Pathfinder Bancorp, Inc. PBHC US Equity☆

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 6,185,644 and 6,125,649 shares of voting and non-voting common stock in aggregate outstanding at December 31, 2025 and December 31, 2024, 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 was also 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

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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, 2025, Castle Creek owned approximately 9.7% 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.

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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:

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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;

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

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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 include the Non-Voting Common Stock); or (ii) automatically, without any further action of the part of the holder, on the date that the holder transfers such share of Non-Voting Common Stock to a non-affiliate of the holder in a permissible transfer.

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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

Net income attributable to noncontrolling interest - 1,445 129 101 103

Convertible preferred stock dividends - - - - 97

Per Share

Performance Ratios

Shareholders' Equity to total assets at end of year 8.58 8.24 8.15 7.93 8.58

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At December 31,

Asset Quality Ratios

Regulatory Capital Ratios (Bank Only)

Number of:

(a)

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

(b)

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

NON-GAAP FINANCIAL INFORMATION

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions, like the Company and its subsidiary bank, are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC, and does so without compliance with Regulation G, on the widely-shared assumption that the SEC regards such non-GAAP measures to be exempt from Regulation G. The Company uses in this regulatory filing additional non-GAAP financial measures that are commonly utilized by financial institutions and have not been specifically exempted by the SEC from Regulation G. The Company provides, as supplemental information, such non-GAAP measures included in this document as described immediately below.

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At or for the year ended December 31,

Per Share

Book value per common share

Total common equity

Tangible book value per common share

Performance Ratios

Efficiency ratio

Less: Gains on sales of loans and foreclosed real estate 402 187 181 137 313

Less: Fair value adjustment to loans held-for-sale (3,462 ) - - - -

Less: Loss (gain) on asset sale (115 ) 3,169 - - -

Dividend payout ratio

Return on average common equity

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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 average assets)

Common Equity Tier 1 (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 ASC 326, Financial Instruments—Credit Losses, and accounts for its allowance for credit losses on loans in accordance with the Current Expected Credit Loss ("CECL") methodology. The allowance for credit losses on loans and unfunded commitments is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio and commitments to extend credit. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future

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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 troubled credits identified through both normal and targeted credit review processes. Loans recognized within the internal review are identified as being individually evaluated and excluded from collective pools. Individually evaluated loans are considered to have unique risk characteristics when their risk profile, repayment characteristics, or loss exposure are sufficiently distinct such that inclusion in a pooled evaluation would not appropriately reflect its expected credit loss. Factors that may result in such classification include, but are not limited to, borrower-specific financial stress or credit deterioration, nonaccrual status or sustained delinquency, bankruptcy, insolvency, or restructuring proceedings, reliance on a single or materially weakened source of repayment, material adverse changes in collateral value, condition, or marketability, collateral dependency, unique or non-standard loan structures or modifications, adverse changes in guarantor support, or other circumstances indicating the loan no longer shares similar risk characteristics with the pool. For individually evaluated loans, management measures credit losses using a discounted cash flow approach, collateral-dependent valuation techniques, observable market pricing (when available), or other methods permitted under ASC 326 that reasonably estimate expected credit losses based on the specific facts and circumstances of the loan. The selected methodology is applied consistently and is based on the specific facts and circumstances of each loan. At December 31, 2025, the Bank’s position in individually evaluated loans consisted of 127 loans totaling $89.4 million. All were valued based on a collateral analysis. No loans were valued using the present value of future cash flows method or other methods permitted under ASC 326. 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 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, 2025, the Bank held $536.9 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 59.9% of the Bank’s entire loan portfolio. The Bank allocated $23.3 million to the ACL for these loans, including $326,000 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 $82,000, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2025 in the final recorded estimation of the ACL on loans recognized on the Consolidated Statements 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

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between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. For additional information regarding the Company's deferred income taxes, see Note 17 to the consolidated financial statements.

Pension Obligations. Pension and postretirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated financial statements contained herein.

Evaluation of Goodwill. Management performs an annual evaluation of the Company’s goodwill for possible impairment. Based on the results of the 2025 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2025. 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 AFS investment securities, interest rate derivatives (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 AFS securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.

Fair values for AFS securities are obtained from an independent third party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of individually analyzed loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.

RECENT EVENTS

On December 22, 2025, 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, 2025. The dividend was paid on February 6, 2026 to shareholders of record on January 16, 2026.

EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS

The Company reported a net loss of $1.9 million or $0.31 per diluted share for the full year 2025, a decrease of $5.3 million compared to net income of $3.4 million or $0.54 per diluted share in 2024. Net income decreased during 2025 compared to the previous year, primarily due to an increase of $5.4 million in provision for credit losses, which reflected a comprehensive review of all commercial loan relationships with exposures of $500,000 or more, representing approximately 90% of the commercial portfolio, that was announced in October 2025 and completed in December 2025. Additionally, the decrease in net income from the prior year was driven by fair value adjustment or lower of cost or market adjustment to loans held-for-sale ("LOCOM HFS adjustment") that lowered noninterest income by $3.5 million in 2025. Prior year net income also benefited from $1.1 million of insurance agency revenue and a $3.2 million gain on sale associated with the Company's insurance agency asset which was sold in October 2024.

Return on average assets decreased 36 basis points to negative 0.13% in 2025 from 0.23% in 2024. Return on average equity decreased 429 basis points to negative 1.54% in 2025 as compared to 2.75% in 2024. The decreases in return on average assets and return on average equity in 2025, as compared to the previous year, were both primarily due to the aforementioned decrease in net income. Average assets increased in 2025 by $17.6 million, or 1.2%.

Net interest income before provision for credit losses increased $3.3 million or 8.2% to $44.3 million for the year ended December 31, 2025, compared to $41.0 million for the year ended December 31, 2024. Interest and dividend income decreased $1.7 million or 2.2% to $76.7 million for the year ended December 31, 2025 from $78.4 million for the year ended December 31, 2024. Total interest expense for the year ended December 31, 2025 decreased $5.1 million or 13.5% to $32.3 million from $37.4 million for the year ended December 31, 2024. The increase in net interest income before provision for credit losses, was driven by lower interest expense, primarily reflecting a reduction in interest rates for the year ended December 31, 2025, compared to one year ago. Total average balances on interest-earning assets increased $5.0 million, to $1.38 billion for the year ended December 31, 2025. The overall average yield on interest-earning assets

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decreased 14 basis points to 5.56% for the year ended December 31, 2025 from 5.70% for the year ended December 31, 2024. The total average interest-bearing liabilities decreased $4.9 million to $1.12 billion for the year ended December 31, 2025, while the average rate paid on interest-bearing liabilities decreased 44 basis points, to 2.89% for the year ended December 31, 2025, compared to 3.33% one year ago.

