to enhance digital banking services, which align with the Company’s long-term strategic plans.
Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a year-over-year increase of $1.9 million, primarily attributed to increased headcount including staff associated with the East Syracuse branch acquired in July 2024, higher salaries, and benefits costs associated with merit increases and wage inflation. Professional and other services expense increased $1.7 million in 2024, as compared to 2023. This increase was primarily attributed to branch acquisition-related expenses, as well as an increase in technology project implementation services and other outsourced consulting services. An increase of $555,000 in occupancy and equipment expenses contributed to the annual increase in overall noninterest expense, reflecting the Bank's investment in physical infrastructure and branch network expansion. Other increases in overall noninterest expense included a $453,000 increase in data processing mostly related to the opening of the new East Syracuse branch, and a $248,000 increase in insurance agency expense primarily associated with transaction-related expenses related to the Company's insurance agency assets sale in October 2024. The increase in other expenses of $520,000 was primarily due to amortization expenses of a core deposit intangible related to the East Syracuse branch acquisition, in addition to increased costs associated with opening and operating the new location in 2024.
Income Tax Expense
The Company reported income tax expense of $332,000 in 2024 and $2.4 million in 2023, a decrease of $2.1 million when compared to the previous year. This decrease was primarily the result of a decrease in income before income taxes.
The Company’s effective tax rate was 8.9% in 2024, as compared to 20.8% in 2023. The effective tax rate for 2024 decreased 11.9% from 2023 due to a larger proportional effect of favorable permanent tax differences on lower pretax income.
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, 2024 were both $0.54, as compared to basic and diluted earnings per share of $1.51 for the year ended December 31, 2023. The decrease in earnings per share between these two years was due to the decrease in net income available to common shareholders between these two time periods. Further information on earnings per share can be found in Note 3 to the consolidated financial statements of this Form 10-K.
CHANGES IN FINANCIAL CONDITION
The Company's total assets were $1.47 billion at December 31, 2024, an increase of $9.1 million, or 0.6% from December 31, 2023. The increase was primarily the result of a $20.5 million increase in loans receivable, net, a $12.6 million increase in finance lease right-of-use assets, and a $10.6 million increase in available-for-sale securities, partially offset by a $20.6 million decrease in held-to-maturity securities, and a $18.8 million decrease in interest-earning deposits. All other asset categories had a net decrease of $4.8 million.
- 41 -
Investment Securities
The average balance of the investment portfolio represented 33.1% of the Company’s average interest-earning assets in 2024 and is designed to generate a favorable rate of return in consideration of all risk factors associated with debt securities while assisting the Company in meeting its liquidity needs and interest rate risk strategies. All of the Company’s investments, with the exception of marketable equity securities, are classified as either available-for-sale or held-to-maturity. The Company does not hold any trading securities. The Company invests in securities issued by United States Government agencies and sponsored enterprises (“GSE”), mortgage-backed securities, collateralized mortgage obligations, state and municipal obligations, mutual funds, equity securities, investment grade corporate debt instruments, and common stock issued by the FHLBNY. By investing in these types of assets, the Company reduces the credit risk of its asset base through geographical and collateral-type diversification but must accept lower yields than would typically be available on loan products. Our mortgage-backed securities and collateralized mortgage obligation portfolios include privately-issued but substantially collateralized pass-through securities as well as pass-through securities guaranteed by GSEs.
At December 31, 2024, available-for-sale investment securities increased 4.1% to $269.3 million and held-to-maturity investment securities decreased 11.5% to $158.7 million as compared to December 31, 2023. 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 - - -
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2024. 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:
Other non-maturity investments:
- 42 -
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:
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 % $ 1,498 3.18 % $ - 0.00 %
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.
- 43 -
Loans Receivable
Average loans receivable represented 65.8% of the Company’s average interest earning assets in 2024 and accounted for the greatest portion of total interest income.
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, 2024 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, 2024 that are contractually due after December 31, 2025:
(In thousands) Due AfterOne Year
Interest rates:
Total loans receivable, including net deferred costs, increased $21.8 million to $919.0 million at December 31, 2024 when compared to $897.2 million at December 31, 2023, due to increases in commercial real estate and home equity and junior liens of $19.1 million and $16.1 million, respectively. These increases in outstanding loan balances were partially offset by decreases in consumer loans, commercial and tax exempt loans, and residential real estate of $7.1 million, $3.4 million, and $2.9 million, respectively.
