EDGAR 10-K Filing

Company CIK: 1609065
Filing Year: 2024
Filename: 1609065_10-K_2024_0000950170-24-035248.json

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ITEM 1. BUSINESS
ITEM 1: BUSINESS
GENERAL
Pathfinder Bancorp, Inc.
Pathfinder Bancorp, Inc. (the "Company") is a Maryland corporation incorporated in 2014 and headquartered in Oswego, New York. The primary business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. The Company is a registered bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company is also subject to supervision and regulation by the New York State Department of Financial Services (the “NYSDFS”).
The Company owns a non-consolidated Delaware statutory trust subsidiary, Pathfinder Statutory Trust II, of which 100% of the common equity is owned by the Company. Pathfinder Statutory Trust II was formed in connection with the issuance of $5.2 million in trust preferred securities.
At December 31, 2023 and 2022, 6,099,571 and 6,032,112 shares of Company common stock (voting and non-voting) were outstanding, respectively.
Following shareholder approval obtained on June 4, 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding shares of Series B Convertible Perpetual Preferred Stock to an equal number of Series A Non-Voting Common Stock. Neither the previously-issued Series B Convertible Perpetual Preferred Stock, nor the Series A Non-Voting Common Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors, in the same per share amount as paid on the Company’s Voting Common Stock.
At December 31, 2023, the Company had total consolidated assets of $1.47 billion, total deposits of $1.12 billion and shareholders' equity of $120.3 million plus a noncontrolling interest of $761,000, which represents the 49% of the FitzGibbons Agency, LLC not owned by the Company.
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Pathfinder Bank
The Bank is a New York-chartered commercial bank and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) through the Deposit Insurance Fund (“DIF”). The Bank is subject to supervision and regulation by the NYSDFS, as its chartering agency, and by the FDIC, as its deposit insurer and primary federal regulator. The Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”) and is also subject to certain regulations by the Federal Home Loan Bank System.
The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits, together with other sources of funds, in loans secured by commercial and residential real estate, and commercial business and consumer assets other than real estate. In addition, the Bank originates unsecured small business and consumer loans. The Bank also invests a portion of its assets in a broad range of debt securities issued by the United States Government and its agencies and sponsored enterprises, state and municipal governments and agencies, and corporations. The Company also invests in mortgage-backed securities issued or guaranteed by United States Government sponsored enterprises, collateralized mortgage obligations and similar debt securities issued by both government sponsored entities and private (non-governmental) issuers, and asset-backed securities that are generally issued by private entities. The Company invests primarily in debt securities but will, within certain regulatory limits, invest from time to time in mutual funds and equity securities. The Bank's principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings from the FHLBNY and correspondent financial institutions. The principal source of the Company’s income is interest on loans and investment securities. The Bank's principal expenses are interest paid on deposits and borrowed funds, employee compensation and benefits, data processing and facilities.
The Bank also owns 100% of Whispering Oaks Development Corp. (“Whispering Oaks”), a New York corporation that is retained to operate or develop real estate-related projects. Whispering Oaks, through a wholly-owned second-tier subsidiary, is the sole limited partner in an unconsolidated special-purpose real estate management partnership. The partnership currently operates a low-income residential housing facility. The activities of Whispering Oaks resulted in a pre-tax gain of $10,000 in 2023.
Additionally, the Bank owns 100% of Pathfinder Risk Management Company, Inc., ("PRMC") which was established to record the 51% controlling interest upon the December 2013 purchase of the FitzGibbons Agency, an Oswego County property, casualty and life insurance brokerage business with approximately $1.3 million in annual revenues. The activities of PRMC resulted in pre-tax income of $263,000 in 2023. The Company’s 51% controlling interest in this entity resulted in income of $134,000 for the Company on a consolidated basis in 2023.
MARKET AREA AND COMPETITION
Market Area
We provide financial services to individuals, families, small to mid-size businesses and municipalities through our seven branch offices located in Oswego County, NY, four branch offices located in Onondaga County, NY and one limited purpose office located in Oneida County, NY. Our primary lending market area includes both Oswego and Onondaga Counties. However, our primary deposit generating area is concentrated in Oswego County and in the areas surrounding our Onondaga County branches.
The economies of Oswego County and Onondaga County are based primarily on manufacturing, energy production, health care, education, and government. In addition to financial services, the broader Central New York market has a more diverse array of economic sectors, including food processing production and transportation. The region has more recently also developed particular strength in the commercialization of certain emerging technologies such as bio-processing, medical devices, aircraft systems and renewable energy.
Based on recent independent market survey reports, median home values were $216,750 in Onondaga County and $162,500 in Oswego County at the end of 2023. Home values have shown modestly accelerating increases in recent years within the Syracuse, NY metro area, including Onondaga and Oswego Counties. The increases in home values within the Company's lending areas followed a period in which those home values exhibited relative stability compared to many other areas of the country during the economic downturns that have occurred in the last 15 years.
Competition
Pathfinder Bank encounters strong competition both in attracting deposits and in originating real estate and other loans. Our most direct competition for deposits and loans comes from commercial banks, savings institutions and credit unions in our market area. Local credit unions, some of which also have more assets than the Company, are particularly strong competitors for consumer deposits and consumer loans. In addition, potential new competitors may be emerging that are generically defined as financial technology (also referred to as “FinTech” or “fintech”) companies. These entities seek to employ new technology and various forms of innovation in order to compete with traditional methods of delivering financial services. The advanced use of smartphones for mobile banking, automated investing services and cryptocurrency are examples of such technologies. Financial technology companies consist of both well-capitalized startup entities, divisions of established financial institutions and/or established technology companies. These entities seek to replace or supplement the financial services provided by established financial service entities, such as the Company. Many established financial institutions are now implementing, or planning to implement, various forms of fintech solutions and technologies in order to broaden
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their product and service offerings and/or to gain improved competitive positions in this emerging marketplace. Some of these technologies either have been implemented to varying degrees by the Bank, or will be available to the Bank for future implementation through its network of service providers and computer system vendors. It cannot be predicted with certainty at this time how effective these new competitors will be in our marketplace or what costs the Company will incur in the future to implement and maintain competitive technologies.
Our primary focus is to build and develop profitable consumer and commercial customer relationships while maintaining our role as a community bank. We compete for deposits by offering depositors a high level of personal service, a wide range of competitively-priced financial services, and a well distributed network of branches, ATMs, and electronic banking. We compete for loans through our competitive pricing, our experienced and active loan officers, local knowledge of our market and local decision making, strong community support and involvement, and a highly reputable brand. Notwithstanding the significant but temporary economic dislocations associated with the COVID-19 pandemic in 2020 and 2021, overall economic activity in the local marketplace and, more specifically, demand for commercial and residential loans grew significantly over the past decade. This growth in overall loan demand in our market area also attracted increased competition from financial institutions for those loans. Additionally, from a competitive perspective, some of our competitors offer products and services that we do not offer, such as trust services and private banking.
As of June 30, 2023, based on the most recently-available FDIC data, we had the largest market share in Oswego County, representing 48.6% of all deposits, and we additionally held 2.0% of all deposits in Onondaga County. In addition, when combining both Oswego and Onondaga Counties, we have the fifth largest market share of fifteen institutions, representing 7.9% of the total market.
LENDING ACTIVITIES
General
Our primary lending activities are originating commercial real estate and commercial loans, the vast majority of which have periodically adjustable rates of interest, and one-to-four family residential real estate loans, the majority of which have fixed rates of interest. Our loan portfolio also includes municipal loans, home equity loans and lines and consumer loans. In order to diversify our loan portfolio, increase our revenues, and make our loan portfolio less interest rate sensitive, the Company has actively sought to increase its commercial real estate and commercial business lending activities, consistent with safe and sound underwriting practices. Accordingly, we offer adjustable-rate commercial mortgage loans and floating rate commercial loans and lines of credit.
Commercial Real Estate Loans
Over the past several years, we have focused on originating commercial real estate loans, and we believe that commercial real estate loans will continue to provide growth opportunities for us. We expect to increase, subject to our underwriting standards and market conditions, this business line in the future with a target loan size of $500,000 to $2.0 million to small businesses and real estate projects in our market area. Commercial real estate loans are secured by properties such as multi-family residential, office, retail, warehouse and owner-occupied commercial properties.
Our commercial real estate underwriting policies provide that such real estate loans are typically made in amounts up to 80% of the appraised value of the property. Commercial real estate loans are offered with interest rates that are generally fixed for up to three or five years then are adjustable based on the FHLBNY advance rate. Contractual maturities generally do not exceed 20 years. In reaching a decision whether to make a commercial real estate loan, we consider market conditions, operating trends, net cash flows of the property, the borrower’s expertise and credit history, and the appraised value of the underlying property. We will also consider the terms and conditions of the leases and the stability of the tenant base. Environmental due diligence is generally conducted for commercial real estate loans. Typically, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the owners of 20% or more of the borrowing entity.
A commercial real estate borrower’s financial condition is monitored on an ongoing basis by requiring current financial statements, rent rolls, payment history reviews, property inspections and periodic face-to-face meetings with the borrower. We generally require borrowers with aggregate outstanding balances exceeding $100,000 to provide annual updated financial statements and/or federal tax returns. These requirements also apply to all guarantors on these loans.
Loans secured by commercial real estate generally have greater credit risk than one-to-four family residential real estate loans. The increased credit risk associated with commercial real estate loans is a result of several factors, including larger loan balances concentrated with a limited number of borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan. Furthermore, the repayment of loans secured by commercial real estate properties typically depends upon the successful operation of the real property securing the loan. If the cash flows from the property are reduced, the borrower’s ability to repay the loan may be impaired. However, commercial real estate loans generally have higher interest rates than loans secured by one-to-four family residential real estate.
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Commercial Loans
Our commercial lines of credit are typically adjustable rate lines, indexed to the prime interest rate. We typically originate commercial loans, including commercial term loans and commercial lines of credit, on the basis of a borrower’s ability to make repayment from the cash flows of the borrower’s business, conversion of current assets in the normal course of business (for seasonal working capital lines), the industry and market in which they operate, experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial loans and commercial lines of credit is substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial loans and commercial lines of credit that we originate have greater credit risk than one-to-four family residential real estate loans.
Commercial term loans are typically secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets, or, in some circumstances, such loans may be unsecured. From time to time, we also originate commercial loans that are guaranteed by the United States Small Business Administration (“SBA”) or United States Department of Agriculture (“USDA”) loan programs. Over the past several years, we have focused on increasing our commercial lending and our business strategy is to continue to increase our originations of commercial loans to small businesses in our market area, subject to our underwriting standards and market conditions. Our commercial loans are generally comprised of adjustable-rate loans, indexed to the prime rate, with terms consisting of three to seven years, depending on the needs of the borrower and the useful life of the underlying collateral. We make commercial loans to businesses operating in our market area for purchasing equipment, property improvements, business expansion or working capital. If a commercial loan is secured by equipment, the maturity of a term loan will depend on the useful life of the equipment purchased, the source of repayment for the loan and the purpose of the loan. We generally obtain personal guarantees on our commercial loans.
The Bank also participated in the Paycheck Protection Program (“PPP”), a specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”) pursuant to the CARES Act and subsequent legislation. Gross revenues recognized from PPP loan activities were $-0- and $707,000 in the years ended December 31, 2023 and 2022, respectively.
Residential Real Estate Loans
We currently offer one-to-four family residential real estate loans, made to borrowers in our general market area, with terms up to 30 years that are generally underwritten according to Federal National Mortgage Association (“Fannie Mae”) guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed-rate and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which as of December 31, 2023, was generally $726,200 for single-family homes in our market area.
We hold our one-to-four family residential real estate loans in our portfolio but do sell mortgages into the secondary market, at management’s discretion, as a source of liquidity or as a means of managing liquidity and interest-rate risks. A significant portion of our retained loan portfolio consists of fixed-rate one-to-four family residential real estate loans with terms in excess of 15 years. We also originate one-to-four family residential real estate loans secured by non-owner occupied properties. However, we generally do not make loans in excess of 80% loan-to-value on non-owner occupied properties.
Our fixed-rate one-to-four family residential real estate loans include loans that generally amortize on a monthly basis over periods between 10 to 30 years. Fixed-rate one-to-four family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans. Our adjustable-rate one-to-four family residential real estate loans generally consist of loans with initial interest rates fixed for one, three, or five years, and annual adjustments thereafter are indexed based on changes in the one-year United States Treasury bill constant maturity rate. Our adjustable-rate mortgage loans generally have an interest rate adjustment limit of 200 basis points per adjustment, with a maximum lifetime interest rate adjustment limit of 600 basis points. Although adjustable-rate one-to-four family residential real estate loans may reduce, to an extent, our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from a borrower also increase (subject to rate caps), thereby increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments.
Residential Construction Loans
Our one-to-four family residential real estate loan portfolio also includes residential constructions loans. Our residential construction loans generally have initial terms of up to six months, subject to extension, during which the borrower pays interest only. Upon completion of construction, these loans typically convert to permanent loans secured by the completed residential real estate. Our construction loans generally have rates and terms comparable to residential real estate loans that we originate.
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Tax-exempt Loans
We make loans to local governments and municipalities for either tax anticipation or for small expenditure projects, including equipment acquisitions and construction projects. Our municipal loans are generally fixed for a term of one year or less, and are generally unsecured. Interest earned on municipal loans is tax exempt for federal tax purposes, which enhances the overall yield on each loan. Generally, the municipality will have a deposit relationship with us along with the lending relationship.
We also make tax-exempt loans to commercial borrowers based on obligations issued by a state or local authority to provide economic development such as the state dormitory authority.
Home Equity Loans and Junior Liens
Home equity loans and junior liens are made up of lines of credit secured by owner-occupied and non-owner occupied one-to-four family residences and second and third real estate mortgage loans. Home equity loans and home equity lines of credit are generally underwritten using the same criteria that we use to underwrite one-to-four family residential mortgage loans. We typically originate home equity loans and home equity lines of credit on the basis of the applicant's credit history, an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan, and the value of the collateral securing the loan. Home equity loans are offered with fixed interest rates. Lines of credit are offered with adjustable rates, which are indexed to the prime rate, and with a draw period of up to 10 years and a payback period of up to 20 years. The loan-to-value ratio for our home equity loans is generally limited to 80% when combined with the first security lien, if applicable. The loan to value of our home equity lines of credit is generally limited to 80%, unless the Bank holds the first mortgage. If we hold the first mortgage, we will permit a loan to value of up to 90%, and we adjust the interest rate and underwriting standards to compensate for the additional risk.
Home equity loans and junior liens secured by junior mortgages have greater risk than one-to-four family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for credit losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to work out the relationship in order to avoid foreclosure because the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Moreover, decreases in real estate values could adversely affect our ability to fully recover the loan balance in the event of a default.
Consumer Loans
We are authorized to make loans for a variety of personal and consumer purposes and our consumer loan portfolio consists primarily of automobile, recreational vehicles and unsecured personal loans, as well as unsecured lines of credit and loans secured by deposit accounts. Our procedure for underwriting consumer loans includes an assessment of the applicant’s credit history and ability to meet existing obligations and payments for the proposed loan, as well as an evaluation of the value of the collateral security, if any.
Consumer loans generally entail greater credit-related risk than one-to-four family residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. As a result, consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower.