The Company recorded a provision for credit losses of $16.3 million in 2025 as compared to $11.0 million in the prior year. The $5.3 million year-over-year increase in provision for credit losses primarily reflects a risk-based reserve build from the comprehensive loan portfolio review of all commercial loan relationships with exposures of $500,000 or more, representing approximately 90% of the commercial portfolio, which was announced in October 2025 and completed in December 2025. Additionally, the provision for credit losses in 2025 reflected an increase in nonperforming loans of $5.5 million at December 31, 2025 as compared to December 31, 2024. The Company recorded $4.2 million in net charge-offs in 2025 as compared to $9.8 million in net charge-offs in 2024. The elevated loan charge-offs for 2024 were related to the loan portfolio review conducted in the third quarter of 2024.

Total noninterest income was $2.5 million in 2025, a decrease of $7.1 million, or 73.9%, from $9.6 million in 2024. The decrease from the prior year was driven by fair value adjustment impacts or lower of cost or market adjustment to loans held-for-sale ("LOCOM HFS adjustment") that reduced noninterest income by $3.5 million in 2025. Prior year noninterest income also benefited from $1.1 million in insurance agency revenue and a $3.2 million gain on sale associated with the Company's insurance agency asset which was sold in October 2024. Additionally, the decrease in noninterest income was driven by lower debit card interchange fees of $365,000 and lower other charges, commissions & fees of $468,000, compared to the previous year.

Noninterest expense totaled $34.6 million and $34.4 million for the years ended December 31, 2025 and December 31, 2024, respectively. Salaries and employee benefits, constituting the largest component of noninterest expense, increased $1.1 million to $18.9 million in 2025. The increase from 2024 was primarily attributed to higher salaries and benefits costs associated with merit increases and wage inflation, as well as higher costs related to stock-based compensation. Building and occupancy costs increased $1.2 million or 29.0% in 2025 from the prior year, reflecting a full year of expenses associated with operating the East Syracuse branch acquired in July 2024. Professional and other services expenses decreased $936,000 from the previous year, when the Company incurred transaction-related expenses associated with the East Syracuse branch acquisition and consulting services costs related to technology enhancements, both in 2024. Additionally, noninterest expense was reduced $1.3 million in 2025 as compared to 2024 due to the absence of costs associated with the Company's insurance agency asset sold in October 2024.

Net loan charge-offs to average loans were 0.46% for 2025, as compared to 1.09% for 2024. Total past due loans measured as a percentage of total loans, increased from 3.81% at December 31, 2024 to 5.91% at December 31, 2025, primarily due to increases of $16.6 million in past due commercial loans and $1.6 million in past due residential loans. Nonperforming loans to total loans increased to 3.07% at December 31, 2025, compared to 2.40% at December 31, 2024. Total nonperforming assets increased $5.6 million, or 25.4%, between December 31, 2024 and December 31, 2025, largely driven by an increase of $6.7 million in nonperforming commercial real estate and commercial and industrial loans, offset by a decrease in nonperforming residential loans of $1.2 million. Commensurate with the increase in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets increased to 1.94% at December 31, 2025 from 1.50% at December 31, 2024. The allowance for credit losses to non-performing loans at December 31, 2025 was 106.80%, compared with 78.08% at December 31, 2024.

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, 2025. Overall, the ratio of the allowance for credit losses to year end loans increased to 3.28% at December 31, 2025 from 1.88% at December 31, 2024.

The Company’s shareholders’ equity increased $968,000 or 0.8%, to $122.5 million at December 31, 2025 from $121.5 million at December 31, 2024. This increase was primarily due to a $3.8 million decrease in accumulated other comprehensive loss, and an increase of $1.6 million in additional paid in capital, offset by a $4.5 million decrease in retained earnings. Comprehensive loss decreased primarily due to net unrealized gains on pension and post-retirement benefits and AFS securities. The increase of $1.6 million for additional paid in capital was due to increased stock option exercise activity during the year. The decrease in retained earnings resulted from a $1.9 million net loss recorded for the year ended December 31, 2025, $1.9 million for cash dividends declared on voting common stock, $552,000 for cash dividends declared on non-voting common stock and $50,000 for cash dividends declared on issued warrants.

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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 $3.3 million, or 8.2%, to $44.3 million in 2025 as compared to $41.0 million in the previous year. Our net interest margin for the year ended December 31, 2025 increased to 3.21% from 2.98% compared to the prior year. The increase in net interest income was primarily due to lower interest expense of $5.1 million, or 13.5%, partially offset by lower interest and dividend income of $1.7 million or 2.2%. The $1.7 million decrease in interest and dividend income was driven by lower average taxable investment securities balances of $2.6 million, combined with lower average yield of taxable investment securities of 45 basis points. The decrease in interest expense was a result of the lower interest rate environment in 2025, which reduced cost of funds on MMDA accounts, time deposits, and borrowings, of 40 basis points, 46 basis points, and 63 basis points, respectively. Additionally, interest expense decreased due to lower average balances of time deposits of $31.4 million and borrowings of $50.0 million for the year ended December 31, 2025.

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Average Balances and Rates

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the table has not been adjusted for tax equivalency. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.

For the year ended December 31,

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 (9,357 ) (9,769 )

Interest-bearing liabilities:

Noninterest-bearing liabilities:

Net interest rate spread 2.67 % 2.37 %

Net interest margin 3.21 % 2.98 %

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Rate/Volume Analysis

Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities, and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the years indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency.