The outstanding balance of commercial real estate 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 home equity and junior liens was primarily the result of such loans acquired from the purchase of the East Syracuse branch in July 2024. The decrease in residential real estate was primarily the result of decreases in the percentage of originated loans allocated to the Bank's portfolio as rates remained elevated throughout 2024.
- 44 -
Nonperforming Loans and Assets
The following table represents information concerning the aggregate amount of nonperforming assets:
December 31
Nonaccrual loans:
Foreclosed real estate - 151 221 - -
Nonperforming assets include nonaccrual loans and foreclosed real estate (“FRE”).
Management monitors its loan portfolios closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2024. The ratio of the allowance for credit losses to year end loans was 1.88% and 1.78% at December 31, 2024 and December 31, 2023, respectively.
Total nonperforming assets increased $4.7 million, or 27.1%, between December 31, 2023 and December 31, 2024, driven by an increase of $5.9 million in nonperforming commercial and commercial real estate loans, and an increase of $1.4 million in nonperforming residential real estate loans. These increases were partially offset by decreases in nonperforming consumer loans and foreclosed real estate of $2.4 million and $151,000, respectively. The increase in nonperforming commercial and commercial real estate loans in 2024 was primarily due to two loan relationships in the amount of $5.4 million that were placed on non-accrual status. The increase in nonperforming residential real estate loans in 2024 was primarily due to one loan relationship in the amount of $1.5 million that was placed on non-accrual status.
Management believes that the value of the collateral properties underlying the loans is sufficient to preclude any significant losses related to these loans. Management continues to monitor and react to national and local economic trends as well as general portfolio conditions which may impact the quality of the portfolio, and considers these environmental factors in support of the allowance for credit loss reserve. Management believes that the current level of the allowance for credit losses, at $17.2 million at December 31, 2024, adequately addresses the current level of risk within the loan portfolio, particularly considering the types and levels of collateralization supporting the substantial majority of the portfolio. The Company maintains strict loan underwriting standards and carefully monitors the performance of the loan portfolio. See Note 1: Summary of Significant Accounting Policies contained in the financial statements herein.
FRE balances decreased to zero at December 31, 2024, compared to $151,000 at 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 as set forth in the table above. The Company considers a loan as individually evaluated when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $2.4 millionand $989,000 would have been recorded for the years ended December 31, 2024 and December 31, 2023, respectively.
The measurement of individually evaluated 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 individually evaluated loans when the receipt of contractual principal and interest is probable. At December 31, 2024 and December 31, 2023, the Company had $20.0 million and $22.6 million in loans, which were deemed to be individually evaluated, having specific reserves of $2.5 million and $3.7 million, respectively. The $1.2 million year-over-year decrease in individually evaluated loans was principally due to increases of $76,000, and $33,000 in individually evaluated consumer and home equity lines, respectively, offset by decreases of $690,000, $400,000, $116,000 and $96,000 in commercial lines of credit, commercial and industrial loans, commercial mortgage, and residential mortgages, respectively.
The threshold for individually evaluated commercial real estate or commercial loans remains at $100,000 and for residential mortgage loans remains at $300,000 at December 31, 2024. The thresholds described above do not apply to loans that have been classified as modified due to borrowers experiencing financial difficulties, which are individually evaluated at the time that the restructuring is affected.
- 45 -
Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years.
Management has identified certain loans with potential credit profiles that may result in the borrowers not being able to comply with the current loan repayment terms and which may result in possible future identified loan reporting. Potential problem loans increased $13.3 million to $56.4 million at December 31, 2024, compared to $43.1 million at December 31, 2023. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered individually evaluated. The increase in potential problem loans was primarily due to a $8.2 million increase in potential problem commercial real estate loans, a $5.4 million increase in potential problem commercial lines of credit, and a $2.3 million increase in potential problem commercial and industrial loans. These increases were partially offset by a decrease of $1.9 million in potential problem residential mortgage loans.