The Company will invest from time to time in pools of collateralized consumer loans originated and serviced by financial institutions operating outside of the Company’s primary market area. Third party-originated consumer loan pools are generally acquired primarily when, in the view of management, they offer superior risk vs. return characteristics to debt securities. Such pools will, in some instances, have projected economic advantages in terms of yield and/or other portfolio characteristics, such as interest rate risk sensitivity, superior to debt securities that would otherwise be purchased and are acquired to increase the overall performance characteristics of the Company’s interest earning-asset portfolios viewed as a whole. Loans acquired through these transactions are required by the Company’s internal policies to be underwritten to standards that are consistent with those of the Company’s own underwriting guidelines and internal practices.
Loan Originations, Purchases, Sales and Servicing
We benefit from a number of sources for our loan originations, including real estate broker referrals, existing customers, borrowers, builders, attorneys, and “walk-in” customers. Our loan origination activity may be affected adversely by a rising interest rate environment which may result in decreased loan demand. Other factors, such as the overall health of the local economy and competition from other financial institutions, can also impact our loan originations. Although we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed-rate versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in our market area. These lenders include commercial banks, savings institutions, credit unions, and mortgage banking companies that also actively compete for local real estate loans. Accordingly, the volume of loan originations may vary from period to period.
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The majority of the fixed rate residential loans that are originated each year meet the underwriting guidelines established by Fannie Mae. While infrequent, in the past, we have sold residential mortgage loans in the secondary market, and we may do so in the future, although we continue to service loans once they are sold.
From time to time, although infrequent, we may purchase commercial real estate loan participations in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. We also have participated out portions of commercial and commercial real estate loans that exceeded our loans-to-one borrower legal lending limit and for purposes of risk diversification.
In recent years, the Bank has purchased broadly-diversified pools of essentially homogenous loans from originators outside of the Bank’s market area. These originators generally specialize in loan types, such as consumer loans, other than those loan types that the Bank specializes in. These loans, which are generally relatively short in duration, are acquired to provide supplementary interest income as well as to provide improvements to the Bank’s overall asset/liability mix, particularly with respect to interest rate risk. Third party-originated loan pools are acquired primarily when, in the view of management, they offer superior risk vs. return characteristics to debt securities. Such loans are generally acquired through the facilitation of third-party brokerages and are serviced in perpetuity by the originating entries or their designees. Funding for loan purchases of this type is generally obtained through incremental usage of brokered deposits and/or other forms of borrowed funds. The Bank intends to purchase similar pools of loans on an occasional basis in the future if and when management believes that it is economically advantageous to do so. See Note 5 within the Notes to consolidated financial statements contained herein.
Loan Approval Procedures and Authority
The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by management and the Board of Directors. Our policies are designed to provide loan officers with guidelines on acceptable levels of risk, given a broad range of factors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan, if applicable.
The Board of Directors grants loan officers individual lending authority to approve extensions of credit. The level of authority for loan officers varies based upon the loan type, total relationship, form of collateral and risk rating of the borrower. Each loan officer is charged with the responsibility of achieving high credit standards. Individual lending authority can be increased, suspended or removed by the Board of Directors, as recommended by the President or Executive Vice President and Chief Banking Officer.
If a loan is in excess of any individual loan officer’s lending authority, the extension of credit must be referred to the Officer Loan Committee (“OLC”) or the Executive Loan Committee ("ELC"), depending on either the size of the loan or the loan relationship. The OLC is comprised of select senior officers, and the ELC includes certain members of the Board of Directors.
Loans to One Borrower
Under New York law, New York commercial banks are subject to loans-to-one borrower limits, which are substantially similar as those applicable to national banks, which generally restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus, which was $24.0 million at December 31, 2023, on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus, which was $16.0 million at December 31, 2023, if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate), subject to exceptions.
Additionally, our internal loan policies limit the total related credit to be extended to any one borrower (after application of the rules of attribution), with respect to any and all loans with the Bank to 10% of Tier 1 and 2 capital, subject to certain exceptions. The indebtedness includes all credit exposure whether direct or contingent, used or unused.
ASSET QUALITY
Loan Delinquencies and Collection Procedures
When a loan becomes delinquent, we make attempts to contact the borrower to determine the cause of the delayed payments and seek a solution to permit the loan to be brought current within a reasonable period of time. The outcome can vary with each individual borrower. The Bank strictly adheres to the requirements of federal and New York State laws and regulations with respect to consumer loan collections. Commercial loans may experience longer workout times than consumer loans and may trigger a need for complex loan modifications.
Specifically-Identified Loans, Non-performing Loans and Loan Modifications
The policy of the Bank is to provide a continuous assessment of the quality of its loan portfolio through the maintenance of an internal and external loan review process. The process incorporates a loan risk grading system designed to recognize degrees of risk on individual
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commercial and mortgage loans in the portfolio. Management is responsible for monitoring of asset quality and risk grade designations, which are communicated to the board on a regular basis.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans generally is applied against principal or interest if it is recognized on the cash basis method. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally for a minimum of six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Our Allowance for Credit Losses policy (“ACL”) establishes criteria for specifically-identified loans to be measured for impairment based on the following:
Residential and Consumer Loans:
•All loans rated substandard or worse, on nonaccrual, and above our total related credit (“TRC”) threshold balance of $300,000.
Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans:
•All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000.
Specifically-identified loans are determined by the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.
Foreclosed real estate
Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are recorded to the allowance for credit losses. Values are derived from appraisals of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals.
Loan delinquencies together with properties within our Foreclosed Real Estate portfolio are reviewed monthly by the Board of Directors.
Classified Assets
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific allowance for credit losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
Allowance for Credit Losses
Management extensively reviews recent trends in historical losses, qualitative factors, including concentrations of loans to related borrowers and concentrations of loans by collateral type, and specific reserve requirements on loans individually evaluated in its determination of the adequacy of the credit losses. Therefore, the allowance for credit losses (ACL) represents management’s estimate of losses inherent in credit-exposed asset portfolios, including the loan portfolio, unfunded loan commitments and the portion of the investment securities portfolio classified as held-to maturity (HTM). The ACL is established as of the date of the statement of condition and it is recorded as a reduction of either loans or HTM securities or as an other liability, in the case of unfunded loan commitments, in accordance with generally accepted accounting principles (GAAP).
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requiring financial institutions, such as the Bank, to adopt the Current Expected Credit Loss (“CECL”) methodology according to a specified implementation timeline. In order to meet this timeline requirement, the Bank adopted the CECL methodology for calculating its ACL on January 1, 2023. The
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amended guidance replaced the previously-required allowance for loan and lease losses (“ALLL”) calculated under what was known as the Incurred Loss Model. The ACL represents a valuation account that is deducted from the amortized cost basis of includable financial assets to present their net carrying value at the amount expected to be collected over the entire life of those assets. The income statement now reflects the measurement of credit losses for newly recognized financial assets as well as expected increases, or decreases, of expected credit losses that have taken place during the reporting period. When determining the ACL, expected credit losses over the expected term of the financial asset will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amount. In addition, the amended guidance requires credit losses relating to assets such as held-to-maturity debt securities and open contractual funding commitments to be recorded through the ACL.
Because the CECL methodology requires that reserves be established within the ACL for a broad range of financial assets, including all loans, through the entirety of their expected lives and also considers categories of financial instruments, such as open funding commitments, the initial ACL upon adoption would, in most cases, be expected to be greater than the ALLL that it replaced. This was the case with the Company's adoption of the CECL model in on January 1, 2023. In addition, the CECL model is designed to be more forward looking than the ILM and reflects a number of factors, most notably the estimation of cumulative credit losses through the entirety of the expected life of each evaluated financial instrument, periodic provisions for credit losses may, in the future, be more volatile than the historical patterns previously established under the ILM.
At December 31, 2022 the Company calculated its ALLL utilizing the Incurred Loss Model ("ILM") methodology, as required under GAAP on that date. As noted above, on January 1, 2023, the Company adopted the CECL model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total ALLL of $15.3 million, of which $4.8 million was related to impaired loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis.
On January 1, 2023 the Company recorded a one-time CECL transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans, evaluated collectively in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to impaired loans at December 31, 2022 was not affected by the transition to the CECL methodology at January 1, 2023.
The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.1 million, net of the effects of tax, on January 1, 2023, which was recorded to retained earnings on that date.
The ACL is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is increased by the provision for credit losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are recorded against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. All or part of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all or part of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, unless productive collection efforts are providing results. Consumer loans may be charged off earlier in the event of bankruptcy, or if there is an amount that is deemed uncollectible. No portion of the ACL is restricted to any individual loan type and the entire allowance is available to absorb any and all credit losses.
The ACL is based on three major components which are: (i) specific components for specifically-identified loans, (ii) quantitative factors, applied to nonspecifically-identified loans derived from historical bank-specific and industry loss charge-off patterns that have been correlated to prior period econometric factors, and (iii) a broad range of qualitative factors intended to provide further forward-looking perspectives on overall credit quality.
The first component is the specific allowance that relates to loans that are specifically-identified or where analysis for impairment is appropriate. For these loans, an allowance is established when the discounted cash flows or collateral value of the specifically-identified loan are lower than the carrying value of the loan. A loan is considered specifically-identified when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Specifically-identified loans are measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of our loans utilize the fair value of the underlying collateral. Factors considered by management in determining specifically-identified loans include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not specifically-identified. Management determines the significance of payment delays and shortfalls on a case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reason for the delay, the borrower’s prior payment record and the amount of shortfall in relation to what is owed.
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When a loan is determined to be specifically-identified, we will reevaluate the collateral which secures the loan. For real estate loans, we will obtain a new appraisal or broker’s opinion, whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from an independent firm able to provide such an evaluation. Collateral will be inspected not less than annually for all specifically-identified loans and will be reevaluated not less than every two years. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of homogeneous loans, including purchased loans, are evaluated for borrowers experiencing financial difficulties in the aggregate. Accordingly, we do not separately identify individual residential mortgage loans with outstanding principal balances less than $300,000, home equity and other consumer loans for impairment disclosures. We make exceptions to this general rule when such loans are (1) rated substandard or worse, on nonaccrual status and are related to borrowers with total related credit exposure in excess of our threshold balance of $300,000; or (2) the loans are modified due to borrowers experiencing financial difficulties. The projected credit losses related to purchased loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at least monthly. Over the life of the purchased loan pools, the allowance for credit losses is adjusted, through the provision for credit losses, for expected loss experience, over the projected life of the loans. The expected credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of the purchased loan pools. The Bank does not initially increase the allowance for credit losses on the purchase date of the loan pools.
The second component of the ACL estimation is based on quantitative factors, which cover discrete pools of loans, by loan class, not considered specifically-identified, smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based on historical loss rates for each of these categories of loans. Under the CECL methodology, quantitative analysis is used to predict future life-of loan charge-offs based on historical charge-off patterns correlated to a range of specific econometric factors, such as the national unemployment rate. The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default with loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to future cash flows that are adjusted to present value and these discounted expected losses become the quantitatively-derived portion of the ACL.
Within the third component of the ACL, management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions, levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration, and changes in regulatory environment, management, markets and product offerings. The Company assesses quarterly the magnitude of QF adjustments necessary to be applied to the quantitatively-derived ACL in order to incorporate forward-looking projections in its final evaluation of current expected credit losses.
In addition, the FDIC and NYSDFS, as an integral part of their examination process, periodically review our allowance for credit losses and may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, we believe the current level of the allowance for credit losses is adequate.
INVESTMENT ACTIVITIES
Our investment policy is established by the Board of Directors. Our investment policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management objectives. The Asset Liability Management Committee (the “ALCO”) of the Board of Directors acts in the capacity of an investment committee and is responsible for overseeing our investment program and evaluating on an ongoing basis our investment policy and objectives. Our President and Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have the authority to purchase and sell securities within specific guidelines established by the investment policy. All transactions are reviewed by the Board of Directors at its regular meetings.
The general objectives of the investment securities portfolio are to assist in the overall interest rate risk management of the Bank, while generating a reasonable rate of return consistent with the risk of purchased principal, provide a source of liquidity, and reduce our overall credit risk profile. We also purchase securities to provide necessary liquidity for day-to-day operations and when investable funds exceed loan demand, as well as to provide highly liquid assets under collateralization arrangements related to municipal deposits. The effect that the proposed security purchase would have on our overall credit and interest rate risk profile and our risk-based equity ratios is also considered in evaluating the timing, mix and characteristics of investment security purchases.
All investment securities purchased/held must meet regulatory guidelines and be permissible bank investments. Our investment securities include a broad range of debt securities issued by the United States Government and its agencies and sponsored enterprises,
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state and municipal governments and agencies, and corporations. The Company also invests in mortgage-backed securities issued or guaranteed by United States Government sponsored enterprises, collateralized mortgage obligations and similar debt securities issued by both government sponsored entities and private (non-governmental) issuers, and asset-backed securities that are generally issued by private entities. The Company invests primarily in debt securities but will from time to time also invest, within certain regulatory limits, in mutual funds and equity securities.
All securities purchased are classified at the time of purchase as either held-to-maturity (HTM) or available-for-sale (AFS). We do not maintain a trading account. Securities purchased with the intent and ability to hold until maturity will be classified as HTM. Securities placed in the HTM category will be accounted for at amortized cost.
Securities that do not qualify or are not categorized as HTM are classified as AFS. This classification includes securities that may be sold in response to changes in interest rates, the security's prepayment risk, liquidity needs, the availability of and the yield on alternative investments, and funding sources and terms. These securities are reported at fair value, which is determined on a monthly basis. Unrealized gains and losses are reported as a separate component of capital, net of tax. The aggregate change in value of the portfolio is reported to the Board of Directors monthly.
The composition of the investment portfolio is substantially the same for securities classified as both HTM and AFS, although the portion of the securities portfolio classified as AFS generally has a higher concentration of shorter-term, and/or more liquid assets. Such securities are held as part of the Bank’s liquidity management programs. The Bank holds a significant portion of its investment securities in mortgage-backed securities and collateralized mortgage obligations (many, but not all of which are issued by government-sponsored enterprises) and direct federal government and federal agency obligations. Federal agency issuers include the Federal Farm Credit Bank, Federal Home Loan Bank, Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), among others. For a discussion on mortgage backed securities, see “Mortgage-Backed Securities and Collateralized Mortgage Obligations.”
As part of our membership in the FHLBNY, we are required to maintain a dividend-earning investment in FHLBNY stock. This investment is classified separately from securities due to significant restrictions on sale or transfer of the stock. For further information regarding our securities portfolio, see Note 4 to the consolidated financial statements.
More specifically, we purchase mortgage-backed and asset-backed securities, as well as collateralized mortgage obligations guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as a number of private issuers. Mortgage-backed and asset-backed securities and collateralized mortgage obligations are created by pooling loan assets (mortgages or other loan types) and issuing a security with an interest rate which is less than the interest rate on the underlying loans. These securities typically represent a participation interest in a pool of mortgages or other loans The issuers of such securities pool and resell the participation interests in the form of securities to investors such as the Bank, and in the case of government agency sponsored issues, guarantee the payment of principal and interest to investors.
The securities issued by private entities are generally senior tranches, and most often the most senior tranche of multi-class issuances that provide substantial credit enhancements to their senior tranches and therefore reasonable, but not absolute, protection for the Bank from the risks of default. We invest in mortgage-backed and asset-backed securities and collateralized mortgage obligations to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk through geographic diversification. These securities are generally relatively short in duration and therefore reduce the Bank’s sensitivity to changes in interest rates. All privately issued mortgage-backed securities held by the Bank at December 31, 2023 were either rated at or above the lowest investment grade for credit quality by a nationally-recognized statistical rating organization (a “NRSRO”) or were the most senior tranches of securitizations that were not rated by a NRSRO at the time of the securities’ issuance. We regularly monitor the credit quality of this portfolio. At December 31, 2023, no securities held by the Bank in this category had been downgraded by a NRSRO.