Years Ended December 31,

Increase/(Decrease) Due to

Total

Increase

(In thousands) Volume Rate (Decrease)

Interest Income:

Tax-exempt investment securities 190 (403 ) (213 )

Interest-earning deposits (63 ) (280 ) (343 )

Interest Expense:

Money management accounts (2 ) 1 (1 )

Savings and club accounts 21 (10 ) 11

Subordinated debt 12 (6 ) 6

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 decreased $1.7 million, or 2.2%, to $76.7 million for the year ended December 31, 2025, compared to $78.4 million for the year ended December 31, 2024. The decrease in 2025 was driven by lower average interest-earning balances of taxable investment securities and federal funds sold and interest-earning deposits down by $2.6 million and $1.4 million, respectively, accompanied by lower average yields of taxable investment securities and federal funds sold and interest-earning deposits down 45 basis points to 4.97% from 5.42% and 184 basis points, to 3.00% from 4.84% respectively. These decreases were offset by higher average balances of loans and tax-exempt securities up $5.7 million and $3.3 million, respectively, and higher average yields of six basis points to 5.89% from 5.83% for average loans, when compared to the year ended December 31, 2024. The decline in interest income reflected the decrease in total average yield of average interest-earnings assets which decreased 14 basis points, to 5.56% for the year ended December 31, 2025 from 5.70% for the year ended December 31, 2024, offset by the increase in total average interest-earning assets which increased $5.0 million from the sequential year.

Interest Expense

Interest expense totaled $32.3 million for the year ended December 31, 2025, down $5.1 million or 13.5% from $37.4 million for the year ended December 31, 2024. The decrease in interest expense for the year ended December 31, 2025, was primarily driven by the lower interest rate environment and decreased average borrowing balances and associated costs. Total cost of funds on average interest-bearing deposits for the year ended December 31, 2025, was 2.74%, down 38 basis points, from 3.12% for the year ended December 31, 2024. Total average balances on interest-bearing deposits increased $44.9 million to $1.02 billion for the year ended December 31, 2025, from $976.9 million for the year ended December 31, 2024. Average balances on borrowings decreased to $64.5 million, down $50.0 million, and cost of funds related to average borrowings decreased to 3.66%, down 63 basis points for the year ended December 31, 2025 as compared to the year ended December 31, 2024. The decrease in interest expense was the result of the decrease in the average balance of total interest-bearing liabilities which decreased $4.9 million, or 0.44%, paired with lower cost of funds down 44 basis points, to 2.89% for the year ended December 31, 2025 from the year ended December 31, 2024.

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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 $16.3 million in 2025 as compared to $11.0 million in the prior year. The $5.3 million year-over-year increase in provision for credit losses reflected a comprehensive loan portfolio review of all commercial loan relationships of $500,000 or more, representing approximately 90% of the commercial portfolio, which was announced in October 2025 and completed in December 2025. The increase in provision for credit losses reflects a risk-based reserve build of the Company's forward-looking assessment of loans identified through the comprehensive loan portfolio review.

The Company recorded $4.2 million in net charge-offs in 2025 as compared to $9.8 million in net charge-offs in 2024. The ratio of net charge-offs to average loans therefore decreased to 0.46% in 2025 from 1.09% in 2024. 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 3.07% at December 31, 2025 as compared to 2.40% at December 31, 2024. The allowance for credit losses to non-performing loans at December 31, 2025 was 106.80%, compared with 78.1% at December 31, 2024.

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 834 854 (20 ) -2.3 %

Losses on sales and redemptions of investment securities (23 ) (71 ) 48 67.6 %

Gains on sales of loans and foreclosed real estate 402 187 215 115.0 %

Fair value adjustment to loans held-for-sale (3,462 ) - (3,462 ) N/M

Loss on sale of premises and equipment (37 ) (13 ) (24 ) -184.6 %

Non-recurring gain on lease renegotiations - 245 (245 ) -100.0 %

N/M - Not meaningful

Total noninterest income was $2.5 million in 2025, a decrease of $7.1 million, or 73.9%, from $9.6 million in 2024. Excluding recorded gains and losses, noninterest income was down $1.6 million to $4.3 million for the year ended December 31, 2025 from $5.8 million for the year ended December 31, 2024. The decrease from the prior year was driven by fair value adjustment or lower of cost or market adjustment to loans held-for-sale ("LOCOM HFS adjustment") of nonperforming and substandard loan sales conducted in 2025, totaling a pre-tax loss in noninterest income of $3.5 million for the year ended December 31, 2025. Prior year noninterest income also benefited from $1.1 million of insurance agency revenue and a $3.2 million gain on sale associated with the Company's insurance agency asset sold in October 2024. Additionally, the decrease in noninterest income was driven by lower debit card interchange fees of $365,000, lower non-recurring gain on lease negotiations of $245,000, and lower other charges, commissions & fees of $223,000 compared to the previous year.

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Noninterest Expense

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

For the years ended

Foreclosed real estate expenses 106 102 4 3.9 %

Noninterest expenses totaled $34.6 million for the year ended December 31, 2025, which was an increase of $164,000, or 0.5%, from $34.4 million for the year ended December 31, 2024. This increase was primarily attributed to higher salaries and employee benefits associated with general salary increases and a change in workforce composition in 2025, as the Company strategically added more senior, key personnel across the organization and higher occupancy costs related to the addition of the East Syracuse branch, offset by lower expenses related to the divestiture of the Company's insurance company in October 2024.

Salaries and employee benefits, which constituted the largest component of noninterest expenses, increased $1.1 million to $18.9 million for the year ended December 31, 2025. The increase from the year ended December 31, 2024, was primarily attributed to higher salaries and benefits costs associated with merit increases and wage inflation of $426,000, as well as $736,000 in higher costs related to stock-based compensation. Building and occupancy costs increased $1.2 million or 29.0% from the sequential year, reflecting a full year of expenses associated with operating the East Syracuse branch acquired in July 2024. Building leases and maintenance increased $915,000 from the previous year. Professional and other services expense decreased $936,000 from the previous year, when the Company incurred transaction-related expenses associated with the East Syracuse branch acquisition and consulting services costs related to technology enhancements, both in 2024. Additionally, noninterest expense was reduced $1.3 million in 2025 as compared with 2024, primarily due to the absence of costs associated with the Company's insurance agency asset sold in October 2024.

Income Tax Expense

Income tax expense (benefit) decreased $2.5 million in 2025, resulting in an income tax benefit of $2.2 million compared to income tax expense of $332,000 in 2024. The change was primarily attributable to a pre-tax loss of $4.1 million in 2025 compared to pre-tax income of $5.2 million in 2024. The decline in pre-tax earnings was largely driven by higher credit-related costs, including asset sales, loan charge-offs and increased provisions for the allowance for credit losses. In addition, the Company recognized deferred tax assets related to New York State net operating losses and temporary differences associated with the allowance for credit losses.