Total potential problem loans, including individually evaluated loans, were $58.0 million at December 31, 2024, and were comprised of special mention, substandard and doubtful loans of $32.8 million, $23.1 million and $2.1 million, respectively. Total potential problem loans, including individually evaluated loans, were $43.1 million at December 31, 2023, and were comprised of special mention, substandard and doubtful loans of $20.7 million, $20.3 million and $2.1 million, respectively.
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 3.81% at December 31, 2024 as compared to 3.79% at December 31, 2023. This increase was due to an increase of $2.0 million in past due commercial loans, a $728,000 increase in past due residential loans, partially offset by a $1.7 million decrease in past due consumer loans.At December 31, 2024, there were $35.1 million in loans past due including $8.8 million, $4.2 million and $22.1 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively. At December 31, 2023, there were $34.0 million in loans past due including $13.6 million, $3.2 million and $17.2 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively.
Loans purchased outside of the Bank’s general market area are subject to substantial pre-purchase due diligence. Homogenous pools of purchased loans are subject to pre-purchase analyses led by a team of the Bank’s senior executives and credit analysts. In each case, the Bank’s analytical processes consider the types of loans being evaluated, the underwriting criteria employed by the originating entity, the historical performance of such loans, especially in the most recent deeply recessionary period, the offered collateral enhancements and other credit loss mitigation factors offered by the seller and the capabilities and financial stability of the servicing entities involved. From a credit risk perspective, these loan pools also benefit from broad diversification, including wide geographic dispersion, the readily-verifiable historical performance of similar loans issued by the originators, as well as the overall experience and skill of the underwriters and servicing entities involved as counterparties to the Bank in these transactions. The performance of all purchased loan pools are monitored regularly from detailed reports and remittance reconciliations provided at least monthly by the external servicing entities.
The projected credit losses related to purchased loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at least monthly. Over the life of the purchased loan pools, the allowance for credit losses is adjusted, through the provision for credit losses, for expected loss experience, over the projected life of the loans. The expected credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of the purchased loan pools. The Bank does not initially increase the allowance for credit losses on the purchase date of the loan pools. See Note 5 for further detail of purchased 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.
- 46 -
Allowance for Credit Losses
The allowance for credit losses (ACL) is established through provision for credit losses and reduced by loan charge-offs net of recoveries. The allowance for credit losses represents the amount available for lifetime credit losses in the Company’s loan portfolio as estimated by management.
The Company establishes a specific allocation for all commercial loans identified as being specifically-identified with a balance in excess of $100,000 that are also on nonaccrual or have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The measurement of individually evaluated 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, 2024, the Bank’s position in individually evaluated loans consisted of 45 loans totaling $20.0 million. Of these loans, 15 loans, totaling $3.0 million, were valued using the present value of future cash flows method; and 30 loans, totaling $17.0 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the probable lifetime loss for each risk-rating category. The Company uses the fair value of collateral, less costs to sell to measure impairment on commercial and commercial real estate loans. Residential real estate loans in excess of $300,000 will also be included in this individual loan review. Residential real estate loans less than this amount will be included in individually evaluated loans if it is part of the total related credit to a previously identified commercial loan. The Company also establishes a specific allowance, regardless of the size of the loan, for all loans modified due to borrowers experiencing financial difficulties.
The allowance for credit losses and the allowance for loan losses at December 31, 2024 and 2023 was $17.2 million and $16.0 million, respectively, or 1.87% and 1.78% of total year end loans on those dates, respectively. The Company recorded $9.8 million in net charge-offs in 2024, as compared to $4.2 million in net charge-offs in 2023. The ratio of net charge-offs to average loans increased to 1.09% in 2024 from 0.47% in 2023. The increase in charge-off activity in 2024, as compared to the previous year, was primarily related to a comprehensive loan portfolio review that the Bank elected to undertake as part of its ongoing commitment to continuously improve its credit risk management approach.
For further discussion of our allowance for credit losses procedures, please see “Business-Allowance for Credit Losses” and Note 6 to the consolidated financial statements contained in this Annual Report on Form 10-K.