HEDGING ACTIVITIES
The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at December 31, 2023. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no material derivative contracts not designated as hedging agreements at December 31, 2023 or December 31, 2022. See Note 21 within the Notes to consolidated financial statements contained herein.
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SOURCES OF FUNDS
General
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also rely on advances from the FHLBNY, the Certificates of Deposit Account Registry Service (“CDARS”) provided by an independent third-party, IntraFi Network, and other deposits acquired through unaffiliated third-party financial institutions as forms of brokered deposits. In addition to deposits and borrowings, we derive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, economic conditions and competition from other financial institutions.
Deposits
A majority of our depositors are persons or businesses who work, reside or operate in Oswego and Onondaga Counties. We offer a variety of deposits, including checking, savings, money market deposit accounts, and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We establish interest rates, maturity terms, service fees and withdrawal penalties on a periodic basis. Management determines the rates and terms based on rates paid by competitors, our need for funds or liquidity, overall growth goals and federal and state regulations. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates.
The Bank participates in a number of programs collectively designed to allow it to supplement deposit funding from its core customers with brokered deposits garnered from outside the Bank's primary locations. These programs, which include certain facilities for which we have participated in since 2009, are employed by the Bank’s management to supplement the funding that the Bank obtains from customer deposits and other borrowings, principally from the FHLBNY, and are used to increase the overall efficiency of the Bank’s funding mix. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Services (“CDARS”) and Insured Cash Sweep (“ICS”) networks. Management intends to continue to use brokered deposits in the future as an integral part of its overall funding strategies. See Note 11 to the consolidated financial statements for further details on our brokered deposits.
As noted above, we participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal deposits totaled $74.0 million at December 31, 2023, compared to $69.2 million at December 31, 2022, and represented 8.4% and 7.9% of total deposits as of the end of each year, respectively.
As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market. Public deposits generally range from 16.1% to 22.9% of our total deposits. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were $149.0 million and $166.6 million at December 31, 2023 and December 31, 2022, respectively, and represented 17.0% and 19.0% of total deposits as of the end of each year, respectively.
Borrowings
The Bank has a number of existing credit facilities available to it. At December 31, 2023, the Bank had existing lines of credit at FHLBNY, the Federal Reserve Bank (“FRB”), and two other correspondent banks. We obtain advances primarily from the FHLBNY utilizing the common stock we own in the FHLBNY, qualifying residential mortgage loans held in portfolio, and certain investment securities as collateral provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLBNY advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.
Subordinated Debt
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the FDIC and the Federal Reserve. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd., with interest rates that reset quarterly, and are indexed to the 3-month the Secured Overnight
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Financing Rate ("SOFR") which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, plus 1.91%. These securities have a five-year call provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2023 and 2022. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Debt (the “2020 Subordinated Debt”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Debt has a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month SOFR plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Debt at par, in whole or in part, at its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this transaction of $1.6 million was recorded in both the years ended December 31, 2023 and 2022.
SUPERVISION AND REGULATION
General
Pathfinder Bank is a New York-chartered commercial bank and the Company is a Maryland corporation and a registered bank holding company. The Bank’s deposits are insured up to applicable limits by the FDIC. The Bank is subject to extensive regulation by NYSDFS, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. The Bank is required to file reports with, and is periodically examined by, the FDIC and the NYSDFS concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, the Company is regulated by the Federal Reserve Board.
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of shareholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate credit loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the New York State legislature, the NYSDFS, the FDIC, the Federal Reserve Board or the United States Congress, could have a material adverse impact on the financial condition and results of operations of the Company and the Bank.
Set forth below is a summary of certain material statutory and regulatory requirements applicable to the Company and the Bank. The summary is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank.
The Dodd-Frank Act
The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act created the Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Banks and savings institutions with $10 billion or less in assets, such as Pathfinder Bank, continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.
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The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”)
On May 24, 2018, the EGRRCPA was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all financial institutions with the exception of the largest banks. The EGRRCPA’s provisions include, among other items: (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from HMDA’s expanded data disclosures; (iv) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (v) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio at a percentage not less than 8% and not greater than 10%; that such institutions may elect to replace the general applicable risk-based capital requirements for determining well-capitalized status. In addition, the law required the Federal Reserve Board to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities.
New York Bank Regulation
Pathfinder Bank derives its lending, investment, branching and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the NYSDFS, as limited by federal laws and regulations. Under these laws and regulations, commercial banks, including Pathfinder Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a bank may invest up to 2% of its assets or 20% of its capital, whichever is less in exchange-registered corporate stock. Investment in the stock of a single corporation is limited to the lesser of 1% of the bank’s assets or 15% of the Bank’s capital. The Bank’s authority to invest in equity securities is constrained by federal law, as explained later. Such equity securities must meet certain earnings ratios and other tests of financial performance. A bank may also exercise trust powers upon approval of the NYSDFS. Pathfinder Bank does not presently have trust powers.
New York State chartered banks may also invest in subsidiaries. A bank may use this power to invest in corporations that engage in various activities authorized for banks, plus any additional activities that may be authorized by the NYSDFS.
Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive officers and directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include that (i) certain loans must be approved in advance by a majority of the entire Board of Directors and the interested party must abstain from participating directly or indirectly in voting on such loan, (ii) the loan must be on terms that are not more favorable than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or present other unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the NYSDFS that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an opportunity to be heard. The Bank does not know of any past or current practice, condition or violation that may lead to any proceeding by the Superintendent or the NYSDFS against the Bank or any of its directors or officers.
The NYSDFS requires New York State-chartered or licensed banks regulated by the NYSDFS, such as the Bank, to adopt broad cybersecurity protections. In particular, the Bank has established a program designed to ensure the safety of its information systems, adopted a written cybersecurity policy, and designated an information security officer. The Bank is subject to ongoing compliance and reporting requirements of the NYSDFS. In November 2023, the NYSDFS amended its cybersecurity regulations to include heightened governance requirements and an expansion of the breadth and depth of required policies and procedures, among other things.
New York State Community Reinvestment Regulation
Pathfinder Bank is also subject to provisions of the New York State Banking Law which imposes continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”) which are substantially similar to those imposed by the Federal Community Reinvestment Act (“CRA”). Pursuant to the NYCRA, a bank must file copies of all federal CRA reports with the NYSDFS. The NYCRA requires the NYSDFS to make a written assessment of a bank’s compliance with the NYCRA every 24 to 36 months, utilizing a four-tiered rating system and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank’s NYCRA rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. Pathfinder Bank’s NYCRA most recent rating, dated September 30, 2021, was “satisfactory.”
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Federal Regulations
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Pathfinder Bank exercised the opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, regulators take into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when and where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management personnel if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. Notwithstanding the foregoing, pursuant to the EGRRCPA, the FDIC finalized a rule that established a community bank leverage ratio (“CBLR”). The CBLR (Tier 1 capital to average consolidated assets) was established at 9% for institutions under $10 billion in assets and such institutions may elect to utilize the CBLR threshold level of capital in lieu of the generally-applicable risk-based capital requirements under Basel III. Such institutions that meet the CBLR threshold and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. A financial institution can elect to be subject to this new definition. The Bank did not elect to become subject to the CBLR.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Business and Investment Activities. Under federal law, all state-chartered FDIC-insured banks, including commercial banks, have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits certain exceptions to these limitations.
The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a
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common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after being designated “critically undercapitalized.”
At December 31, 2023, Pathfinder Bank was well-capitalized.
Transactions with Related Parties. Transactions between a bank (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company (“BHC”) and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions.
In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.
Pathfinder Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
•be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
•not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Pathfinder Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Pathfinder Bank’s Board of Directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The FDIC has extensive enforcement authority over insured state banks, including Pathfinder Bank. That enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if the bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.”
Federal Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.
The FDIC assesses insured depository institutions to maintain its Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure of an institution’s failure within three years.
The FDIC has authority to increase insurance assessments and adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by two basis points beginning in the first quarterly assessment period of 2023. As a result, effective January 1, 2023, assessment rates for institutions of the Bank’s size ranged from 3.5 to 32 basis points. The FDIC may also issue special assessments. In 2023, the FDIC issued a special assessment for banks with total consolidated assets of $5 billion or more in order to
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recover losses sustained by the Deposit Insurance Fund as a result of the March 2023 failures of Silicon Valley Bank and Signature Bank.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Community Reinvestment Act. Under the CRA, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and merger with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Pathfinder Bank’s latest FDIC CRA rating, dated May 13, 2019, was “satisfactory.”
On October 24, 2023, the FDIC and the other federal banking agencies issued a final rule to strengthen and modernize the CRA regulations. Under the final rule, banks with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years will be an “intermediate bank.” The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the Bank’s option, the Community Development Financing Test. The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027.
Federal Reserve System. The Federal Reserve Board regulations require banks to maintain non-interest-earning reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts). In March 2020, due to a change in its approach to monetary policy due to COVID-19, the Federal Reserve Board announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant.
Federal Home Loan Bank System. Pathfinder Bank is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLBNY, Pathfinder Bank is required to acquire and hold a specified amount of shares of capital stock in the FHLBNY. As of December 31, 2023, Pathfinder Bank was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Pathfinder Bank are subject to state usury laws and federal laws concerning interest rates. Pathfinder Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
•Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
•The TILA-RESPA Integrated Disclosure Rule, commonly known as the TRID rule. This rule amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to integrate several consumer disclosures for mortgage loans;
•Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
•Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
•Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
•Truth in Savings Act;
•Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws;
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•Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
•Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
•USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
•Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
The Company, as a BHC, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or BHC if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.
A BHC is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.
The Gramm-Leach-Bliley Act of 1999 authorizes a BHC that meets specified conditions, including depository institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. The Company has elected to be a “financial holding company.”
In December 2014, legislation was passed by Congress that required the Federal Reserve Board to revise its “Small Bank Holding Company Policy Statement” to exempt bank and savings and loan holding companies with less than $1.0 billion of consolidated assets from the consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities. The Federal Reserve Board maintains authority to apply the consolidated capital requirements to any bank or savings and loan holding company as warranted for supervisory purposes. Regulations implementing the exemption were effective in May 2015.
On August 28, 2018, pursuant to EGRRCPA, the Federal Reserve Board issued an interim final rule revising the Policy Statement increasing the consolidated asset limit to $3 billion. Under the Policy Statement, a BHC that meets certain Qualitative Requirements:
•is exempt from the FRB's risk-based capital and leverage rules (Appendixes A and D of Regulation Y); and
•may use debt to finance up to 75% of the purchase price of an acquisition allowing a BHC to have a debt-to-equity ratio of up to 3:1.
The Policy Statement now applies to a BHC with consolidated assets of less than $3 billion that meets the following Qualitative Requirements: (i) it is not engaged in significant non-banking activities either directly or through a non-bank subsidiary; (ii) it does not conduct significant off-balance sheet activities, including securitizations or asset management or administration, either directly or through a non-bank subsidiary; or (iii) it does not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. BHCs that meet these Qualitative Requirements are determined to be "Qualifying BHCs". A Qualifying BHC is exempt from the FRB's risk-based capital and leverage rules. As a consequence, it does not have to comply with the Basel III Capital Adequacy rules. Each subsidiary bank of a Qualifying BHC must comply with the Basel III Capital
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Adequacy rules (or the Community Bank Leverage Ratio) and must be well-capitalized. If any subsidiary bank is not, the Federal Reserve Board expects it to become well-capitalized within a brief period of time. This Policy Statement applies to the Company.
A BHC is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions. The Federal Reserve Board has issued guidance which requires consultation with the Federal Reserve Board prior to a redemption or repurchase in certain circumstances.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by BHCs. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the BHC appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a BHC serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy. Under the prompt corrective action laws, the ability of a BHC to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
The Company and the Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company or the Bank.
The Company’s status as a registered BHC under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
Federal Securities Laws
The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of the Company’s shares of common stock issued in the Company’s initial stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with these regulations.
FEDERAL AND STATE TAXATION
Deferred Income Tax Assets and Liabilities. Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.
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Federal Taxation
General. The Bank and the Company are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.
The Company’s federal tax returns are statutorily subject to potential audit for the years 2020 through 2023. No federal income tax returns are under audit as of the date of this report.
Method of Accounting. For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.
Bad Debt Reserves. Prior to 1996, Pathfinder Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of tax law changes in 1996, Pathfinder Bank was required to use the specific charge-off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2023, Pathfinder Bank had no reserves subject to recapture in excess of its base year reserves. The Bank continues to be required to use the specific charge-off method to account for tax bad debt deductions.
Taxable Distributions and Recapture. Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if Pathfinder Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if Pathfinder Bank makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a “bank” for tax purposes. At December 31, 2023, our total federal pre-base year bad debt reserve was approximately $1.3 million.
Net Operating Loss Carryovers. Federal tax law allows net operating losses to be carried forward indefinitely with the net operating loss deduction limited to 80% of taxable income in any carryforward year.
Corporate Dividends Received Deduction. The Company may exclude from its federal taxable income 100% of dividends received from Pathfinder Bank as a wholly-owned subsidiary by filing consolidated tax returns. The corporate dividends received deduction is 65% when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation. The dividends-received deduction is 50% when the corporation receiving the dividend owns less than 20% of the distributing corporation.
Employee Compensation. A publicly held corporation is not permitted to deduct compensation in excess of $1 million per year paid to certain employees. Federal tax law eliminates certain exceptions to the $1 million limit applicable under prior law related to performance-based compensation, such as equity grants and cash bonuses that are paid only on the attainment of performance goals.
Business Asset Expensing. Federal tax law allows taxpayers to immediately expense the entire cost of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% bonus depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain property).
State Taxation
Pathfinder Bancorp, Inc., Pathfinder Bank, Whispering Oaks, and Pathfinder Risk Management Corporation report income on a combined basis to New York State. The New York State franchise tax is imposed in an amount equal to the greater of 6.5% of Business Income for companies with a Business Income Base up to $5 million, or 7.25% for companies with a Business Income Base greater than $5 million, 0.025% and 0.1875% of average Business Capital for 2022 and 2023, respectively, or a fixed dollar amount based on New York sourced gross receipts.
As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland.
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HUMAN CAPITAL RESOURCES
Our Mission
Our Mission, which is thoroughly communicated to all of our team members, is “To foster relationships with individuals and businesses within our communities to be the financial provider of choice. Our goal is to continually enhance the value of the Bank for the benefit of our shareholders, customers, employees and communities.”
Our Values
Our workplace culture is grounded in our customer and employee value proposition. We have adopted a formally-stated set of Values, which are also ingrained in our human capital resource management programs. These Values state that we are:
•Competent Professionals
•Service-Driven
•A Family
•Respectful
•Compassionate
•Proud
•Honest
Each of the Values, outlined above, are further defined in our internal communications, recognition programs, training programs and team-oriented activities.
Human Capital
The success of our business is highly dependent on our team members, who provide value to our customers and communities through their dedication to our mission and values. We define, exemplify and foster our culture by the Values listed above. We value our team members by investing in a healthy work-life balance, competitive compensation and benefit packages, and a vibrant, team-oriented environment centered on professional service and open communication among team members. We strive to build and maintain a high-performing culture by creating a work environment that attracts and retains outstanding, engaged team members who embody our company mantra of "Local. Community. Trust.”