In 2025, the Company’s effective tax rate was a benefit of 52.8%, as compared to an expense of 8.9% in 2024. The effective tax rate for 2025 was significantly impacted by the pre-tax loss reported during the year, which magnifies the effect of permanent tax differences relative to pre-tax results. The effective tax rate also reflects the recognition of state deferred tax assets associated with net operating losses and temporary differences related to the allowance for credit losses.

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, 2025 were both ($0.31), as compared to basic and diluted earnings per share of $0.54 for the year ended December 31, 2024. 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.

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CHANGES IN FINANCIAL CONDITION

The Company's total assets were $1.43 billion at December 31, 2025, a decrease of $48.2 million, or 3.3% from December 31, 2024. The decrease was primarily the result of a decrease of $28.4 million in HTM securities, as well as a $34.5 million decrease in loans receivable, net, that reflects the reclassification of $5.9 million in loans to held-for-sale status. These decreases were partially offset by increases of $7.5 million in AFS securities and $6.6 million in bank owned life insurance. All other asset categories had a net increase of $499,000.

Investment Securities

The average balance of the investment portfolio, which represented 33.0% of the Company’s average interest-earning assets in 2025, 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 AFS or HTM. 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 FHLB-NY. 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, 2025, AFS investment securities increased 2.8% to $276.8 million and HTM investment securities decreased 17.9% to $130.3 million as compared to December 31, 2024. There were four securities that exceeded 10% of consolidated shareholders’ equity.

Our AFS investment securities are carried at fair value and our HTM 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 - -

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The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2025. 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

Debt investment securities:

Mortgage-backed securities:

Other non-maturity investments:

HELD-TO-MATURITY

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.

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Loans Receivable

Average loans receivable represented 65.9% of the Company’s average interest earning assets in 2025 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,

Residential real estate held-for-sale - 0.0 % - 0.0 %

The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2025 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, 2025 that are contractually due after December 31, 2026:

(In thousands) Due After One Year

Interest rates:

Total loans receivable, including net deferred costs, decreased $22.3 million to $896.7 million at December 31, 2025 when compared to $919.0 million at December 31, 2024, due to decreases in residential mortgages of $14.7 million, consumer loans of $9.9 million, offset by an increase in commercial loans of $3.8 million.

In 2025, 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 decrease in residential real estate and consumer loans was primarily the result of decreases in newly originated loans.

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Nonperforming Loans and Assets

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

December 31

Nonaccrual loans:

Commercial and commercial real estate loans $ 24,616 $ 18,212

Foreclosed real estate 137 -

Nonperforming loans to total loans 3.07 % 2.40 %

Nonperforming assets to total assets 1.94 % 1.50 %

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, 2025. The ratio of the allowance for credit losses to year end loans was 3.28% and 1.88% at December 31, 2025 and December 31, 2024, respectively.

Total nonperforming assets increased $5.6 million, or 25.4%, between December 31, 2024 and December 31, 2025, driven by an increase of $6.4 million in nonperforming commercial and commercial real estate loans, and an increase of $258,000 in nonperforming consumer loans offset by a decrease of $1.2 million in nonperforming residential real estate loans. The increase in nonperforming loans primarily reflected certain legacy commercial loans moving to nonperforming status, including loans that may have been less than 90 days delinquent but were identified as having unique risk characteristics through the Company’s 2025 portfolio review.

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 $29.4 million at December 31, 2025, 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 totaled $137,000 at December 31, 2025. There were no FRE balances reported at December 31, 2024.

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. Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $1.8 millionand $2.4 million would have been recorded for the years ended December 31, 2025 and December 31, 2024, respectively.

Individually evaluated loans are considered to have unique risk characteristics when their risk profile, repayment characteristics, or loss exposure are sufficiently distinct such that inclusion in a pooled evaluation would not appropriately reflect its expected credit loss. Individually evaluated loans measures credit losses using a discounted cash flow approach, collateral-dependent valuation techniques, observable market pricing (when available), or other methods permitted under ASC 326 that reasonably estimate expected credit losses based on the specific facts and circumstances of the loan. The selected methodology is applied consistently and is based on the specific facts and circumstances of each loan. At December 31, 2025 and December 31, 2024, the Company had $89.4 million and $20.0 million in loans, which were deemed to be individually evaluated, having specific reserves of $18.1 million and $2.5 million, respectively. The $69.4 million year-over-year increase in individually evaluated loans reflects management's proactive decision to initiate a comprehensive review of every performing and nonperforming commercial loan with exposures of $500,000 or more, representing approximately 90% of the commercial loan portfolio, which was announced in October 2025 and completed in December 2025.

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 $19.5 million to $75.9 million at December 31, 2025, compared to $56.4 million at December 31, 2024. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered individually evaluated. The $19.5 million

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increase in potential problem loans included increases of $15.2 million in commercial real estate loans, $1.8 million in residential mortgage loans, $928,000 in commercial and industrial loans, $772,000 in commercial lines of credit, $395,000 in home equity loans, and $121,000 in consumer loans.

Total potential problem loans, including individually evaluated loans, were $77.2 million at December 31, 2025, and were comprised of special mention, substandard and doubtful loans of $45.4 million, $28.7 million and $3.1 million, respectively. 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.

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 5.91% at December 31, 2025 as compared to 3.81% at December 31, 2024. This increase was due to an increase of $16.6 million in past due commercial loans, and a $1.6 million increase in past due residential loans, partially offset by a $235,000 decrease in past due consumer loans.At December 31, 2025, there were $53.0 million in loans past due including $13.9 million, $11.5 million and $27.6 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively. 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.

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 is 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.

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Allowance for Credit Losses

The 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 allowance for all troubled credits identified through both normal and targeted credit review processes. Loans recognized within the internal review are identified as being individually evaluated and excluded from collective pools. Individually evaluated loans are considered to have unique risk characteristics when their risk profile, repayment characteristics, or loss exposure are sufficiently distinct such that inclusion in a pooled evaluation would not appropriately reflect its expected credit loss. Factors that may result in such classification include, but are not limited to, borrower-specific financial stress or credit deterioration, nonaccrual status or sustained delinquency, bankruptcy, insolvency, or restructuring proceedings, reliance on a single or materially weakened source of repayment, material adverse changes in collateral value, condition, or marketability, collateral dependency, unique or non-standard loan structures or modifications, adverse changes in guarantor support, or other circumstances indicating the loan no longer shares similar risk characteristics with the pool. For individually evaluated loans, management measures credit losses using a discounted cash flow approach, collateral-dependent valuation techniques, observable market pricing (when available), or other methods permitted under ASC 326 that reasonably estimate expected credit losses based on the specific facts and circumstances of the loan. The selected methodology is applied consistently and is based on the specific facts and circumstances of each loan. At December 31, 2025, the Bank’s position in individually evaluated loans consisted of 127 loans totaling $89.4 million. Of these loans, all were valued based on a collateral analysis. No loans were valued using the present value of future cash flows method. 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 allowance for credit losses at December 31, 2025 and 2024 were $29.4 million and $17.2 million, respectively, or 3.28% and 1.88% of total year end loans on those dates, respectively. The increase in allowance for credit losses reflects a risk-based reserve build following the completion of the comprehensive loan portfolio review, which was proactively initiated by management, announced in October 2025, and completed in December 2025. The comprehensive loan portfolio review included all performing and nonperforming commercial loan relationships with exposures of $500,000 or more, representing approximately 90% of the commercial portfolio. The increase in allowance for credit losses in 2025 substantially addresses credit quality issues associated with legacy commercial loans.