The following table sets forth the allocation of allowance for credit losses by loan category for the years indicated. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
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 for each of the indicated years.
- 47 -
The following table sets forth the allowance for credit losses for the years indicated:
Adoption of New Accounting Standards - $ 1,886
Recoveries of loans previously charged-off:
Residential real estate 34 1 - - 2
Loans charged off:
Net charge-offs to average loans outstanding 1.09 % 0.48 % 0.04 % 0.10 % 0.08 %
Allowance for credit losses to year-end loans 1.88 % 1.78 % 1.71 % 1.57 % 1.55 %
The following table sets forth the loan net charge-off ratios for the years indicated:
Allowance for credit losses to year-end loans 1.88 % 1.78 %
Allowance for credit losses to nonperforming loans 78.08 % 92.73 %
Nonaccrual loans to total loans 2.40 % 1.92 %
Net charge-offs to average loans outstanding
Commercial real estate and loans 0.71 % 0.44 %
Consumer and home equity 0.38 % 0.03 %
Residential real estate 0.00 % 0.01 %
Total charged-off 1.09 % 0.48 %
Charge-offs for commercial real estate and loans increased $2.4 million, or .27%, and consumer and home equity increased $3.3 million, or .35% at December 31, 2024, when compared to the prior year. The increases primarily related to a comprehensive loan portfolio review that the Bank elected to undertake as part of its ongoing commitment to continuously improve its credit risk management approach.
Bank Owned Life Insurance
The Company held $24.7 million and $24.6 million in bank owned life insurance ("BOLI") at December 31, 2024 and 2023, respectively. Bank owned life insurance increased $85,000, or 0.3%, to $24.7 million at December 31, 2024, as compared to December 31, 2023. The increase of $85,000 included earnings and gains on BOLI and in addition, the Company recorded a net death benefit of $175,000.
Deposits
The Company’s deposit base is drawn from eleven full-service branches and one motor bank in its market area. The deposit base consists of demand deposits, money management and money market deposit accounts, savings, and time deposits. Average deposits increased by $37.5 million, or 3.3%, to $1.16 billion in 2024, as compared to 2023.
Total deposits grew by $84.5 million, or 7.5%, during 2024 to $1.20 billion on December 31, 2024. During 2024, the Company assumed $186.0 million in deposits as a result of the East Syracuse branch acquisition completed July 19, 2024. As part of the purchase, the Company paid a deposit premium on acquired time deposits of $543,000, which is included in the balance of time deposits on the balance sheet and accreted on a straight-line basis over 10 years.
Core deposits represented 76.9% of total deposits on December 31, 2024, compared to 69.8% on December 31, 2023. Core deposits, which exclude brokered deposits and certificates of deposit of $250,000 or more, are considered to be more stable and generally provide the Company with a lower cost of funds than brokered and time deposits. The Company will continue to emphasize retail and business core deposits in the future by providing depositors with a full range of deposit product offerings and will maintain its recent focus on deposit gathering within the Syracuse market.
- 48 -
Brokered deposits totaled $136.3 million and represented 11.3% of all deposits at December 31, 2024 and totaled $242.7 million and represented 21.7% at December 31, 2023.
At December 31, 2024, consumer deposits increased by $178.9 million, while business and municipal deposits decreased by $6.1 million and $302,000, respectively, when compared to December 31, 2023. The significant increase in consumer deposits was primarily related to the acquisition of the East Syracuse branch in July 2024. Noninterest-bearing deposits, which are primarily demand deposits, were $213.7 million at year end, compared with $170.2 million on December 31, 2023.
The following table sets forth our deposit balances by category, and as a percentage of total deposits for the years indicated:
December 31,
The Bank Call Report estimated uninsured deposit balances are reported gross as $417.8 million and $403.2 million, at December 31, 2024 and December 31, 2023, respectively. These estimates are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC. At December 31, 2024, time deposit accounts in excess of $250,000 totaled $142.5 million, or 28.3% of time deposits and 11.8% of total deposits. At December 31, 2023, these deposits totaled $95.3 million, or 20.1% of time deposits and 8.5% 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, 2024:
(In thousands)
Remaining Maturity:
Three months or less $ 41,958
Three through six months 37,927
Six through twelve months 54,217
Over twelve months 8,371
All municipal deposits, regardless of amount, are effectively insured, either through specific collateralization with securities held in third-party escrow or reciprocal deposit programs, as required under New York State law. Therefore, municipal deposits are not considered to be subject to the same risks of large unannounced withdrawals as consumer and business accounts for the reason of FDIC insurance coverage limitations.
We participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal deposits totaled $63.5 million at December 31, 2024, compared to $74.0 million at December 31, 2023, and represented 5.9% and 8.4% of total deposits as of the end of each year, respectively.
As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were $148.8 million and $149.0 million at December 31, 2024 and December 31, 2023, respectively, and represented 13.9% and 17.0% of total deposits as of the end of each year, respectively.
Deposit Activity
During 2024, like many financial institutions, the Bank experienced significant increases in its cost of deposits resulting from the high interest rate environment and increased competition.
We offer deposit accounts to consumers, business and local municipalities having a wide range of interest rates and terms. Our deposits consist of various types of transactional accounts such as savings accounts, money market accounts, NOW, and demand accounts as
- 49 -
well as time accounts in the form of certificates of deposits. We solicit deposits in our market areas as well as online through our website. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Services (“CDARS”) and Insured Cash Sweep (“ICS”) networks. The Bank also has a substantial number of readily-available sources for brokered term deposits that it uses regularly as a secondary funding source.
The Bank primarily relies on competitive pricing policies, marketing and customer service to attract and retain these deposits. As noted above, the Bank also accepts deposits from deposit brokers.
The following table sets forth our brokered deposit balances and rates at December 31, 2024:
(Dollars in thousands) Balance Average Rate
Maturity Year:
Included in the brokered deposit balances, detailed above, are $33.1 million in deposits that can be called at the Bank's discretion, should that become economically advantageous in the future.
In addition to the term brokered deposits detailed above, the Bank had $2.0 million in overnight brokered funds, derived from a pool of individual depositors, at December 31, 2024. The interest rate paid for these funds is indexed to the overnight Fed funds effective rate plus -0- basis points. These aggregate deposits are comprised of multiple individual deposits with balances small enough to be fully insured by the FDIC and the individual depositors with the aggregate pool can be readily substituted when withdrawals are made. These deposits are therefore considered to be highly stable in the aggregate. The Bank can exit this funding arrangement, in whole or in part, with 60 days prior notice to the issuing counterparty.
Excluding brokered deposits, all other deposits, collectively referred to as nonbrokered deposits, totaled $1.07 billion, or 88.7% of total deposits with an average rate of 2.3% at December 31, 2024. Nonbrokered deposits, totaled $877.4 million, or 78.3% of total deposits with an average rate of 2.4% at December 31, 2023. Our core deposits, which herein are defined as nonbrokered deposits excluding time accounts in excess of $250,000, were $925.8 million, or 86.7% of nonbrokered deposits, and $782.1 million, or 89.1% of nonbrokered deposits, at December 31, 2024 and December 31, 2023, respectively.
The following table sets forth our certificate of deposit balances and rates at December 31, 2024:
(Dollars in thousands) Balance Average Rate
Maturity Year:
Deposit Concentrations
The Bank utilizes a variety of funding sources to support the interest-earning asset base in addition to achieving targeted growth objectives. Overall funding is comprised of three primary sources that possess a variety of maturity, stability, and price characteristics: deposits from individuals, non-governmental businesses, and governmental deposits that are collateralized for amounts not covered by FDIC insurance, and other external borrowings. The average daily amount of deposits and the average rate paid on each of the following deposit categories are summarized below for the years ended December 31:
- 50 -
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 5.45 % 5.42 % 2.48 %
Average interest rate at the end of the period 6.14 % 4.50 % 3.86 %
The following table represents information regarding long-term borrowings for the years ended December 31:
Average interest rate during the year 1.70 % 1.54 % 0.96 %
Average interest rate at the end of the period 1.26 % 1.84 % 1.39 %
Trust Preferred Securities and Subordinated Debt
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the FDIC and the Federal Reserve. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd., with interest rates that reset quarterly, and are indexed to the 3-month the Secured Overnight Financing Rate ("SOFR") which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, plus 1.91%. These securities have a five-year call provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2024 and 2023. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Debt (the “2020 Subordinated Debt”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Debt has a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month SOFR plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Debt at par, in whole or in part, at its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving
- 51 -
rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this transaction of $1.6 million was recorded in both the years ended December 31, 2024 and 2023.