Demographics
At December 31, 2023, we employed 174 team members, of which 161 were full-time, 12 were part-time, and one was an intern. Our staff is comprised of approximately 78% women. We continue to grow and employ team members respectively across our three-county footprint as follows:
Date
Headcount
12/31/2023
12/31/2022
12/31/2021
12/31/2020
12/31/2019
At December 31, 2023, approximately 60% of our staff was employed at our bank branch and loan production offices, with the remainder of our team employed within all other functional areas, including our customer-facing electronic commerce and call center units. None of these employees are represented by a collective bargaining agreement and management considers its relationship with employees to be good. During fiscal year 2023, we hired 44 employees, of which 34 were full-time, six were part-time, one was temporary, and three were interns. Our voluntary turnover rates for the previous five years are as follows:
Year
Voluntary Turnover %
23.4%
25.0%
24.2%
13.2%
18.8%
Diversity and Inclusion
An inclusive open-minded community that engages excellence and embraces diversity is fundamental to supporting the Pathfinder Bank vision to be a local bank that the community trusts. The communities in which we serve include persons of various race, ethnicity,
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gender, sexual orientation, socio-economic status, age, physical and cognitive ability, religion and political belief. We are committed to valuing and sharing the strength of our differences in a safe and positive environment.
Our primary goal is to attract and cultivate a dynamic and cultural sensitivity that exemplifies, promotes and celebrates diversity. This definition of diversity includes recognition and appreciation of the uniqueness of each individual. We seek to hire well-qualified team members who are, at least as importantly, a good fit for our value system. Our selection and promotion processes are without bias and include the active recruitment of minorities and women.
With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the differences between people. To accomplish this, we continue our efforts through our Diversity, Equity and Inclusion Committee made up of several employee representatives from areas located throughout our market footprint. We collaborate with local business partners to better our understanding and position ourselves to improve and fulfill our commitment to diversity and inclusion. Our goal is to build and leverage a diverse and inclusive workforce and workplace by building leadership capability and organizational capacity. This requires all team members to do their part. Management must possess diversity and inclusion competencies to lead and manage an engaged workforce. All team members must treat their colleagues with respect by listening to different viewpoints, opinions, thoughts and ideas and embracing a culture of inclusion.
A commitment to diversity and inclusion is essential to reflecting the values of our team members and the society we serve today. It makes business sense because it helps us to attract and retain the best talent, it enables us to understand and meet clients' needs more effectively and thus provide a better quality service. We continue our commitment to equal employment opportunity through a robust anti-discrimination plan, which includes annual compensation analyses and ongoing reviews of our selection and hiring practices, alongside a continued focus on building and maintaining a diverse workforce.
For the year 2023, the population of our workforce was as follows:
Ethnicity
%
American Indian or Alaska Native
0.6%
Asian
2.2%
Black or African American
2.2%
Hispanic or Latino
3.4%
Two or more races (Not Hispanic or Latino)
1.1%
White
90.5%
Age Range
Total
18-25
26-35
36-45
46-55
56-65
Over 65
Grand Total
Compensation and Benefits
We provide a competitive compensation and benefits program to help meet the needs of our team members. In addition to salaries, these programs include annual bonuses, stock awards, a 401(k) Plan with an employer matching contribution in addition to an employer-paid annual contribution, healthcare and other insurance benefits, health savings, flexible spending accounts, paid time off, family leave, identity theft protection, telemedicine service, and an employee assistance program, including mental health services. A survey was conducted to determine employee preferences and changes were made accordingly.
Learning and Development
We invest in the growth and development of our team members by providing a multi-dimensional approach to learning that empowers, intellectually grows, and professionally develops our colleagues. We encourage and support the growth and development of our team members and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through performance and development conversations between team members and their managers, internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is available to team members enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to our business, in compliance with Section 127 of the Internal Revenue Code, and for seminars, conferences, and other training events team members attend in connection with their job duties.
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Retention Efforts
Employee retention helps us operate efficiently and achieve one of our business objectives. We believe our commitment to living out our core values, actively prioritizing concern for our team members’ well-being, supporting our team members’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing team members. In addition, nearly all of our team members are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our employees. At December 31, 2023, over 27% of our current staff had been with us for ten years or more. There is a team assigned to retention efforts as a strategic initiative for 2024 and forward.

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ITEM 1A. RISK FACTORS
ITEM 1A: RISK FACTORS
Not required of a smaller reporting company.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
ITEM 2: PROPERTIES
The Company has seven offices located in Oswego County, four offices located in Onondaga County and one limited purpose office located in Oneida County. Management believes that the Bank’s facilities are adequate for the business conducted. The following table sets forth certain information concerning the main office and each branch office of the Bank at December 31, 2023. The aggregate net book value of the Bank's premises and equipment was $18.4 million at December 31, 2023. For additional information regarding the Bank's properties, see Notes 8 and 28 to the consolidated financial statements.
Location
Opening Date
Owned/Leased
Main Office
Owned
214 West First Street
Oswego, New York 13126
Plaza Branch
Owned (1)
291 State Route 104 East
Oswego, New York 13126
Mexico Branch
Owned
3361 Main Street
Mexico, New York 13114
Oswego East Branch
Owned
34 East Bridge Street
Oswego, New York 13126
Lacona Branch
Owned
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch
Owned (2)
5 West First Street South
Fulton, New York 13069
Central Square Branch
Owned
3025 East Ave
Central Square, New York 13036
Cicero Branch
Owned
6194 State Route 31
Cicero, New York 13039
Pike Block Branch
Leased (3)
109 West Fayette Street
Syracuse, New York 13202
Clay Branch
Leased (4)
3775 State Route 31
Liverpool, NY 13090
Southwest Corridor Branch
Leased (5)
506 West Onondaga Street
Syracuse, NY 13204
Utica Loan Production Office
Leased (6)
258 Genesee Street
Utica, New York 13502
(1)The building is owned; the underlying land is leased with an annual rent of $39,000.
(2) Both building and land are owned as of July 2023; the land lease expense in 2023 was $23,000.
(3)The premises are leased with an annual rent of $91,000.
(4)The premises are leased with an annual rent of $75,000.
(5)The premises are leased with an annual rent of $262,000.
(6)The premises are leased with an annual rent of $17,000.
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ITEM 3. LEGAL PROCEEDINGS
ITEM 3: LEGAL PROCEEDINGS
There are various claims and lawsuits to which the Company is periodically involved that are incidental to the Company's business, most notably foreclosures. In the opinion of management, such claims and lawsuits in the aggregate are not expected to have a material adverse impact on the Company's consolidated financial condition and results of operations at December 31, 2023.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4: MINE SAFETY DISCLOSURE
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s voting common stock trades on the NASDAQ Capital Market under the symbol “PBHC.”
There were 310 shareholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) as of March 22, 2024.
The Company did not repurchase any shares of its common stock for the year ended December 31, 2023.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023 with respect to shares of voting common stock that may be issued under the Company’s existing equity compensation plans.
Plan Category
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
Equity compensation plans
approved by security holders
164,857
$
11.03
10,408
Equity compensation plans
not approved by stockholders
N/A
N/A
N/A
Dividends and Dividend History
The Company has historically paid regular quarterly cash dividends on its common stock. The Board of Directors presently intends to continue the payment of regular quarterly cash dividends, subject to the need for those funds for debt service and other purposes. Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder Bank and its subsidiaries’ results of operations and financial condition, tax considerations, and general economic conditions. More details are included within the section titled Regulation and Supervision.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6: RES ERVED
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
Throughout Management’s Discussion and Analysis (“MD&A”) the term, the “Company”, refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank (the “Bank”) and Pathfinder Statutory Trust II are wholly owned subsidiaries of Pathfinder Bancorp, Inc.; however, Pathfinder Statutory Trust II is not consolidated for reporting purposes (see Note 13 of the consolidated financial statements). Pathfinder Risk Management Company, Inc., and Whispering Oaks Development Corp. are wholly owned subsidiaries of Pathfinder Bank.
On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual holding company form of organization to the stock holding company form of organization (the “Conversion”). Following the completion of the Conversion, the Company was created substantially in its current form and Pathfinder Bancorp, MHC ceased to exist. The Company had 6,099,571 and 6,032,112 shares of voting and non-voting common stock in aggregate outstanding at December 31, 2023 and December 31, 2022, respectively.
Since the Conversion, we have substantially transformed our business activities from those of a traditional savings bank to those of a commercial bank. This transformation of activities has significantly affected the overall composition of our balance sheet. While not reducing our role as a leading originator of one-to-four family residential real estate loans within our marketplace, which had been our primary focus as a savings bank, we have substantially grown our commercial business and commercial real estate loan portfolios since the Conversion. As a commercial bank, we have been able to offer customized products and services to meet individual commercial customer needs and thereby more definitively differentiate our services from those offered by our competitors. As a result, we have been able to create a substantially more diversified loan portfolio than the one that was in place before the completion of the Conversion. When compared to the Bank’s loan portfolio composition prior to the Conversion, it is our view that our current asset portfolio (1) significantly improves upon the distribution of credit risk across a broader range of borrowers, industries and collateral types, and (2) is more likely to generate consistent net interest margin in a broader range of interest rate environments due to the portfolio’s increased percentage of shorter-term and/or adjustable-rate assets. In a concurrent effort, the Bank has been able to fund the majority of the high level of growth in our loan portfolios primarily with deposits gathered from our local community. We believe that we have gathered these deposits at a reasonable overall cost in terms of deposit interest rates, as well as at a reasonable overall level of related infrastructure and customer support service expenses.
On May 8, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Castle Creek Capital Partners VII, L.P. (“Castle Creek”), pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Common Stock”); (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Series B Preferred Stock”); and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of Common Stock at an exercise price equal to $14.25 per share (the “Warrant”), in a private placement transaction (the “Private Placement”) for gross proceeds of approximately $17.0 million. The Securities Purchase Agreement contains significant representations, warranties, and covenants of the Company and Castle Creek.
On May 8, 2019, the Company filed Articles Supplementary with the Maryland Department of Assessments and Taxation to issue 1,155,283 shares of Series B Preferred Stock to Castle Creek. Each share of the Series B Preferred Stock was convertible on a one-for-one basis into either (i) Common Stock under certain circumstances or (ii) non-voting common stock, par value $0.01 per share (which will also be convertible into Common Stock), subject to approval of the creation of such class of non-voting common stock by the Company’s stockholders.
The Company also entered into subscription agreements dated as of May 8, 2019 (the “Subscription Agreements”) with certain directors and executive officers of the Company as well as other accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of Common Stock at $14.25 per share for gross proceeds of approximately $3.8 million, before payment of placement fees and related costs and expenses. The Subscription Agreements contain representations, warranties, and covenants of the purchasers and the Company that are customary in private placement transactions. The subscription agreements were also part of the Private Placement, and the term “Private Placement” includes both transactions.
In total, therefore, the Company issued 306,977 shares of Common Stock, 1,155,283 shares of Series B Preferred Stock and the Warrant at the conclusion of the Private Placement. The transaction raised $20.8 million in gross proceeds and the final net cash received from the Private Placement, after all issuance expenses, including placement fees and all other issuance/due diligence costs of $927,000 and $342,000, respectively, was $19.6 million. The fair value of the Warrant at the time of issuance was $373,000.
Pursuant to NASDAQ rules, Castle Creek could not convert the Series B Preferred Stock or, in the future, the non-voting common stock into Common Stock, or exercise the Warrant if doing so would cause Castle Creek, when combined with the purchases of certain directors and executive officers of the Company as well as other accredited investors in the Private Placement, to own more than 19.99% of the Common Stock outstanding immediately prior to the execution of the Securities Purchase Agreement (the “Exchange Cap”). The Company was required to request stockholder approval to eliminate the Exchange Cap no later than at the 2021 annual meeting of Company shareholders. In addition, at the same meeting, the Company was required to seek shareholder approval to create a class of
- 28 -
non-voting convertible common stock. Castle Creek will need the approval or non-objection of the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services if it seeks to increase its ownership of shares of Common Stock in excess of 9.9% of the outstanding shares of Common Stock.
Holders of the Series B Preferred Stock were entitled to receive dividends if declared by the Company’s Board of Directors, in the same per share amount as paid on the Common Stock. No dividends would be payable on the Common Stock unless a dividend identical to that paid on the Common Stock was payable at the same time on the Series B Preferred Stock. The Series B Preferred Stock would rank, as to payments of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, pari passu with the Common Stock pro rata. Holders of Series B Preferred Stock had no voting rights except as was required by law. The Series B Preferred Stock was not redeemable by either the Company or by the holder.
As discussed above, pursuant to the Securities Purchase Agreement, on May 8, 2019, the Company issued a Warrant to Castle Creek to purchase 125,000 shares of non-voting common stock at an exercise price equal to $14.25 per share. At the same time, the Company entered into a Warrant Agreement with Castle Creek, to, among other things, authorize and establish the terms of the Warrant. The Warrant is exercisable at any time after May 8, 2019, and from time to time, in whole or in part, until May 8, 2026. However, the exercise of such Warrant remains subject to certain contractual provisions, and regulatory approval if Castle Creek’s ownership of Common Stock would exceed 9.9%. At December 31, 2023, Castle Creek owned approximately 8.8% of the Company’s common voting stock. The Warrant will receive dividends equal to the amount paid on the Company’s common stock. The dividend payment shall be calculated on (1) the unexercised portion of the 125,000 notional shares encompassed within the terms of the Warrant, less (2) any exercised portion of the 125,000 shares, times (3) the amount of the quarterly dividend paid to common shareholders. Dividend payments, if declared on the Company’s common stock, will be made on the Warrant until its expiration date.
Following the Private Placement, the Company used the net cash received from the transaction to strengthen the Company’s general capital and liquidity positions, fund growth within our marketplace, purchase certain loan assets, and increase the regulatory capital position of the Bank. The Company will continue to use the additional capital raised through the Private Placement primarily to support the realization of continued growth opportunities within our marketplace and, to a lesser extent, for general corporate purposes.
Pursuant to the terms of the Securities Purchase Agreement, Castle Creek is entitled to have one representative appointed to the Company’s Board of Directors for so long as Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Voting Stock. If Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Voting Stock and does not have a board representative appointed to the Company’s Board of Directors, the Company will invite a person designated by Castle Creek to attend meetings of the Company’s Board of Directors as an observer. On June 30, 2023, the Company’s Board of Directors appointed Anthony R. Scavuzzo, a representative of Castle Creek, to the Board of Directors.
On November 13, 2020, the Company entered into an agreement (the “Exchange Agreement”) with Castle Creek providing for the exchange of 225,000 shares of the Company’s Common stock owned by Castle Creek for 225,000 shares of the Company’s Series B Preferred Stock. The exchange was consummated simultaneously with the execution and delivery of the Exchange Agreement. The Company and Castle Creek entered into the Exchange Agreement to enable the equity ownership of Castle Creek to comply with applicable banking laws and regulations.
As a result of the Exchange Agreement, on November 13, 2020, the Company issued to Castle Creek 225,000 shares of its Series B Preferred Stock in exchange for an equivalent number of shares of Company Common Stock held by Castle Creek in a transaction exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. Castle Creek was the only stockholder of the Series B Preferred Stock. The Company received no cash proceeds as a result of the exchange. In addition, the Company did not pay any commission or remuneration for the solicitation of the exchange.
On November 13, 2020, the Company filed an amendment to the Articles Supplementary to the Articles of Incorporation of the Company designating the Series B Preferred Stock with the Maryland Department of Assessments and Taxation to increase the classified number of shares of the Series B Preferred Stock from 1,155,283 to 1,506,000 to allow for the additional issuance of Series B Preferred Stock to Castle Creek. There were no other changes made to the preferences, limitations, powers and relative rights of the Series B Preferred Stock.