The Company recorded $4.2 million in net charge-offs in 2025, as compared to $9.8 million in net charge-offs in 2024. The ratio of net charge-offs to average loans decreased to 0.46% in 2025 from 1.09% in 2024. The decrease in charge-off activity in 2025, as compared to the previous year, was due to elevated loan charge-offs for 2024 that were related to the loan portfolio review conducted in the third quarter of 2024.

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.

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

Adoption of New Accounting Standards - -

Provisions charged to operating expenses 16,403 11,106

Recoveries of loans previously charged-off:

Commercial real estate and loans 220 90

Consumer and home equity 605 221

Residential real estate 5 34

Loans charged off:

Commercial real estate and loans (2,740 ) (6,473 )

Consumer and home equity (2,154 ) (3,663 )

Residential real estate (146 ) (47 )

Net charge-offs to average loans outstanding 0.47 % 1.09 %

Allowance for credit losses to year-end loans 3.28 % 1.88 %

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

Allowance for credit losses to year-end loans 3.28 % 1.88 %

Allowance for credit losses to nonperforming loans 106.80 % 78.08 %

Nonaccrual loans to total loans 3.07 % 2.40 %

Net charge-offs to average loans outstanding

Commercial real estate and loans 0.28 % 0.71 %

Consumer and home equity 0.17 % 0.38 %

Residential real estate 0.02 % 0.00 %

Total charged-off 0.47 % 1.09 %

The Company recorded $4.2 million in net charge-offs in 2025 as compared to $9.8 million in net charge-offs in 2024. Charge-offs for commercial real estate loans decreased $3.7 million or 57.7% and consumer and home equity charge-offs decreased $1.5 million or 41.2% offset by increases in residential real estate charge-offs of $99,000, at December 31, 2025, compared to December 31, 2024.

Bank Owned Life Insurance

The Company held $31.4 million and $24.7 million in bank owned life insurance ("BOLI") at December 31, 2025 and 2024, respectively. Bank owned life insurance increased $6.7 million, or 26.9%, to $31.4 million at December 31, 2025, as compared to December 31, 2024. The increase of $6.7 million was primarily attributable to the Company's $6.0 million purchase of new life insurance policies during the second quarter of 2025, in addition to earnings and gains on BOLI.

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 $56.7 million, or 4.9%, to $1.22 billion in 2025, as compared to $1.16 billion in 2024.

Total deposits declined by $20.7 million, or 1.7%, to $1.18 billion on December 31, 2025 as compared to $1.20 billion on December 31, 2024. In 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 79.8% of total deposits on December 31, 2025, compared to 76.9% on December 31, 2024. 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

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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.

Brokered deposits totaled $101.9 million and represented 8.6% of all deposits at December 31, 2025 and totaled $136.3 million and represented 11.3% of all deposits at December 31, 2024.

At December 31, 2025, municipal deposits increased by $27.0 million compared to December 31, 2024, primarily reflecting increased utilization of the Company’s reciprocal deposit programs. Business and consumer deposits decreased by $11.1 million and $6.5 million, respectively, largely due to lower time deposit balances compared to the prior year. Noninterest-bearing deposits, which consist primarily of demand deposit accounts, totaled $196.4 million at December 31, 2025, compared to $213.7 million at December 31, 2024, reflecting a decline of $17.3 million year over year.

The following table sets forth our deposit balances by category, and as a percentage of total deposits at the dates indicated:

December 31,

Uninsured deposit balances were $405.3 million and $417.8 million at December 31, 2025 and December 31, 2024, respectively. These balances are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC. At December 31, 2025, time deposit accounts in excess of $250,000 totaled $134.8 million, or 29.8% of time deposits and 11.4% of total deposits. At December 31, 2024, these deposits totaled $142.5 million, or 28.3% of time deposits and 11.8% 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, 2025:

(In thousands)

Remaining Maturity:

Three months or less $ 52,136

Three through six months 50,218

Six through twelve months 28,050

Over twelve months 4,375

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 $88.1 million at December 31, 2025, compared to $63.5 million at December 31, 2024, and represented 8.1% and 5.9% of nonbrokered deposits as of the end of each year, respectively.

The Company offers a variety of public deposit products to municipalities within its market area, including towns, villages, counties and school districts, which serve as an additional source of funding. Total public (municipal) deposits were $175.7 million and $148.8 million at December 31, 2025 and 2024, respectively, representing 16.2% and 13.9% of total deposits at the end of each year. The increase in public deposits during 2025 compared to the prior year was primarily attributable to an increase of approximately $20.0 million in balances from an existing municipal relationship.

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Deposit Activity

During 2025, like many financial institutions, the Bank experienced significant decreases in its cost of deposits resulting from the lower interest rate environment.

We offer deposit accounts to consumers, business and local municipalities having a wide range of interest rates and terms. Our deposits consist of various types of transactional accounts such as savings accounts, money market accounts, NOW, and demand accounts as well as time accounts in the form of certificates of deposits. We solicit deposits in our market areas as well as online through our website. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Services (“CDARS”) and Insured Cash Sweep (“ICS”) networks. The Bank also has a substantial number of readily available sources for brokered term deposits that it uses regularly as a secondary funding source.

The Bank primarily relies on competitive pricing policies, marketing and customer service to attract and retain these deposits. As noted above, the Bank also accepts deposits from deposit brokers.