Shareholders' Equity
The Company’s shareholders’ equity increased $2.0 million, or 1.7%, to $121.5 million at December 31, 2024 from $119.5 million at December 31, 2023. This increase was due to a $1.8 million increase in retained earnings, a $461,000 decrease in accumulated other comprehensive loss, a decrease of $364,000 in additional paid in capital, and an increase of $135,000 of ESOP shares earned. The increase in retained earnings resulted from $3.4 million in net income recorded in 2024, and $863,000 from the deconsolidation of a subsidiary related to the insurance agency assets sale. Partially offsetting these increases in retained earnings were $1.9 million for cash dividends declared on our voting common stock, $552,000 for cash dividends declared on our non-voting common stock and $50,000 for cash dividends declared on our issued warrant. Comprehensive loss decreased primarily as the result of a $363,000 gain on derivatives and hedging activities, an $82,000 adjustment to pension and post-retirement benefits, and a gain of $16,000 on available-for-sale securities.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
As of December 31, 2024, the Bank’s most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well-capitalized”, under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, the Bank must maintain specified total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The regulations also impose a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action (“PCA”) standards and imposes restrictions on dividend distributions and discretionary bonuses for senior officers if the buffer is not met (See Note 20 contained within the accompanying consolidated financial statements). In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. At December 31, 2024, 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, 2024, cash and cash equivalents decreased by $17.2 million. The Company reported net cash outflows from financing activities of $6.0 million generated principally by an increase in customer deposits of $190.9 million, offset by a $64.7 million decrease in short-term borrowings, a decrease in brokered deposits of $106.4 million, a decrease in net proceeds from long-term borrowings of $22.9 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 $2.4 million. Additionally, $11.2 million was provided through operating activities generated principally by net income and proceeds from loan sales. These cash flows were primarily invested in: $117.6 million in purchases of investment securities in 2024, and $31.2 million net increases in loans outstanding.
Certificates of deposit due within one year of December 31, 2024 totaled $428.3 million, representing 85.1% of certificates of deposit at December 31, 2024, an increase from 68.7% at December 31, 2023. If these maturing deposits do not remain with us, we will be
- 52 -
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, 2025.
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, 2024 and 2023, the Company had cash and cash equivalents of $31.6 million and $48.7 million, respectively.
The Bank has a number of existing credit facilities available to it. At December 31, 2024, total credit available under the existing lines of credit was approximately $245.3 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2024, the Company had $88.1 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 $157.2 million available.
The Company's sources of immediately available liquidity of $327.1 million represent 219.5% and $149.0 million of the Company's net estimated uninsured deposits. Net estimated uninsured deposits exclude collateralized and certain other deposit accounts. When compared to 2023, the $78.6 million increase in sources of immediately available liquidity was primarily attributed to the decrease in FHLB borrowed fund balances. The table below details available sources of liquidity at December 31, 2024.
December 31
Unrestricted cash and cash equivalents $ 31,572 $ 48,732
Total sources of liquidity/net estimated uninsured deposits 219.47 % 166.47 %
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, 2024, management reported to the Board of Directors that the Bank was in compliance with its liquidity policy guidelines.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. At December 31, 2024, the Bank had $233.0 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.
- 53 -
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 55
Report of Independent Registered Public Accounting Firm 56
Consolidated Statements of Condition – December 31, 2023 and 2022 58
Consolidated Statements of Income – Years ended December 31, 2023 and 2022 59
Notes to Consolidated Financial Statements 64
- 54 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview of Internal Control
Internal control processes and procedures help entities achieve important objectives and sustain and improve performance. The COSO Framework (as defined below) enables organizations to effectively and efficiently develop systems of internal control that adapt to changing business and operating environments, mitigate risks at acceptable levels and support sound decision making and governance of organizations. The COSO Framework defines internal control as “a process, effected by an entity’s Board of Directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance.” The COSO Framework provides three categories of objectives, which allow organizations to focus on differing aspects of internal control: (a) Operations Objectives, (b) Reporting Objectives and (c) Compliance Objectives.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial information through a program of ongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Under applicable SEC accounting related rules, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements would not be prevented or detected on a timely basis.