On June 4, 2021, shareholders of the Company approved an amendment to the Company’s Articles of Incorporation to authorize Non-Voting Common Stock, and to eliminate the Exchange Cap. On June 9, 2021, the Company filed Articles Supplementary to the Articles of Incorporation of the Company (the “Articles Supplementary”) with the Maryland State Department of Assessments and Taxation creating a Class A Non-Voting Common Stock, par value $0.01 per share (“Non-Voting Common Stock”). The Articles Supplementary authorized 1,505,283 shares of the Non-Voting Common Stock which Castle Creek received in exchange for the Company’s outstanding Series B Preferred Stock on a one for one basis and allowed for the issuance of 125,000 shares of Non-Voting Common Stock that may be issued upon the exercise of the Warrant.
- 29 -
The preferences, limitations, powers and relative rights of the Non-Voting Common Stock are set forth in the Articles Supplementary, a summary of which follows:
Ranking: The Non-Voting Common Stock will rank, as to the payment of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, (i) pari passu with the Company’s Common Stock, and (ii) subordinate and junior to all other securities of the Company which, by their respective terms, are senior to the Non-Voting Common Stock or the Company’s Common Stock.
Dividend Rights: Holders of the Non-Voting Common Stock will be entitled to receive dividends when, as and if declared by the Company’s Board of Directors, in the same per share amount as paid on Company’s Common Stock. No dividends will be payable on the Company’s Common Stock unless a dividend identical to that paid on the Company’s Common Stock is payable at the same time on the Non-Voting Common Stock in an amount per share equal to the product of (i) the per share dividend declared and paid in respect of each share of the Company’s Common Stock and (ii) the number of shares of the Company’s Common Stock into which such share of Non-Voting Common Stock is then convertible (without regard to limitations on conversion of such Non-Voting Common Stock); provided that if any stock dividend is declared on the Company’s Common Stock, the holders of Non-Voting Common Stock will be entitled to receive such dividend payable in shares of Non-Voting Common Stock.
Voting: The holders of shares of Non-Voting Common Stock have no voting rights, except as may be required by Maryland law and as set forth in the Articles Supplementary. So long as any shares of Non-Voting Common Stock are issued and outstanding, the Company will not (including by means of merger, consolidation or otherwise) without obtaining the approval of the holders of a majority of the issued and outstanding shares of Non-Voting Common Stock:
•alter or change the rights, preferences, privileges or restrictions provided for the benefit of the holders of the Non-Voting Common Stock so as to affect them adversely;
•increase or decrease the authorized number of shares of Non-Voting Common Stock; or
•enter into any agreement, merger or business combination, or engage in any other transaction, or take any action that would have the effect of adversely changing any preference or any relative or other right provided for the benefit of the holders of the Non-Voting Common Stock.
Redemption and Repurchase: The Non-Voting Common Stock is not redeemable by the Company or the holder. However, in the event that the Company offers to repurchase shares of the Company’s Common Stock, the Company must offer to repurchase shares of the Non-Voting Common Stock pro rata based upon the number of shares of the Company’s Common Stock such holders would be entitled to receive if such shares were converted into shares of the Company’s Common Stock immediately prior to such repurchase.
Conversion: Each share of Non-Voting Common Stock will be convertible into one share of the Company’s Common Stock (i) at any time and from time to time at the request of the holder thereof or at the written request of the Company; provided that upon such conversion, the holder, together with all affiliates of the holder, will not own or control in the aggregate more than 9.9% of the Company’s Common Stock (or of any class of the Company’s voting securities), excluding for the purpose of this calculation any reduction in the ownership resulting from transfers by such holder of voting securities (which, for the avoidance of doubt, does not included the Non-Voting Common Stock); or (ii) automatically, without any further action of the part of the holder, on the date that the holder transfers such share of Non-Voting Common Stock to a non-affiliate of the holder in a permissible transfer.
- 30 -
SELECTED FINANCIAL DATA
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the consolidated financial statements and related notes:
At or for the year ended December 31,
(In thousands, except per share amounts)
Year End
Total assets
$
1,465,798
$
1,399,921
$
1,285,177
$
1,227,443
$
1,093,807
Investment securities available-for-sale
258,716
191,726
190,598
128,261
111,134
Investment securities held-to-maturity
179,286
194,402
160,923
171,224
122,988
Loans receivable, net
881,232
882,435
819,524
812,718
772,782
Deposits
1,120,067
1,125,430
1,055,346
995,907
881,893
Borrowings and subordinated debt
205,513
145,730
106,661
121,450
108,253
Shareholders' equity
120,256
111,582
110,633
97,722
90,669
For the Year
Total interest income
$
67,663
$
51,098
$
45,827
$
42,507
$
41,758
Total interest expense
28,744
9,695
7,532
10,864
13,528
Net interest income
38,919
41,403
38,295
31,643
28,230
Provision for credit losses
2,930
2,754
1,022
4,707
1,966
Net interest income after provision for credit losses
35,989
38,649
37,273
26,936
26,264
Total noninterest income
5,190
5,914
6,231
6,485
4,917
Total noninterest expense
29,395
28,874
27,495
25,080
25,730
Income before income taxes
11,784
15,689
16,009
8,341
5,451
Income tax expense
2,362
2,656
3,499
1,295
1,165
Net income attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp, Inc.
$
9,293
$
12,932
$
12,407
$
6,950
$
4,276
Convertible preferred stock dividends
-
-
Warrant dividends
Undistributed earnings allocated to participating securities
1,729
2,666
2,699
1,224
Net income available to common shareholders
$
7,519
$
10,221
$
9,576
$
5,405
$
3,578
Per Share
Income per share - basic
$
1.51
$
2.13
$
2.07
$
1.17
$
0.80
Income per share - diluted
1.51
2.13
2.07
1.17
0.80
Book value per common share
19.59
18.40
18.43
17.56
15.94
Tangible book value per common share (a)
18.83
17.63
17.66
16.53
14.95
Cash dividends declared
0.36
0.36
0.28
0.24
0.24
Performance Ratios
Return on average assets
0.67
%
0.96
%
0.98
%
0.60
%
0.43
%
Return on average equity
8.09
11.77
11.91
7.43
5.34
Average equity to average assets
8.26
8.17
8.26
8.02
7.97
Shareholders' Equity to total assets at end of year
8.15
7.93
8.58
7.94
8.27
Net interest rate spread
2.47
3.05
3.06
2.68
2.73
Net interest margin
2.95
3.24
3.21
2.88
2.98
Average interest-earning assets to average interest-bearing liabilities
121.63
124.03
124.61
120.49
116.84
Noninterest expense to average assets
2.11
2.15
2.18
2.15
2.56
Efficiency ratio (a) (b)
66.62
61.11
63.07
68.71
78.75
Dividend payout ratio
28.95
20.87
16.17
20.39
30.21
Return on average common equity
8.09
11.77
11.91
8.92
6.02
- 31 -
At December 31,
Asset Quality Ratios
Nonperforming loans to year end loans
1.92
%
1.00
%
1.00
%
2.58
%
0.67
%
Nonperforming assets to total assets
1.19
0.66
0.65
1.74
0.49
Allowance for credit losses to year end loans
1.78
1.71
1.57
1.55
1.11
Allowance for credit losses to nonperforming loans
92.73
169.93
155.99
59.89
165.25
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
15.05
%
15.14
%
15.19
%
13.13
%
12.28
%
Tier 1 capital (to risk-weighted assets)
13.80
13.88
13.94
11.87
11.16
Tier 1 capital (to adjusted assets)
10.11
9.67
9.52
8.63
8.20
Tier 1 Common Equity (to risk-weighted assets)
13.80
13.88
13.94
11.87
11.16
Number of:
Banking offices
Fulltime equivalent employees
(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.
- 32 -
At or for the year ended December 31,
(In thousands, except per share amounts)
Per Share
Book value per common share
Total Pathfinder Bancorp, Inc. shareholders' equity (book value)
(GAAP)
$
119,495
$
110,997
$
110,287
$
97,456
$
90,434
Preferred stock
-
-
-
17,901
15,370
Total shares outstanding
6,100
6,032
5,983
4,531
4,709
Book value per common share
$
19.59
$
18.40
$
18.43
$
17.56
$
15.94
Total common equity
Total equity (GAAP)
$
119,495
$
110,997
$
110,287
$
79,555
$
75,064
Goodwill
4,536
4,536
4,536
4,536
4,536
Intangible assets
Tangible common equity
$
114,874
$
106,360
$
105,634
$
74,886
$
70,379
Tangible book value per common share
Tangible common equity
$
114,874
$
106,360
$
105,634
$
74,886
$
70,379
Total shares outstanding
6,100
6,032
5,983
4,531
4,709
Tangible book value per common share
$
18.83
$
17.63
$
17.66
$
16.53
$
14.95
Performance Ratios
Efficiency ratio
Operating expenses (numerator)
$
29,395
$
28,874
$
27,495
$
25,080
$
25,730
Net interest income
38,919
41,403
38,295
31,643
28,230
Noninterest income
5,190
5,914
6,231
6,485
4,917
Less: Gains/(Losses) on the sale/redemption of investment
securities, fixed assets, loans, and foreclosed real estate
(282
)
2,255
Less : (Losses)/Gains on marketable securities
(255
)
(629
)
Denominator
$
44,121
$
47,247
$
43,593
$
36,502
$
32,673
Efficiency ratio
66.62
%
61.11
%
63.07
%
68.71
%
78.75
%
Dividend payout ratio
Dividends declared (numerator)
$
2,177
$
2,143
$
1,548
$
1,102
$
1,081
Net income available to common shareholders (denominator)
7,519
10,221
9,576
5,405
3,578
Dividend payout ratio
28.95
%
20.97
%
16.17
%
20.39
%
30.21
%
Return on average common equity
Net income attributable to Pathfinder Bancorp Inc. (GAAP)
(numerator)
$
9,293
$
12,932
$
12,407
$
6,950
$
4,276
Average equity
114,824
109,898
104,131
93,586
80,136
Average preferred stock
-
-
-
15,709
9,074
Denominator
$
114,824
$
109,898
$
104,131
$
77,877
$
71,062
Return on average common equity
8.09
%
11.77
%
11.91
%
8.92
%
6.02
%
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At or for the year ended December 31,
(In thousands, except per share amounts)
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Total equity (GAAP)
$
137,943
$
126,148
$
121,896
$
106,720
$
88,138
Goodwill
(4,536
)
(4,536
)
(4,536
)
(4,536
)
(4,536
)
Intangible assets
(85
)
(101
)
(117
)
(133
)
(149
)
Addback: Accumulated other comprehensive income
9,605
12,172
1,268
2,236
2,971
Total Tier 1 Capital
$
142,927
$
133,683
$
118,511
$
104,287
$
86,424
Allowance for loan and lease losses
12,995
12,076
10,655
11,002
8,669
Total Tier 2 Capital
$
12,995
$
12,076
$
10,655
$
11,002
$
8,669
Total Tier 1 plus Tier 2 Capital (numerator)
$
155,922
$
145,759
$
129,166
$
115,289
$
95,093
Risk-weighted assets (denominator)
1,035,747
962,861
850,157
878,380
774,177
Total core capital to risk-weighted assets
15.05
%
15.14
%
15.19
%
13.13
%
12.28
%
Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)
$
142,927
$
133,683
$
118,511
$
104,287
$
86,424
Risk-weighted assets (denominator)
1,035,747
962,861
850,157
878,380
774,177
Total capital to risk-weighted assets
13.80
%
13.88
%
13.94
%
11.87
%
11.16
%
Tier 1 capital (to adjusted assets)
Total Tier 1 capital (numerator)
$
142,927
$
133,683
$
118,511
$
104,287
$
86,424
Total average assets
1,418,313
1,387,480
1,249,752
1,212,512
1,059,060
Goodwill
(4,536
)
(4,536
)
(4,536
)
(4,536
)
(4,536
)
Intangible assets
(85
)
(101
)
(117
)
(133
)
(149
)
Adjusted assets (denominator)
$
1,413,692
$
1,382,843
$
1,245,099
$
1,207,843
$
1,054,375
Total capital to adjusted assets
10.11
%
9.67
%
9.52
%
8.63
%
8.20
%
Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 capital (numerator)
$
142,927
$
133,683
$
118,511
$
104,287
$
86,424
Risk-weighted assets (denominator)
1,035,747
962,861
850,157
878,380
774,177
Total Tier 1 Common Equity to risk-weighted assets
13.80
%
13.88
%
13.94
%
11.87
%
11.16
%
CRITICAL ACCOUNTING ESTIMATES
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values, and information used to record valuation adjustments for certain assets and liabilities, are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for credit losses, deferred income tax assets and liabilities, pension obligations, the annual evaluation of the Company’s goodwill for possible impairment, and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available.
Allowance for Credit Losses. On January 1, 2023 the Company adopted the Current Expected Credit Loss ("CECL") model, as required under Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company adopted the standard, which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses on loans and unfunded commitments is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio and commitments to extend credit. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires
- 34 -
significant judgment on the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, and environmental factors, all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being individually evaluated which are on nonaccrual and have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The Company also establishes a specific allowance, regardless of the size of the loan, modified due to borrowers experiencing financial difficulties. In addition, an accruing substandard loan could be identified as being individually evaluated. The measurement of individually evaluated loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured based on the fair value of the collateral, less costs to sell. At December 31, 2023, the Bank’s position in individually evaluated loans consisted of 69 loans totaling $22.6 million. Of these loans, 17 loans, totaling $1.6 million, were valued using the present value of future cash flows method; and 66 loans, totaling $20.9 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime loss for each risk-rating category. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in this report.
As noted above, the allowance for credit losses (“ACL”) represents management’s estimate of lifetime losses in the Bank’s loan portfolio. Determining the amount of the ACL requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, as correlated to historical economic metrics and in consideration of current economic trends and conditions, and other qualitative factors, all of which may be susceptible to significant change.
The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default with loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to future cash flows that are adjusted to present value and these discounted expected losses become the Allowance for Credit Losses.
Management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions, levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration, and changes in regulatory environment, management, markets and product offerings. The Company quarterly assesses the magnitude of QF adjustments necessary to be applied to the quantitatively-derived ACL in order to incorporate forward-looking projections in its final evaluation of current expected credit losses.
In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. At December 31, 2023, the Bank held $520.6 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 57.9% of the Bank’s entire loan portfolio. The Bank allocated $10.7 million to the ACL for these loans, including $3.4 million derived from the use of qualitative factors in the calculation. Given the concentration of ACL allocation to the total commercial loan portfolio and the significant judgments made by management in deriving the qualitative loss factors, management considers the impact that changes in judgments could have on the ACL. The ACL could increase (or decrease) by approximately $891,000, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2023 in the final recorded estimation of the ACL on loans recognized on the Statement of Financial Condition.
If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual credit losses and an increase to the ACL may be necessary in future periods to allow for different assumptions or adverse developments. In addition, future problems with one or more specifically-identified loans or one or more specifically-identified borrower relationships could require a significant increase to the ACL.
Management’s methodology and policy in determining the allowance for credit losses can be found in Note 1 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The activity in the allowance for credit losses is depicted in supporting tables in Note 6 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
At December 31, 2022 the Company calculated its ALLL utilizing the Incurred Loss Model ("ILM") methodology, as required under GAAP on that date. As noted above, on January 1, 2023, the Company adopted the Current Expected Credit Loss ("CECL") model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total allowance for loan and lease losses ("ALLL") of $15.3 million, of which $4.8 million was related to impaired loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis.