The following table sets forth our brokered deposit balances and rates at December 31, 2025:

(Dollars in thousands) Balance Average Rate

Maturity Year:

Included in the brokered deposit balances, detailed above, are $5.0 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 $5.0 million in overnight brokered funds, derived from a pool of individual depositors, at December 31, 2025. The interest rate paid for these funds is indexed to the overnight Federal funds effective rate. 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 $1.08 billion, or 91.4% of total deposits with an average rate of 2.0% at December 31, 2025. Nonbrokered deposits, totaled $1.07 billion, or 88.7% of total deposits with an average rate of 2.3% at December 31, 2024. Our core deposits, which herein are defined as nonbrokered deposits excluding time accounts in excess of $250,000, were $947.1 million, or 87.5% of nonbrokered deposits, and $925.8 million, or 86.7% of nonbrokered deposits, at December 31, 2025 and December 31, 2024, respectively.

The following table sets forth our certificate of deposit balances and rates at December 31, 2025:

(Dollars in thousands) Balance Average Rate

Maturity Year:

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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:

Borrowings

Borrowings are comprised primarily of advances and overnight borrowings at the FHLB-NY.

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

Average amount outstanding during the year 43,865 76,668

Average interest rate during the year 4.49 % 5.45 %

Average interest rate at the end of the period 4.33 % 6.14 %

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

Maximum outstanding at any month end $ 23,802 $ 49,919

Average amount outstanding during the year 20,612 43,162

Average interest rate during the year 1.88 % 1.70 %

Average interest rate at the end of the period 2.84 % 1.26 %

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 three-month 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, 2025 and 2024. 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 investors. The 2020 Subordinated Debt has a

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maturity date of October 15, 2030, and initially was interest-bearing, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company.

Commencing on October 16, 2025, the interest rate applicable to the outstanding principal amount due resets quarterly to an interest rate per annum equal to the then current three-month SOFR plus 5.32%, payable quarterly through maturity. Although the Company has the option to redeem the 2020 Subordinated Debt at par, in whole or in part, at any time after October 15, 2025 (the first redemption date), the Company currently expects to allow the debt to remain outstanding. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees were fully amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this indebtedness of $1.7 million and $1.6 million was recorded in the years ended December 31, 2025 and December 31, 2024, respectively.

Shareholders' Equity

The Company’s shareholders’ equity increased $968,000 or 0.8%, to $122.5 million at December 31, 2025 from $121.5 million at December 31, 2024. The increase was due to a $3.8 million decrease in accumulated other comprehensive loss, and an increase of $1.6 million in additional paid in capital, offset by a $4.5 million decrease in retained earnings. The decrease in accumulated other comprehensive loss was due to higher net unrealized gains on pension and post-retirement benefits of $810,000 net tax, and higher gains on AFS securities of $3.2 million net tax, offset by unrealized losses of derivatives and hedging activity of $291,000 net tax. The increase of $1.6 million for additional paid capital was due to increased stock option exercise volume within the year. The decrease in retained earnings resulted from a $1.9 million net loss recorded for the year ended December 31, 2025, $1.9 million for cash dividends declared on voting common stock, $552,000 for cash dividends declared on non-voting common stock, and $50,000 for cash dividends declared on issued warrants.

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, 2025, 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 CET1 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 of the following capital to risk-weighted assets ratios: (1) Total Capital, (2) Tier 1 Capital, and (3) CET1. At December 31, 2025, the Bank exceeded all current regulatory required minimum capital ratios, including the capital buffer requirements.

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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 FHLB-NY, 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 AFS 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, 2025, cash and cash equivalents decreased by $402,000. The Company reported net cash outflows from financing activities of $52.5 million generated principally by an increase in customer deposits of $13.7 million, offset by a $17.0 million decrease in short-term borrowings, a decrease in brokered deposits of $34.4 million, a decrease in net proceeds from long-term borrowings of $13.0 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 $2.5 million. Additionally, $11.7 million was provided through operating activities generated principally by net income and proceeds from loan sales. These cash flows were primarily used in 2025 to purchase $74.7 million of investment securities, partially offset by a $12.1 million net decrease in loans outstanding.

Certificates of deposit due within one year of December 31, 2025 totaled $425.3 million, representing 94.1% of certificates of deposit at December 31, 2025, an increase from 85.1% at December 31, 2024. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2026.

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, 2025 and 2024, the Company had cash and cash equivalents of $31.2 million and $31.6 million, respectively.

The Bank has a number of existing credit facilities available to it. At December 31, 2025, total credit available under the existing lines of credit was approximately $244.0 million at FHLB-NY, the FRB, and two other correspondent banks. At December 31, 2025, the Company had $58.0 million of the available lines of credit utilized, including encumbrances supporting the outstanding letters of credit, described above, on its existing lines of credit with the remainder of $186.0 million available.

The Company's sources of immediately available liquidity of $384.9 million represent 238.9% and $161.1 million of the Company's net estimated uninsured deposits. Net estimated uninsured deposits exclude collateralized and certain other deposit accounts. When compared to 2024, the $42.8 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, 2025 and December 31, 2024.

December 31,

Unrestricted cash and cash equivalents $ 31,170 $ 31,572

Correspondent bank borrowing capacity 15,000 15,000

Total sources of liquidity/net estimated uninsured deposits 238.88 % 229.53 %

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The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of December 31, 2025, 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, 2025, the Bank had $186.3 million in outstanding commitments to extend credit and standby letters of credit. See Note 18 within the Notes to consolidated financial statements contained herein.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required of a smaller reporting company.

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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Pathfinder Bancorp, Inc.

Page

Management’s Report on Internal Control over Financial Reporting 55

Report of Independent Registered Public Accounting Firm 56

Consolidated Statements of Condition – December 31, 2025 and 2024 58

Consolidated Statements of Income – Years ended December 31, 2025 and 2024 59

Notes to Consolidated Financial Statements 63

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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, 2025, 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 30, 2026

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Pathfinder Bancorp, Inc.

Oswego, New York:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2025 and 2024, 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, 2025, 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, 2025 and 2024, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2025, 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, 2025 was $16.4 million and the allowance for credit losses on loans as of December 31, 2025 was $29.4 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 using a collective basis (pooled) for similar loans and an individual basis for loans that do not share similar risk characteristics. The quantitative analysis includes using a discounted cash flow (“DCF”) model for determining the allowance for credit losses for pooled loans. 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. The individually evaluated loans component represented the most significant component of the ACL in the current year. This component requires management to exercise

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high subjectivity in determining the expected cash flows, valuing underlying collateral, and determining the timing of repayments for specifically identified impaired loans. The allowance for credit loss methodology is inherently complex and requires the use of significant management judgment.