Management conducted the Evaluation based on the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
As a result of the Evaluation as of December 31, 2024, management has determined that there were no material weaknesses in the Company’s internal controls over financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
/s/ James A. Dowd /s/ Justin K. Bigham
James A. Dowd Justin K. Bigham
Oswego, New York
March 31, 2025
- 55 -
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 (collectively, the “Company”) as of December 31, 2024 and 2023, 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, 2024, 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, 2024 and 2023, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2024, 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 Matter
The critical audit matter 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 matter or on the accounts or disclosures to which they relate.
Allowance for Credit Losses on Loans
As described in Notes 1, 5 and 6 to the consolidated financial statements, the Company accounts for an allowance for credit losses on loans in accordance with Financial Accounting Standards Board Accounting Standard Codification (“ASC”) Topic 326, Financial Instruments-Credit Losses. ASC 326 requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on evaluation of the size of the portfolio, current risk characteristics, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The provision for credit loss for the year ended December 31, 2024 was $11.1 million and the allowance for credit losses on loans as of December 31, 2024 was $17.2 million.
The Company’s methodology for estimating the allowance for credit losses on loans includes quantitative and qualitative components of the calculation. The Company’s loan portfolio is segmented by loan types that behave similarly during economic cycles. The quantitative analysis includes using a discounted cash flow (“DCF”) model for determining the allowance for credit losses. Economic forecasts are used in the model to estimate the probability of default and loss given default through regression which are key inputs into the DCF model calculation. Quantitative model assumptions include, but are not limited to the discount rate, prepayment speeds, and curtailments. The quantitative model output is adjusted with qualitative adjustments. Management develops a qualitative framework that serves as the basis for determining the reasonableness of the model’s output and makes qualitative adjustments as necessary. The allowance for credit loss methodology is inherently complex and requires the use of significant management judgment.
- 56 -
We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the application processes, including segmentation, the economic forecasts used to calculate the regressions within the DCF model, the quantitative model assumptions as mentioned above, and the qualitative adjustments made using the qualitative framework.
The primary audit procedures performed to address this critical audit matter included the following:
•
Evaluated management’s judgments and assumptions related to the selection of the model including evaluating the conceptual design of the model and the mathematical accuracy of the model;
•
Evaluated the relevance and reliability of the data used in the model;
•
Evaluated the composition of the peer group selected by the Company and the methodology for making this determination;
•
Evaluated management’s judgments and assumptions used in the formation of the qualitative factor framework, including the relevance and reliability of internal and external data used in their formulation;
•
Evaluated the relevance and reliability of the internal and external data used in the development of qualitative adjustments and the effect of those adjustments; and
•
Evaluated the selection and use of a third-party service organization and specialist in assisting with the collective ACL on loans.
We have served as the Company’s auditor since 2011.
/s/ BONADIO & CO., LLP
Bonadio & Co., LLP
Syracuse, New York
- 57 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
December 31, December 31,
(In thousands, except share and per share data) 2024 2023
ASSETS:
Marketable equity securities, at fair value 4,076 3,206
Federal Home Loan Bank stock, at cost 4,590 8,748
Assets held-for-sale - 3,042
Operating lease right-of-use assets 1,391 1,526
Finance lease right-of-use assets 16,676 4,073
Foreclosed real estate - 151
Intangible assets, net 5,989 85
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Shareholders' equity:
Accumulated other comprehensive loss (9,144 ) (9,605 )
Unearned ESOP shares - (135 )
Total Pathfinder Bancorp, Inc. shareholders' equity 121,483 119,495
Noncontrolling interest - 761
The accompanying notes are an integral part of the consolidated financial statements.