As a consequence of the adoption of the CECL model, the Company recorded a one-time transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million related to its aggregate loan portfolio that reversed the $10.5 million in the
- 35 -
December 31, 2022 ALLL, that was related to pooled loans evaluated in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to specifically-identified loans at December 31, 2022 was not affected by the transition to the CECL methodology on January 1, 2023.
The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment, recorded to retained earnings, was $2.9 million on January 1, 2023. This transition adjustment, which had no effect on reported earnings in 2023, was booked to retained earnings in the first quarter of 2023 and was therefore a nonrecurring subtraction from tangible book value, after tax effects of approximately $2.1 million.
Deferred Income Tax Assets and Liabilities. Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. For additional information regarding the Company's deferred income taxes, see Note 17 to the consolidated financial statements.
Pension Obligations. Pension and postretirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated financial statements contained herein.
Evaluation of Goodwill. Management performs an annual evaluation of the Company’s goodwill for possible impairment. Based on the results of the 2023 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2023. The evaluation approach is described in Note 10 of the consolidated financial statements contained herein.
Estimation of Fair Value. The estimation of fair value is significant to several of our assets; including investment securities available-for-sale, interest rate derivative (discussed in detail in Note 22 of the consolidated financial statements), intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.
Fair values for securities available-for-sale are obtained from an independent third party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of individually analyzed loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.
RECENT EVENTS
On December 22, 2023, the Company announced that its Board of Directors had declared a cash dividend of $0.09 per share on the Company’s voting common and non-voting common stock, and a cash dividend of $0.09 per notional share for the issued Warrant relating to the fiscal quarter ended December 31, 2023. The dividend was paid on February 2, 2024 to shareholders of record on January 12, 2024.
On March 4, 2024 Pathfinder Bank entered into a purchase and assumption agreement (the “Purchase Agreement”) with Berkshire Bank, the banking subsidiary of Berkshire Hills Bancorp, Inc. (“Berkshire Bank”). Under the Purchase Agreement, Pathfinder Bank will acquire approximately $32 million in loans and one branch location (along with associated personal property and fixtures), and will assume approximately $198 million in deposits. With respect to loans, Pathfinder Bank will pay an amount equal to the sum of 95% of the aggregate unpaid principal balances, measured as of the closing date, plus any accrued interest through closing on the loans. Pathfinder Bank will pay a 5.8% premium on the aggregate amount of non-time deposits associated with the branch, measured as of the closing date (the “Core Deposits”), and will assume all non-Core Deposits associated with the branch, measured as of the closing date, at par value. The total deposit premium to be paid by Pathfinder Bank equates to approximately 4.0% when applied to the aggregated Core Deposits and non-Core Deposits. Pathfinder Bank will assume Berkshire Bank’s existing commercial lease for the real property associated with the branch (including anticipated annual lease payment costs of approximately $946,000). The transaction is expected
- 36 -
to close by the end of the third quarter of 2024 and is subject to receipt of regulatory approvals and certain other customary closing conditions.
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $9.3 million for 2023, a decrease of $3.6 million as compared to net income of $12.9 million in 2022. Net income decreased during 2023, as compared to the previous year, due to a decrease in net interest income after provision for credit losses of $2.7 million, a decrease in total noninterest income of $724,000, and an increase in noninterest expense of $521,000. These decreases in net income were partially offset by a $294,000 decrease in the provision for income taxes, and a $28,000 increase in net income attributable to noncontrolling interest. Basic and diluted earnings per share in 2023 were both $1.51 per share, as compared to $2.13 per share in 2022.
Return on average assets decreased 29 basis points to 0.67% in 2023 from 0.96% in 2022. Return on average equity decreased 368 basis points to 8.09% in 2023 as compared to 11.77% in 2022. The decreases in return on average assets and return on average equity in 2023, as compared to the previous year, were both primarily due to the aforementioned decrease in net income. Average assets increased in 2023 by $44.4 million, or 3.3%, as the Company grew its total assets from $1.40 billion for the year ended December 31, 2022 to $1.47 billion for the year ended December 31, 2023.
Net interest income, before provision for credit losses, decreased $2.5 million, or 6.0%, to $38.9 million in 2023 on average interest earning assets of $1.32 billion, as compared to net interest income before provision for loan losses of $41.4 million in 2022 on average interest earning assets of $1.28 billion. Interest and dividend income increased $16.6 million in 2023 to $67.7 million, as compared to $51.1 million in 2022. The income effects of the aggregate increase in the average balance of interest-earning assets of $42.2 million were enhanced by an increase of 113 basis points in the overall average yield earned on those assets. These increases in interest income were more than offset by increases in interest expense, as interest expense increased $19.0 million due to an increase in the average rate paid on interest-bearing liabilities of 171 basis points in 2023 as compared to 2022, enhanced by an increase in the average balance of interest-bearing liabilities of $55.0 million during the same time period.
The Company recorded a provision for credit losses of $2.9 million in 2023 as compared to $2.8 million in the prior year. The $176,000 year-over-year increase in provision for credit losses was primarily due to the downgrading of a limited number of relatively large commercial real estate and commercial loan relationships. Additionally, the provision for credit losses in 2023 reflected an increase in nonperforming loans of $8.2 million at December 31, 2023, as compared to December 31, 2022. The Company recorded $4.2 million in net charge-offs in 2023 as compared to $370,000 in 2022. The increase in charge-off activity in 2023, as compared to the previous year, was primarily related to the aforementioned limited number of large commercial real estate and commercial loan relationships. The charge-offs in 2023 involved loans for which the charged-off amounts had been fully reserved for in prior periods.
Total noninterest income was $5.2 million in 2023, a decrease of $724,000, or 12.2%, from $5.9 million in 2022. This decrease was due in part to the receipt of one-time Federal and New York State historical tax credits, totaling $521,000, granted in 2022 in connection with the restoration of our Southwest Corridor branch. The decrease was also in part due to a $607,000 increase in net losses on marketable equity securities. Fluctuations in the market value of equity securities are recorded as periodic net gain or loss, and the net losses recorded in 2023 are considered to be transitory. Partially offsetting these decreases in noninterest income were a $525,000 increase in gains on sales of securities, fixed assets, loans, and foreclosed real estate, as well as a $123,000 increase in service charges on deposit accounts, and a $41,000 increase in bank-owned life insurance revenues.
Noninterest expenses totaled $29.4 million for 2023, which was an increase of $521,000, or 1.8%, from the $28.9 million reported for the previous year. This modest increase can be primarily attributed to the incremental expenses associated with the Company's growth activities, including the opening of the Southwest Corridor branch in late 2022, and investments in technology to enhance digital banking services, which align with Pathfinder Bancorp’s long-term strategic plans.
Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a moderate year-over-year decrease of $102,000, indicative of the Company’s commitment to cost saving measures even in a competitive labor market. An increase of $183,000 in occupancy and equipment expenses contributed to the annual increase in overall noninterest expenses, reflecting the Bank's investment in physical infrastructure and branch network expansion. Professional and other services expense increased $491,000 in 2023, as compared to 2022. This increase was primarily due to a $390,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, and a $136,000 increase in non-recurring legal fees. FDIC assessments expense increased $279,000 during 2023, primarily attributable to an increase in fees calculated on total liabilities and insured deposits, as well as certain nonrecurring adjustments made in 2022.
Net loan charge-offs to average loans were 0.47% for 2023, as compared to 0.04% for 2022. Nonperforming loans to total loans increased to 1.92% at December 31, 2023, compared to 1.00% at December 31, 2022. The allowance for credit losses to non-performing loans at December 31, 2023 was 92.73%, compared with 169.93% at December 31, 2022. Total nonperforming assets increased $8.1 million, or 88.2%, between December 31, 2022 and December 31, 2023, largely driven by an increase of $6.6 million in commercial and commercial real estate loans, and increases of $957,000 and $658,000 in nonperforming consumer and residential real estate loans respectively.
- 37 -
Management monitors its loan portfolio closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2023. Overall, the ratio of the allowance for credit losses to year end loans increased to 1.78% at December 31, 2023 from 1.71% at December 31, 2022.
Total past due loans measured as a percent of total loans, increased from 2.89% at December 31, 2022 to 3.79% at December 31, 2023, primarily due to an increase of $3.8 million in past due commercial loans, a $2.3 million increase in past due residential loans, and a $1.9 million increase in past due consumer loans. The level of nonperforming loans increased in aggregate by $8.2 million led by an increase of $6.6 million in commercial and commercial real estate loans, a $957,000 increase in consumer loans, and a $658,000 increase in residential mortgage loans. Commensurate with the increase in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets increased to 1.19% at December 31, 2023 from 0.66% at December 31, 2022.
The Company’s shareholders’ equity increased $8.5 million, or 7.7%, to $119.5 million at December 31, 2023 from $111.0 million at December 31, 2022. This increase was primarily due to a $4.7 million increase in retained earnings, a $2.6 million decrease in accumulated other comprehensive loss, a $1.0 million increase in additional paid in capital, and a $180,000 increase in ESOP shares earned. The increase in retained earnings resulted from $9.3 million in net income recorded in 2023. Partially offsetting these increases in retained earnings during 2023 were a one-time $2.1 million CECL transition adjustment, as well as $1.7 million for cash dividends declared on voting common stock, $497,000 for cash dividends declared on non-voting common stock, $45,000 for cash dividends declared on issued warrants, and $199,000 for cumulative effect of affiliate capital allocation.
Net Interest Income
Net interest income is the Company's primary source of operating income. It is the amount by which interest earned on interest-earning deposits, loans and investment securities exceeds the interest paid on deposits and borrowed money. Changes in net interest income and the net interest margin ratio resulted from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, and their respective yields and funding costs.
The following comments refer to the table of Average Balances and Rates and the Rate/Volume Analysis, both of which follow below.
Net interest income, before provision for credit losses, decreased $2.5 million, or 6.0%, to $38.9 million in 2023 as compared to $41.4 million in the previous year. Our net interest margin for the year ended December 31, 2023 decreased to 2.95% from 3.24% for the comparable prior year. The decrease in net interest income was primarily due to an increase in interest expense of $19.0 million, or 196.5%, offset by a lesser increase in interest and dividend income of $16.6 million, or 32.4%. The increase in interest expense was primarily a result of the increase in average cost of deposits resulting from the rapidly rising interest rate environment and increased competition.
- 38 -
Average Balances and Rates
The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the table has not been adjusted for tax equivalency. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.
For the year ended December 31,
Average
Average
Unaudited
Average
Yield /
Average
Yield /
(In thousands)
Balance
Interest
Cost
Balance
Interest
Cost
Interest-earning assets:
Loans
$
899,605
$
47,348
5.26
%
$
869,591
$
38,322
4.41
%
Taxable investment securities
379,600
18,073
4.76
%
351,898
11,454
3.25
%
Tax-exempt investment securities
30,318
1,947
6.42
%
38,456
1,173
3.05
%
Fed funds sold and interest-earning deposits
11,730
2.51
%
19,134
0.78
%
Total interest-earning assets
1,321,253
67,663
5.12
%
1,279,079
51,098
3.99
%
Noninterest-earning assets:
Other assets
100,319
89,391
Allowance for credit losses
(17,870
)
(13,196
)
Net unrealized losses
on available-for-sale securities
(13,600
)
(9,580
)
Total assets
$
1,390,102
$
1,345,694
Interest-bearing liabilities:
NOW accounts
$
92,223
$
0.58
%
$
102,223
$
0.31
%
Money management accounts
14,116
0.11
%
16,201
0.11
%
MMDA accounts
239,182
6,695
2.80
%
260,594
1,941
0.74
%
Savings and club accounts
124,617
0.22
%
138,954
0.15
%
Time deposits
480,867
15,743
3.27
%
412,536
4,584
1.11
%
Subordinated debt
29,815
1,941
6.51
%
29,639
1,749
5.90
%
Borrowings
105,471
3,538
3.35
%
71,152
1.23
%
Total interest-bearing liabilities
1,086,291
28,744
2.65
%
1,031,299
9,695
0.94
%
Noninterest-bearing liabilities:
Demand deposits
172,950
192,106
Other liabilities
16,037
12,391
Total liabilities
1,275,278
1,235,796
Shareholders' equity
114,824
109,898
Total liabilities & shareholders' equity
$
1,390,102
$
1,345,694
Net interest income
$
38,919
$
41,403
Net interest rate spread
2.47
%
3.05
%
Net interest margin
2.95
%
3.24
%
Ratio of average interest-earning assets
to average interest-bearing liabilities
121.63
%
124.03
%
- 39 -
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities, and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the years indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency.
Years Ended December 31,
2023 vs 2022
2022 vs 2021
Increase/(Decrease) Due to
Increase/(Decrease) Due to
Total
Total
Increase
Increase
(In thousands)
Volume
Rate
(Decrease)
Volume
Rate
(Decrease)
Interest Income:
Loans
$
1,361
$
7,665
$
9,026
$
1,601
$
(305
)
$
1,296
Taxable investment securities
5,657
6,619
1,132
1,746
2,878
Tax-exempt investment securities
(292
)
1,066
Interest-earning deposits
(77
)
(4
)
Total interest income
1,954
14,611
16,565
3,223
2,048
5,271
Interest Expense:
NOW accounts
(34
)
Money management accounts
(2
)
(1
)
(3
)
-
MMDA accounts
(172
)
4,926
4,754
Savings and club accounts
(23
)
Time deposits
10,284
11,159
1,322
Subordinated debt
(177
)
(41
)
Borrowings
2,083
2,664
(103
)
(51
)
(154
)
Total interest expense
1,235
17,814
19,049
1,888
2,163
Net change in net interest income
$
$
(3,203
)
$
(2,484
)
$
2,948
$
$
3,108
Interest Income
Changes in interest income result from changes in the average balances of loans, securities, and interest-earning deposits and the related average yields on those balances.
Interest and dividend income increased $16.6 million, or 32.4%, to $67.7 million in 2023 as compared to $51.1 million in 2022 due principally to the $42.2 million, or 3.3%, increase in average interest-earning assets and a 113 basis points increase in the average yield on average interest-earning assets. The average yield earned on loans increased 85 basis points in 2023, when compared to 2022, as a result of rising interest rates associated with variable rate loans. The average balance of loans increased $30.0 million, or 3.4%, in 2023, as compared to the previous year due to the increase in average commercial real estate and commercial and industrial loans. The average yields earned on taxable investment securities increased 151 basis points to 4.76% in 2023 as compared to 3.25% in 2022, primarily as a result of the rising interest rate environment in 2023. In addition, the average balance of taxable investment securities increased $27.7 million, or 7.9%, when compared to the prior year primarily due to increased purchases of securities in the fourth quarter of 2023 intended to take advantage of certain dynamics in the interest rate environment present at that time. In combination, these factors resulted in a $6.6 million increase in interest income associated with taxable investment securities in 2023, as compared to 2022.
Interest Expense
Interest expense increased $19.0 million, or 196.5%, to $28.7 million in 2023, as compared to $9.7 million in the previous year. The year-over-year increase in interest expense was primarily driven by the rising interest rate environment in 2023 and lagged effects from the rising interest rate environment in 2022. The average rate paid on interest-bearing deposits increased by 225 basis points to 3.26% in 2023 as compared to 1.10% in the previous year. The average cost of all interest-bearing liabilities increased from 0.94% in 2022 to 2.65% in 2023. In addition, the year-over-year increase in interest expense resulted from increases in the average balances of deposits and borrowings. The average balance of total interest-bearing liabilities increased $55.0 million, or 5.3%, in 2023, as compared to 2022, and the average balance of all deposits increased by $20.5 million, or 2.2% in 2023, as compared to the previous year.