We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the 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 allowance for credit losses on collectively evaluated loans, including the relevance and reliability of internal and external data used in their formulation;

•

Evaluated management’s judgments and assumptions used in the formation of the allowance for credit losses on individually evaluated loans, including the relevance and reliability of internal and external data used in their formulation including collateral value for collateral-dependent loans;

•

Evaluated the relevance and reliability of the internal and external data used in the development of qualitative adjustments and the effect of those adjustments, which we determined were not material; and

•

Evaluated the selection and use of a third-party service organization and specialist in assisting with the calculation of the allowance for credit losses on loans.

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

/s/ BONADIO & CO., LLP

Bonadio & Co., LLP

Syracuse, New York

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Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

December 31, December 31,

(In thousands, except share and per share data) 2025 2024

ASSETS:

Marketable equity securities, at fair value 6,034 4,076

Federal Home Loan Bank stock, at cost 2,560 4,590

Loans held-for-sale 5,900 -

Operating lease right-of-use assets 1,098 1,391

Foreclosed real estate 137 -

LIABILITIES AND SHAREHOLDERS' EQUITY:

Deposits:

Accrued interest payable 424 546

Shareholders' equity:

Accumulated other comprehensive loss (5,367 ) (9,144 )

Total Pathfinder Bancorp, Inc. shareholders' equity 122,451 121,483

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Income

For the year ended

(In thousands, except per share data) December 31, 2025 December 31, 2024

Interest and dividend income:

Debt securities:

Federal funds sold and interest earning deposits 450 793

Interest expense:

Interest on short-term borrowings 1,971 4,176

Interest on long-term borrowings 387 733

Interest on subordinated debt 1,972 1,966

Provision for (benefit from) credit losses:

Held-to-maturity securities (81 ) (95 )

Unfunded commitments 20 (38 )

Net interest income after provision for credit losses 27,993 30,016

Noninterest income:

Service charges on deposit accounts 1,539 1,436

Earnings and gain on bank owned life insurance 834 854

Losses on sales and redemptions of investment securities (23 ) (71 )

(Loss) gain on asset sale (115 ) 3,169

Net unrealized gains on marketable equity securities 1,450 197

Gains on sales of loans and foreclosed real estate 402 187

Fair value adjustment to loans held-for-sale (3,462 ) -

Losses on sale of premises and equipment (37 ) (13 )

Debit card interchange fees 510 875

Insurance agency revenue - 1,073

Other charges, commissions & fees 1,011 1,479

Noninterest expense:

Professional and other services 2,750 3,686

Insurance agency expense - 1,281

Community service activities 70 130

Foreclosed real estate expenses 106 102

(Loss) income before provision for income taxes (4,093 ) 5,160

(Benefit) provision for income taxes (2,160 ) 332

Net income attributable to noncontrolling interest - 1,445

Net (loss) income attributable to Pathfinder Bancorp Inc. $ (1,933 ) $ 3,383

Voting Earnings per common share - basic and diluted $ (0.31 ) $ 0.54

Dividends per common share (Voting and Series A Non-Voting) $ 0.40 $ 0.40

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Comprehensive Income

For the years ended

Other Comprehensive Income (Loss)

Retirement Plans:

Retirement plan net gains recognized in plan expenses 136 150

Plan gains (losses) not recognized in plan expenses 912 (41 )

Net unrealized gains on retirement plans 1,048 109

Available-for-sale securities:

Unrealized holding gains (losses) arising during the period 4,388 (115 )

Reclassification adjustment for net losses included in net income 5 137

Net unrealized gains on available-for-sale securities 4,393 22

Derivatives and hedging activities:

Unrealized holding (losses) gains arising during the period (327 ) 493

Net unrealized (losses) gains on derivatives and hedging activities (327 ) 493

Other comprehensive income, before tax 5,114 624

Other comprehensive income, net of tax 3,777 461

Comprehensive income, attributable to noncontrolling interest $ - $ 1,445

Comprehensive income attributable to Pathfinder Bancorp, Inc. $ 1,844 $ 3,844

Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income

Retirement plan net gains recognized in plan expenses $ (36 ) $ (39 )

Plan (gains) losses not recognized in plan expenses (238 ) 11

Income tax effect related to other comprehensive income $ (1,337 ) $ (163 )

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Changes in Shareholder's Equity

Years ended December 31, 2025 and December 31, 2024

Other comprehensive income, net of tax - - - - 3,777 - - 3,777

Stock based compensation - - 985 - - - - 985

Stock options exercised 1 - 655 - - - - 656

Warrant dividends declared ($0.40 per share) - - - (50 ) - - - (50 )

Other comprehensive income, net of tax - - - - 461 - - 461

Stock options exercised - - 291 - - - - 291

Warrant dividends declared ($0.40 per share) - - - (50 ) - - - (50 )

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Cash Flows

For the years ended December 31,

OPERATING ACTIVITIES

Net (loss) income attributable to Pathfinder Bancorp, Inc. $ (1,933 ) $ 3,383

Deferred income tax benefit (3,521 ) (417 )

Proceeds from sales of loans held-for-sale 13,267 6,250

Originations of loans held-for-sale (12,865 ) (6,101 )

Realized (gains) losses on sales, redemptions and calls of:

Foreclosed real estate - (38 )

Loss on sale of premises and equipment 37 13

Available-for-sale investment securities 5 139

Held-to-maturity investment securities 18 (68 )

Marketable securities (1,450 ) (197 )

Gain on sale of subsidiary, attributable to Pathfinder Bancorp, Inc. - (1,504 )

Amortization of mortgage servicing rights 5 (41 )

Amortization of deferred loan fees and costs 23 (293 )

Amortization of operating and finance leases, net 442 (224 )

Amortization of deferred financing fees from subordinated debt 48 193

Earnings on bank owned life insurance (834 ) (86 )

Net amortization of premiums and discounts on investment securities 47 (284 )

Net amortization of premiums on intangible assets 573 258

Stock based compensation and ESOP expense 985 247

Net change in accrued interest receivable 553 405

Net change in other assets and liabilities (1,042 ) (2,594 )

Net cash inflows from operating activities 11,677 11,209

INVESTING ACTIVITIES

Purchase of available-for-sale securities (57,842 ) (92,883 )

Purchase of held-to-maturity securities (16,858 ) (24,665 )