- 58 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Income
For the year ended
(In thousands, except per share data) December 31, 2024 December 31, 2023
Interest and dividend income:
Debt securities:
Federal funds sold and interest earning deposits 793 295
Interest expense:
Interest on short-term borrowings 4,176 2,688
Interest on long-term borrowings 733 850
Interest on subordinated debt 1,966 1,941
Provision for (benefit from) credit losses:
Held-to-maturity securities (95 ) (98 )
Unfunded commitments (38 ) 37
Total provision for credit losses 10,973 2,930
Net interest income after provision for credit losses 30,016 35,989
Noninterest income:
Service charges on deposit accounts 1,436 1,249
Earnings and gain on bank owned life insurance 854 630
(Losses) gains on sales and redemptions of investment securities (71 ) 62
Gain on sale of subsidiary 3,169 -
Net realized gains (losses) on marketable equity securities 197 (255 )
Gains on sales of loans and foreclosed real estate 187 181
Losses on sale of premises and equipment (13 ) -
Debit card interchange fees 875 616
Other charges, commissions & fees 1,479 1,096
Noninterest expense:
Professional and other services 3,686 2,019
Community service activities 130 200
Foreclosed real estate expenses 102 111
Income before provision for income taxes 5,160 11,784
Provision for income taxes 332 2,362
Net income attributable to noncontrolling interest 1,445 129
Net income attributable to Pathfinder Bancorp Inc. $ 3,383 $ 9,293
Voting Earnings per common share - basic and diluted $ 0.54 $ 1.51
Series A Non-Voting Earnings per common share- basic and diluted $ 0.54 $ 1.51
Dividends per common share (Voting and Series A Non-Voting) $ 0.40 $ 0.36
The accompanying notes are an integral part of the consolidated financial statements.
- 59 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the years ended
Other Comprehensive Income (Loss)
Retirement Plans:
Retirement plan net gains recognized in plan expenses 151 222
Plan (losses) gains not recognized in plan expenses (41 ) 257
Net unrealized gains on retirement plans 110 479
Available-for-sale securities:
Unrealized holding (losses) gains arising during the period (115 ) 1,538
Reclassification adjustment for net losses included in net income 137 1,932
Net unrealized gains on available-for-sale securities 22 3,470
Derivatives and hedging activities:
Unrealized holding gains (losses) arising during the period 492 (474 )
Net unrealized gains (losses) on derivatives and hedging activities 492 (474 )
Other comprehensive income, before tax 624 3,475
Other comprehensive income, net of tax 461 2,567
Comprehensive income, attributable to noncontrolling interest $ 1,445 $ 129
Comprehensive income attributable to Pathfinder Bancorp, Inc. $ 3,844 $ 11,860
Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income
Retirement plan net gains recognized in plan expenses $ (39 ) $ (58 )
Plan losses (gains) not recognized in plan expenses 11 (67 )
Income tax effect related to other comprehensive income $ (163 ) $ (908 )
The accompanying notes are an integral part of the consolidated financial statements.
- 60 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Other comprehensive income, net of tax - - - - 461 - - 461
Stock options exercised - - 291 - - - - 291
Warrant dividends declared ($0.40 per share) - - - (50 ) - - - (50 )
Other comprehensive loss, net of tax - - - - 2,567 - - 2,567
Stock based compensation - - 92 - - - - 92
Stock options exercised - - 623 - - - - 623
Warrant dividends declared ($0.36 per share) - - - (45 ) - - - (45 )
Cumulative effect of affiliate capital allocation - - 108 (199 ) - - 91 -
Distributions from affiliates - - - - - - (44 ) (44 )
The accompanying notes are an integral part of the consolidated financial statements.
- 61 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc. $ 3,383 $ 9,293
Deferred income tax benefit (417 ) (367 )
Proceeds from sales of loans held-for-sale 6,250 5,785
Originations of loans held-for-sale (6,101 ) (5,550 )
Realized (gains) losses on sales, redemptions and calls of:
Foreclosed real estate (38 ) 35
Loss on sale of premises and equipment 13 -
Available-for-sale investment securities 139 (80 )
Held-to-maturity investment securities (68 ) 18
Marketable securities (197 ) 255