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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 $2.9 million in 2023 as compared to $2.8 million in the prior year. The $176,000 year-over-year increase in provision for credit losses was primarily due to the downgrading of a limited number of relatively large commercial real estate and commercial loan relationships. The Company recorded $4.2 million in net charge-offs in 2023 as compared to $370,000 in net charge-offs in 2022. The ratio of net charge-offs to average loans therefore increased to 0.47% in 2023 from 0.04% in 2022. Further information on earnings per share can be found in Note 1 to the consolidated financial statements of this Form 10-K.
Nonperforming loans to total loans increased to 1.92% at December 31, 2023 as compared to 1.00% at December 31, 2022. The allowance for credit losses to non-performing loans at December 31, 2023 was 92.7%, compared with 169.9% at December 31, 2022.
Noninterest Income
The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions and net gains or losses on sales of securities, loans, and foreclosed real estate.
The following table sets forth certain information on noninterest income for the years indicated.
For the year ended December 31,
(In thousands)
Change
Service charges on deposit accounts
$
1,249
$
1,126
$
10.9
%
Earnings and gain on bank owned life insurance
7.0
%
Loan servicing fees
(56
)
-15.4
%
Debit card interchange fees
(251
)
-29.0
%
Insurance agency revenue
1,304
1,128
15.6
%
Historical tax credit
-
(521
)
-100.0
%
Other charges, commissions and fees
1,096
1,250
(154
)
-12.3
%
Noninterest income before gains
5,202
5,844
(642
)
-11.0
%
Net gains (losses) on sales of securities, fixed assets, loans and foreclosed real estate
(282
)
-186.2
%
(Losses) gains on marketable equity securities
(255
)
(607
)
-172.4
%
Total noninterest income
$
5,190
$
5,914
$
(724
)
-12.2
%
Total noninterest income was $5.2 million in 2023, a decrease of $724,000, or 12.2%, from $5.9 million in 2022. The decrease was in part due to a $607,000 increase in net losses on marketable equity securities. Fluctuations in the market value of equity securities are recorded as periodic net gain or loss, and the net losses recorded in 2023 are considered to be transitory.
Noninterest income before recorded gains and losses, decreased $642,000, or 11.0%, to $5.2 million in 2023 as compared to $5.8 million in 2022. The largest contributor to the year-over year decrease in noninterest income was due to the receipt of Federal and New York historical tax credits related to the restoration of the newly opened Southwest Corridor branch in 2022. The credits of $521,000 were received in 2022 concurrently with the opening of the branch facility and were not applicable in 2023. Also of note, debit card interchange fees decreased $251,000 year over year. This decrease is correlated to a decrease in transactional revenues volume and increases in rewards expense. The $154,000 year-over-year decrease in other charges, commissions and fees was the result of the 2022 sale of real estate held by our subsidiary, Whispering Oaks.
- 41 -
Noninterest Expense
The following table sets forth certain information on noninterest expense for the years indicated.
For the year ended December 31,
(In thousands)
Change
Salaries and employee benefits
$
15,920
$
16,022
$
(102
)
-0.6
%
Building and occupancy
3,563
3,380
5.4
%
Data processing
2,018
2,042
(24
)
-1.2
%
Professional and other services
2,019
1,528
32.1
%
Advertising
(234
)
-25.9
%
FDIC assessments
46.0
%
Audits and exams
6.8
%
Insurance agency expense
1,033
14.0
%
Community service activities
(67
)
-25.1
%
Foreclosed real estate expenses
42.3
%
Other expenses
2,240
2,452
(212
)
-8.6
%
Total noninterest expenses
$
29,395
$
28,874
$
1.8
%
Noninterest expense increased $521,000, or 1.8%, to $29.4 million in 2023 from $28.9 million in 2022. The increase in noninterest expenses in 2023, as compared to 2022, was primarily due to increases in building and occupancy, professional and other services, audits and exams, and insurance agency expense totaling $848,000. Increased foreclosure activity in 2023 when compared to 2022 caused an increase in foreclosed real estate expenses of $33,000. An increase of $183,000 in occupancy and equipment expenses contributed to the annual increase, reflecting the Bank's increased investment in physical infrastructure and branch network expansion. Professional and other services expense increased $491,000 in 2023, as compared to 2022. This increase was primarily due to a $390,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, and a $136,000 increase in non-recurring legal fees. FDIC assessments expense increased $279,000 during 2023, primarily attributable to an increase in fees calculated on total liabilities and insured deposits, as well as certain nonrecurring adjustments made in 2022. Strategic decreases in advertising in combination with decreases in salaries and employee benefits, data processing, community service activities, and other operating expenses help to offset noninterest expense by $639,000. Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a moderate year-over-year decrease of $102,000, indicative of the Company’s commitment to cost saving measures even in a competitive labor market.
Income Tax Expense
The Company reported income tax expense of $2.4 million in 2023 and $2.7 million in 2022, a decrease of $300,000 when compared to the previous year. This decrease was primarily the result of a decrease in income before income taxes.
The Company’s effective tax rate was 20.8% in 2023, as compared to 17.5% in 2022. The Company’s effective tax rate in 2023 increased 3.3% primarily due to fluctuations in permanent tax differences, including state taxes, the reversal of a deferred tax asset valuation allowance for the year ended December 31, 2022, and the benefit of Federal and New York State historical tax credits claimed for the year ended December 31, 2022.
As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland.
See Note 17 to the consolidated financial statements for the reconciliation of the statutory tax rate to the effective tax rate.
Earnings Per Share
Basic and diluted earnings per share for the year ended December 31, 2023 were both $1.51, as compared to basic and diluted earnings per share of $2.13 for the year ended December 31, 2022. The decrease in earnings per share between these two years was due to the decrease in net income available to common shareholders between these two time periods. Further information on earnings per share can be found in Note 3 to the consolidated financial statements of this Form 10-K.
CHANGES IN FINANCIAL CONDITION
The Company's total assets were $1.47 billion at December 31, 2023 as compared to $1.40 billion at December 31, 2022. The increase in total assets of $65.9 million, or 4.7%, was primarily the result of a $67.0 million increase in available-for-sale securities, a $13.5 million increase in interest-earning deposits, partially offset by a $15.1 million decrease in held-to-maturity securities. All other asset categories had a net increase of $500,000.
- 42 -
Investment Securities
The average investment portfolio represented 31.0% of the Company’s average interest-earning assets in 2023 and is designed to generate a favorable rate of return in consideration of all risk factors associated with debt securities while assisting the Company in meeting its liquidity needs and interest rate risk strategies. All of the Company’s investments, with the exception of marketable equity securities, are classified as either available-for-sale or held-to-maturity. The Company does not hold any trading securities. The Company invests in securities issued by United States Government agencies and sponsored enterprises (“GSE”), mortgage-backed securities, collateralized mortgage obligations, state and municipal obligations, mutual funds, equity securities, investment grade corporate debt instruments, and common stock issued by the FHLBNY. By investing in these types of assets, the Company reduces the credit risk of its asset base through geographical and collateral-type diversification but must accept lower yields than would typically be available on loan products. Our mortgage-backed securities and collateralized mortgage obligations portfolios include privately-issued but substantially collateralized pass-through securities as well as pass-through securities guaranteed by GSEs.
At December 31, 2023, available-for-sale investment securities increased 34.9% to $258.7 million and held-to-maturity investment securities decreased 7.6% to $179.6 million as compared to December 31, 2022. There were no securities that exceeded 10% of consolidated shareholders’ equity.
Our available-for-sale investment securities are carried at fair value and our held-to-maturity investment securities are carried at amortized cost.
The following table sets forth the carrying value of the Company's investment portfolio at December 31:
Available-for-Sale
Held-to-Maturity
(In thousands)
Investment Securities:
US treasury, agencies and GSEs
$
80,083
$
29,364
$
32,273
$
3,760
$
3,852
$
-
State and political subdivisions
32,924
45,385
39,199
16,576
15,211
14,790
Corporate
10,919
11,829
14,127
45,427
45,086
46,290
Asset backed securities
19,892
15,400
13,613
16,860
19,158
14,636
Residential mortgage-backed - US agency
24,418
16,400
22,164
6,974
7,489
9,740
Collateralized mortgage obligations - US agency
12,179
11,708
12,285
13,221
15,109
11,362
Collateralized mortgage obligations - Private label
78,095
61,434
56,731
76,819
88,497
64,105
Common stock - financial services industry
-
-
-
Total investment securities
$
258,716
$
191,726
$
190,598
$
179,637
$
194,402
$
160,923
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2023. Average yield is calculated on the amortized cost to maturity. Adjustable rate mortgage-backed securities are included in the period in which interest rates are next scheduled to be reset.
AVAILABLE FOR SALE
More Than One
More Than Five
One Year or Less
to Five Years
to Ten Years
Annualized
Annualized
Annualized
Amortized
Weighted
Amortized
Weighted
Amortized
Weighted
(Dollars in thousands)
Cost
Avg Yield
Cost
Avg Yield
Cost
Avg Yield
Debt investment securities:
US Treasury, agencies and GSEs
$
6,004
4.67
%
$
3,463
2.21
%
$
30,584
2.28
%
State and political subdivisions
-
0.00
%
1.82
%
3,103
2.15
%
Corporate
4,096
5.45
%
5,221
5.65
%
1.80
%
Asset backed securities
-
0.00
%
-
0.00
%
5,498
7.36
%
Total
$
10,100
4.99
%
$
9,197
4.14
%
$
39,941
2.96
%
Mortgage-backed securities:
Residential mortgage-backed - US agency
$
5,055
5.81
%
$
2,495
0.99
%
$
-
0.00
%
Collateralized mortgage obligations - US agency
-
0.00
%
1,741
2.18
%
1,974
5.48
%
Collateralized mortgage obligations - Private label
5,871
6.72
%
9,787
5.88
%
15,619
3.94
%
Total
$
10,926
6.30
%
$
14,023
4.55
%
$
17,593
4.11
%
Other non-maturity investments:
Equity securities
$
0.53
%
$
-
0.00
%
$
-
0.00
%
Total
$
0.53
%
$
-
0.00
%
$
-
0.00
%
Total investment securities
$
21,232
5.62
%
$
23,220
4.39
%
$
57,534
3.31
%
- 43 -
More Than Ten Years
Total Investment Securities
Annualized
Annualized
Amortized
Weighted
Amortized
Fair
Weighted
(Dollars in thousands)
Cost
Avg Yield
Cost
Value
Avg Yield
Debt investment securities:
US Treasury, agencies and GSEs
$
42,537
5.77
%
$
82,588
$
80,083
4.25
%
State and political subdivisions
30,972
2.09
%
34,588
32,924
2.09
%
Corporate
5.22
%
11,008
10,919
5.27
%
Asset backed securities
14,753
5.23
%
20,251
19,892
5.81
%
Total
$
89,197
4.40
%
$
148,435
$
143,818
4.05
%
Mortgage-backed securities:
Residential mortgage-backed - US agency
$
17,896
4.22
%
$
25,446
$
24,418
4.22
%
Collateralized mortgage obligations - US agency
9,343
3.54
%
13,058
12,179
3.65
%
Collateralized mortgage obligations - Private label
50,535
6.29
%
81,812
78,095
5.82
%
Total
$
77,774
5.48
%
$
120,316
$
114,692
5.25
%
Other non-maturity investments:
Equity securities
$
-
0.00
%
$
0.53
%
Total
$
-
0.00
%
$
$
0.53
%
Total investment securities
$
166,971
4.90
%
$
268,957
$
258,716
4.58
%
HELD-TO-MATURITY
More Than One
More Than Five
One Year or Less
to Five Years
to Ten Years
Annualized
Annualized
Annualized
Amortized
Weighted
Amortized
Weighted
Amortized
Weighted
(Dollars in thousands)
Cost
Avg Yield
Cost
Avg Yield
Cost
Avg Yield
Debt investment securities:
US Treasury, agencies and GSEs
$
-
0.00
%
$
-
0.00
%
$
1,497
3.18
%
State and political subdivisions
3.14
%
2,614
3.15
%
7,987
2.36
%
Corporate
1,754
4.10
%
11,695
4.82
%
31,978
4.85
%
Asset backed securities
-
0.00
%
4,259
4.09
%
1,997
7.52
%
Total
$
2,420
0.00
%
$
18,568
4.42
%
$
43,459
4.11
%
Mortgage-backed securities:
Residential mortgage-backed - US agency
$
-
0.00
%
$
1,253
3.40
%
$
2,374
2.82
%
Collateralized mortgage obligations - US agency
-
0.00
%
1,302
3.63
%
4,938
2.80
%
Collateralized mortgage obligations - Private label
12,298
8.47
%
12,283
5.11
%
8,117
6.18
%
Total
$
12,298
8.47
%
$
14,838
4.84
%
$
15,429
4.58
%
Total investment securities
$
14,718
7.08
%
$
33,406
4.60
%
$
58,888
4.23
%
More Than Ten Years
Total Investment Securities
Annualized
Annualized
Amortized
Weighted
Amortized
Fair
Weighted
(Dollars in thousands)
Cost
Avg Yield
Cost
Value
Avg Yield
Debt investment securities:
US Treasury, agencies and GSEs
$
2,263
2.66
%
$
3,760
$
3,456
2.87
%
State and political subdivisions
5,309
2.51
%
16,576
14,730
2.56
%
Corporate
-
0.00
%
45,427
42,155
4.81
%
Asset backed securities
10,604
4.55
%
16,860
15,680
4.79
%
Total
$
18,176
3.72
%
$
82,623
$
76,021
4.28
%
Mortgage-backed securities:
Residential mortgage-backed - US agency
$
3,347
2.79
%
$
6,974
$
6,324
2.91
%
Collateralized mortgage obligations - US agency
6,981
2.93
%
13,221
11,928
2.95
%
Collateralized mortgage obligations - Private label
44,121
4.33
%
76,819
73,761
5.31
%
Total
$
54,449
4.06
%
$
97,014
$
92,013
4.84
%
Total investment securities
$
72,625
3.89
%
$
179,637
$
168,034
4.59
%
The yield information disclosed above does not give effect to changes in fair value that are reflected in accumulated other comprehensive loss in consolidated shareholders’ equity.
- 44 -
Loans Receivable
Average loans receivable represented 68.1% of the Company’s average interest earning assets in 2023 and account for the greatest portion of total interest income. At December 31, 2023, the Company had the largest portion of its loan portfolio in commercial loan products that represented 58.4% of total loans. These products include credits extended to businesses and political subdivisions within its marketplace that are typically secured by commercial real estate, equipment, inventories, and accounts receivable. The residential mortgage loans product segment represents 28.8% of total loans at December 31, 2023. The consumer loan products represented 12.8% of total loans at December 31, 2023. The Company has seen the proportion of commercial loan products to total loans increase in recent years and it will continue to emphasize these types of loans. Notwithstanding this emphasis, the Company also anticipates a continued commitment to financing the purchase or improvement of residential real estate in its market area.
The following table sets forth the composition of our loan portfolio, including net deferred costs, in dollar amount and as a percentage of loans.