Purchase of marketable securities (508 ) (673 )

Purchase of Federal Home Loan Bank stock (11,067 ) (14,634 )

Proceeds from redemption of Federal Home Loan Bank stock 13,097 18,792

Proceeds from sale of subsidiary 816 1,155

Proceeds from sales, redemptions and calls of:

Available-for-sale securities 6,190 3,276

Loans held-for-sale 3,161 -

Real estate acquired through foreclosure - 167

Acquisition of core deposit intangible asset - (6,271 )

Proceeds from sale of assets held-for-sale - 3,007

Purchase of premises and equipment (1,260 ) (2,062 )

Net cash inflows (outflows) from investing activities 40,445 (22,398 )

FINANCING ACTIVITIES

Net change in short-term borrowings (17,000 ) (64,680 )

Payments on long-term borrowings (23,883 ) (33,551 )

Proceeds from exercise of stock options 656 291

Cash dividends paid to common voting shareholders (1,908 ) (1,840 )

Cash dividends paid to common non-voting shareholders (552 ) (538 )

Cash dividends paid on warrants (50 ) (49 )

Change in noncontrolling interest, net - (761 )

Net cash outflows from financing activities (52,524 ) (5,971 )

Change in cash and cash equivalents (402 ) (17,160 )

Cash and cash equivalents at beginning of year 31,572 48,732

Cash and cash equivalents at end of year $ 31,170 $ 31,572

CASH PAID DURING THE YEAR FOR:

NON-CASH INVESTING ACTIVITY

Transfer of loans to loans held-for-sale 5,900 -

Real estate acquired in exchange for loans 137 -

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: Summary of Significant Accounting Policies

Nature of Operations

The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Pathfinder Bank (the “Bank”). The Company is a Maryland corporation headquartered in Oswego, New York. On October 16, 2014, the Company completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public. As a result of the conversion, the mutual holding company and former mid-tier holding company were merged into Pathfinder Bancorp, Inc. The primary business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company previously owned, through its wholly owned subsidiary Pathfinder Risk Management Company, Inc., 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of the Agency within the consolidated financial statements. The 49% of the Agency which the Company did not own is accounted for separately as noncontrolling interests within the consolidated financial statements. The Company completed the sale of its majority membership interest in the FitzGibbons Agency to Marshall & Sterling Enterprises, Inc. in October 2024. PRMC continues to exist as a separate legal entity, but is currently inactive.

The Company has seven branch offices located in Oswego County, five branch offices in Onondaga County and one limited purpose office in Oneida County. The Company is primarily engaged in the business of attracting deposits from the general public in the Company’s market area, and investing such deposits, together with other sources of funds, in loans secured by commercial real estate, business assets, one-to-four family residential real estate and investment securities.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has identified the allowance for credit losses, deferred income taxes, pension obligations, the annual evaluation of the Company’s goodwill for possible impairment and the evaluation of investment securities for credit loss impairment and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments, and as such, could be the most subject to revision as new information becomes available.

The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examinations.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located primarily in Oswego and Onondaga counties of New York State. A large portion of the Company’s portfolio is centered in residential and commercial real estate. The Company closely monitors real estate collateral values and requires additional reviews of commercial real estate appraisals by a qualified third party for commercial real estate loans in excess of $400,000.All residential loan appraisals are reviewed by an individual or third party who is independent of the loan origination or approval process and was not involved in the approval of appraisers or selection of the appraiser for the transaction, and has no direct or indirect interest, financial or otherwise in the property or the transaction. Note 4 discusses the types of securities that the Company invests in. Note 5 discusses the types of lending that the Company engages in.

Advertising

The Company generally follows the policy of charging the costs of advertising to expense as incurred. Expenditures for new marketing and advertising material designs and/or media content, related to specifically-identifiable marketing campaigns are capitalized and expensed over the estimated life of the campaign. Such periods of time are generally 12-24 months in duration and do not exceed 36 months.

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Noncontrolling Interest

Noncontrolling interest represented the portion of ownership and profit or loss that is attributable to the minority owners of the FitzGibbons Agency. In accordance with ASC 810, Consolidation, the noncontrolling interest was reduced to zero on October 1, 2024 as a result of the sale of the FitzGibbons Agency and accounting treatment for deconsolidation of a subsidiary.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits (with original maturity of three months or less).

Investment Securities

The Company classifies investment securities as either AFS or HTM. The Company does not hold any securities considered to be trading. AFS securities are reported at fair value, with net unrealized gains and losses reflected as a separate component of shareholders’ equity, net of the applicable income tax effect. HTM securities are those that the Company has the ability and intent to hold until maturity and are reported at amortized cost.

Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums and discounts on HTM securities are amortized and accreted into income using the interest method over the period to maturity.

The Company records its investment in marketable equity securities (“MES”) at fair value. Changes in the fair value of MES are recorded as additions to, or subtractions from, net income in the period that the change occurs. These changes in fair value are separately disclosed as gains (losses) on equity securities on the Consolidated Statements of Income.

Note 4 to the consolidated financial statements includes additional information about the Company’s accounting policies with respect to the credit loss impairment of investment securities.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula. The stock is carried at cost.

Transfers of Financial Assets and Loans Held for Sale

Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Loans

The Company grants mortgage, commercial, municipal, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding unpaid principal balances, less the allowance for credit losses plus net deferred loan origination costs. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the market area. Interest income is generally recognized when income is earned using the interest method. Nonrefundable loan fees received and related direct origination costs incurred are deferred and amortized over the life of the loan using the interest method, resulting in a constant effective yield over the loan term. Deferred fees are recognized into income and deferred costs are recorded to income immediately upon prepayment of the related loan.

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment consists of one-to-four family first-lien residential mortgages and construction loans. Commercial loans consist of the following classes: real estate, lines of credit, other commercial and industrial, and tax-exempt loans. Consumer loans include both home equity lines of credit and loans with junior liens and other consumer loans.

Allowance for Credit Losses

Management extensively reviews recent trends in historical losses, qualitative factors, including concentrations of loans to related borrowers and concentrations of loans by collateral type, and specific reserve requirements on loans individually evaluated in its determination of the adequacy of the credit losses. Therefore, ACL represents management’s estimate of losses inherent in credit-exposed asset portfolios, including the loan portfolio, unfunded loan commitments and the investment securities portfolio classified as HTM. The allowance is increased by the provision for credit losses, and decreased by charge-offs, net of recoveries. The ACL is