December 31,
(Dollars in thousands)
Residential real estate
$
258,198
28.8
%
$
262,008
29.2
%
$
246,344
29.6
%
$
233,094
28.2
%
$
212,663
27.2
%
Residential real estate held-for-sale
-
0.0
%
0.0
%
0.1
%
1,526
0.2
%
35,936
4.6
%
Commercial real estate
358,521
40.0
%
344,721
38.4
%
287,279
34.5
%
286,066
34.7
%
254,781
32.6
%
Commercial and tax exempt
165,460
18.4
%
163,806
18.3
%
156,167
18.8
%
194,963
23.6
%
148,776
19.0
%
Home equity and junior liens
35,231
3.9
%
34,349
3.8
%
32,048
3.8
%
38,941
4.7
%
46,688
6.0
%
Consumer loans
79,797
8.9
%
92,851
10.3
%
110,108
13.2
%
70,905
8.6
%
82,607
10.6
%
Total loans receivable
$
897,207
100.0
%
$
897,754
100.0
%
$
832,459
100.0
%
$
825,495
100.0
%
$
781,451
100.0
%
The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2023 which, based on remaining scheduled repayments of principal, are due in the periods indicated. Demand loans having no stated schedule of repayments, no stated maturity, and overdrafts are reported as one year or less. Adjustable and floating rate loans are included in the period on which interest rates are next scheduled to adjust, rather than the period in which they contractually mature. Fixed rate loans are included in the period in which the final contractual repayment is due.
(In thousands)
Due Under One Year
Due 1-5 Years
Due > 5 Years to Fifteen Years
Due Over Fifteen Years
Total
Real estate:
Commercial real estate
$
8,692
$
12,180
$
86,709
$
250,940
$
358,521
Residential real estate
2,533
51,648
203,164
258,198
Total real estate loans
9,545
14,713
138,357
454,104
616,719
Commercial and tax exempt
74,433
40,765
43,983
6,279
165,460
Home Equity and junior liens
18,599
1,240
12,064
3,328
35,231
Consumer
2,784
6,854
8,846
61,313
79,797
Total loans
$
105,361
$
63,572
$
203,250
$
525,024
$
897,207
The following table sets forth fixed- and adjustable-rate loans at December 31, 2023 that are contractually due after December 31, 2024:
(In thousands)
Due After
One Year
Interest rates:
Fixed
$
408,149
Variable
383,697
Total loans
$
791,846
Total loans receivable, including net deferred costs, decreased $547,000, to $897.2 million at December 31, 2023 when compared to $897.8 million at December 31, 2022, due to decreases in consumer loans and residential mortgage loans of $13.1 million and $3.8 million, respectively. These decreases in outstanding loan balances were partially offset by increases in commercial real estate loans, commercial and tax exempt loans, and home equity and junior liens of $13.8 million, $1.7 million, and $882,000, respectively. Although the Company maintained its previously established credit standards, the outstanding balances of commercial real estate and commercial loans increased as the Bank continued to benefit from the expanding relationship-derived business activity within the markets that the Bank serves. The decrease in residential mortgage loans was primarily the result of decreases in the percentage of originated loans allocated for addition to the Bank's portfolio as rates generally increased throughout 2023. The Company does not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential mortgages.
- 45 -
Nonperforming Loans and Assets
The following table represents information concerning the aggregate amount of nonperforming assets:
December 31
(Dollars In thousands)
Nonaccrual loans:
Commercial and commercial real estate loans
$
12,317
$
5,720
$
6,297
$
17,978
$
3,002
Consumer
3,140
2,183
1,104
Residential mortgage loans
1,770
1,112
2,608
1,613
Total nonaccrual loans
17,227
9,015
8,292
21,333
5,246
Total nonperforming loans
17,227
9,015
8,292
21,333
5,246
Foreclosed real estate
-
-
Total nonperforming assets
$
17,378
$
9,236
$
8,292
$
21,333
$
5,334
Nonperforming loans to total loans
1.92
%
1.00
%
1.00
%
2.58
%
0.67
%
Nonperforming assets to total assets
1.19
%
0.66
%
0.65
%
1.74
%
0.49
%
Nonperforming assets include nonaccrual loans, and foreclosed real estate (“FRE”).
Management monitors its loan portfolios closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2023. The ratio of the allowance for credit losses to year end loans was 1.78% and 1.71% at December 31, 2023 and December 31, 2022, respectively.
Total nonperforming assets increased $8.1 million, or 88.2%, between December 31, 2022 and December 31, 2023, driven by increases of $6.6 million, $957,000, and $658,000 in nonperforming commercial and commercial real estate loans, consumer loans, and residential real estate loans, respectively, partially offset by a decrease of $70,000 in foreclosed real estate. The increase in nonperforming commercial and commercial real estate loans in 2023 was primarily due to one loan relationship in the in the amount of $7.8 million that was placed on non-accrual status. The $957,000 increase in nonperforming consumer loans was primarily due to increases in purchased loans that are 90 days or greater past due.
Management believes that the value of the collateral properties underlying the loans is sufficient to preclude any significant losses related to these loans. Management continues to monitor and react to national and local economic trends as well as general portfolio conditions which may impact the quality of the portfolio, and considers these environmental factors in support of the allowance for credit loss reserve. Management believes that the current level of the allowance for credit losses, at $16.0 million at December 31, 2023, adequately addresses the current level of risk within the loan portfolio, particularly considering the types and levels of collateralization supporting the substantial majority of the portfolio. The Company maintains strict loan underwriting standards and carefully monitors the performance of the loan portfolio. See Note 1: Summary of Significant Accounting Policies contained in the financial statements herein.
Foreclosed Real Estate (“FRE”) balances decreased to $151,000 at December 31, 2023, compared to $221,000 from the prior year end.
The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest. The Company considers a loan specifically-identified when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $989,000 and $476,000 would have been recorded for the years ended December 31, 2023 and December 31, 2022, respectively.
The measurement of specifically-identified loans is based upon the fair value of the collateral or the present value of future cash flows discounted at the historical effective interest rate for specifically-identified loans when the receipt of contractual principal and interest is probable. At December 31, 2023 and December 31, 2022, the Company had $22.6 million and $20.2 million in loans, which were deemed to be specifically-identified, having specific reserves of $3.7 million and $4.8 million, respectively. The $2.4 million year-over-year increase in specifically-identified loans was principally due to increases of $4.4 million, $2.0 million, and $177,000 in specifically-identified commercial real estate, other commercial and industrial, and residential mortgages, respectively, offset by decreases of $4.1 million and $8,000 in commercial lines of credit and home equity and junior liens, respectively.
The threshold for specifically-identified commercial real estate or commercial loans remains at $100,000 and for residential mortgage loans remains at $300,000 at December 31, 2023. The thresholds described above do not apply to loans that have been classified as modified due to borrowers experiencing financial difficulties, which are individually evaluated at the time that the restructuring is affected.
Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years.
- 46 -
Management has identified certain loans with potential credit profiles that may result in the borrowers not being able to comply with the current loan repayment terms and which may result in possible future identified loan reporting. Potential problem loans increased $6.3 million to $43.1 million at December 31, 2023, compared to $38.6 million at December 31, 2022. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered specifically-identified. The increase in potential problem loans was primarily due to a $7.8 million increase in potential problem commercial real estate loans and a $2.1 million increase in potential problem consumer loans. These increases were partially offset by a decrease of $3.3 million in potential problem commercial and industrial loans. The increase in potential problem commercial real estate loans in 2023 was a result of one loan relationship for $7.1 million, and one residential real estate loan relationship in the amount of $1.4 million.
Total potential problem loans, including specifically-identified loans, were $43.1 million at December 31, 2023, and were comprised of special mention, substandard and doubtful loans of $20.7 million, $20.3 million and $2.1 million, respectively. Total potential problem loans, including impaired loans, were $38.6 million at December 31, 2022, and were comprised of special mention, substandard and doubtful loans of $20.0 million, $17.0 million and $2.1 million, respectively.
The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of delinquent loans to total loans increased to 3.79% at December 31, 2023 as compared to 3.21% at December 31, 2022. This increase was due to an increase of $3.8 million in past due commercial loans, a $1.9 million increase in past due consumer loans, and a $2.3 million increase in past due residential loans. At December 31, 2023, there were $34.0 million in loans past due including $13.6 million, $3.2 million and $17.2 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively. At December 31, 2022, there were $28.9 million in loans past due including $13.0 million, $4.3 million and $8.7 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively.
Loans purchased outside of the Bank’s general market area are subject to substantial pre-purchase due diligence. Homogenous pools of purchased loans are subject to pre-purchase analyses led by a team of the Bank’s senior executives and credit analysts. In each case, the Bank’s analytical processes consider the types of loans being evaluated, the underwriting criteria employed by the originating entity, the historical performance of such loans, especially in the most recent deeply recessionary period, the offered collateral enhancements and other credit loss mitigation factors offered by the seller and the capabilities and financial stability of the servicing entities involved. From a credit risk perspective, these loan pools also benefit from broad diversification, including wide geographic dispersion, the readily-verifiable historical performance of similar loans issued by the originators, as well as the overall experience and skill of the underwriters and servicing entities involved as counterparties to the Bank in these transactions. The performance of all purchased loan pools are monitored regularly from detailed reports and remittance reconciliations provided at least monthly by the external servicing entities.
The projected credit losses related to purchased loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at least monthly. Over the life of the purchased loan pools, the allowance for credit losses is adjusted, through the provision for credit losses, for expected loss experience, over the projected life of the loans. The expected credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of the purchased loan pools. The Bank does not initially increase the allowance for credit losses on the purchase date of the loan pools.
In the normal course of business, the Bank has, from time to time, sold residential mortgage loans and participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyer. Pathfinder Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal.
Allowance for Credit Losses
The allowance for credit losses (ACL) is established through provision for credit losses and reduced by loan charge-offs net of recoveries. The allowance for credit losses represents the amount available for probable credit losses in the Company’s loan portfolio as estimated by management.
The Company establishes a specific allocation for all commercial loans identified as being specifically-identified with a balance in excess of $100,000 that are also on nonaccrual or have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The measurement of specifically-identified loans is based upon either the present value of future cash flows discounted at the historical effective interest rate or the fair value of the collateral, less costs to sell for collateral dependent loans. At December 31, 2023, the Bank’s position in specifically-identified loans consisted of 69 loans totaling $22.5 million. Of these loans, 17 loans, totaling $1.6 million, were valued using the present value of future cash flows method; and 52 loans, totaling $20.9 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the probable lifetime loss for each risk-rating category. The Company uses the fair value of collateral, less costs to sell to measure impairment on commercial and commercial real estate loans. Residential real estate loans in excess of $300,000 will also be included in this individual loan review. Residential real estate loans less than this amount will be included in specifically-identified loans if it is part of the total related credit to a previously identified commercial loan. The Company also establishes a specific allowance, regardless of the size of the loan, for all loans modified due to borrowers experiencing financial difficulties.
- 47 -
At December 31, 2022 the Company calculated its ALLL utilizing the Incurred Loss Model ("ILM") methodology, as required under GAAP on that date. On January 1, 2023, the Company adopted the Current Expected Credit Loss ("CECL") model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total allowance for loan and lease losses ("ALLL") of $15.3 million, of which $4.8 million was related to impaired loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis. On January 1, 2023 the Company recorded a one-time CECL transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans, evaluated collectively in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to impaired loans at December 31, 2022 was not affected by the transition to the CECL methodology at January 1, 2023.
The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.9 million on January 1, 2023, which was recorded to retained earnings on that date. Beginning on January 1, 2023, the Bank has had to account for all credit loss exposures using this CECL methodology. The resulting nonrecurring adjustment from ILM to CECL, was made on January 1, 2023, increasing the ACL at December 31, 2022 by $2.2 million in determining the beginning allowance for credit losses ("ACL") for the quarter ended March 31, 2023. This transition adjustment was booked to retained earnings in the first quarter of 2023 and was therefore a subtraction from tangible book value, after tax effects of approximately $2.1 million.
The allowance for credit losses and the allowance for loan losses at December 31, 2023 and 2022 was $16.0 million and $15.3 million, respectively, or 1.78% and 1.71% of total year end loans on those dates, respectively. The Company recorded $4.2 million in net charge-offs in 2023, as compared to $370,000 in net charge-offs in 2022. The ratio of net charge-offs to average loans increased to 0.47% in 2023 from 0.04% in 2022.
For further discussion of our allowance for credit losses procedures, please see “Business-Allowance for Credit Losses” and Note 6 to the consolidated financial statements contained in this Annual Report on Form 10-K.
The following table sets forth the allocation of allowance for credit losses by loan category for the years indicated. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
Allocation
Percent of
Allocation
Percent of
Allocation
Percent of
Allocation
Percent of
Allocation
Percent of
of the
Loans to
of the
Loans to
of the
Loans to
of the
Loans to
of the
Loans to
(Dollars in thousands)
Allowance
Total Loans
Allowance
Total Loans
Allowance
Total Loans
Allowance
Total Loans
Allowance
Total Loans
Residential real estate
$
2,466
28.8
%
$
29.2
%
$
29.6
%
$
28.2
%
$
27.2
%
Commercial real estate
5,751
40.0
%
5,881
38.4
%
5,308
34.5
%
4,776
34.7
%
4,010
32.6
%
Commercial and tax exempt
4,956
18.4
%
6,937
18.3
%
3,701
18.8
%
4,663
23.6
%
2,841
19.0
%
Home equity and junior liens
3.9
%
3.8
%
3.8
%
4.7
%
6.0
%
Consumer loans
2,145
8.9
%
1,046
10.3
%
1,297
13.2
%
1,123
8.6
%
10.6
%
Unallocated (1)
-
-
-
-
0.1
%
0.2
%
4.6
%
Total
$
15,975
100.0
%
$
15,319
100.0
%
$
12,935
100.0
%
$
12,777
100.0
%
$
8,669
100.0
%
(1)Includes loans held-for-sale at December 31 for each of the indicated years.
- 48 -
The following table sets forth the allowance for credit losses for the years indicated:
(Dollars In thousands)
Balance at beginning of year
$
15,319
$
12,935
$
12,777
$
8,669
$
7,306
Adoption of New Accounting Standards
1,886
Provisions charged to operating expenses
2,991
2,754
1,022
4,707
1,966
Recoveries of loans previously charged-off:
Commercial real estate and loans
Consumer and home equity
Residential real estate
-
-
Total recoveries
Loans charged off:
Commercial real estate and loans
(4,109
)
(585
)
(764
)
(222
)
(294
)
Consumer and home equity
(346
)
(147
)
(240
)
(353
)
(361
)
Residential real estate
(121
)
(29
)
(20
)
(125
)
(11
)
Total charged-off
(4,576
)
(761
)
(1,024
)
(700
)
(666
)
Net charge-offs
(4,221
)
(370
)
(866
)
(599
)
(603
)
Balance at end of year
$
15,975
$
15,319
$
12,935
$
12,777
$
8,669
Net charge-offs to average loans outstanding
0.48
%
0.04
%
0.10
%
0.08
%
0.09
%
Allowance for credit losses to year-end loans
1.78
%
1.71
%
1.57
%
1.55
%
1.11
%
The following table sets forth the loan net charge-off ratios for the years indicated:
Allowance for credit losses to year-end loans
1.78
%
1.71
%
Allowance for credit losses to nonperforming loans
92.73
%
169.93
%
Nonaccrual loans to total loans
1.92
%
1.00
%
Allowance for credit losses to nonaccrual loans
92.73
%
169.93
%
Net charge-offs to average loans outstanding
Commercial real estate and loans
0.44
%
0.03
%
Consumer and home equity
0.03
%
0.01
%
Residential real estate
0.01
%
0.00
%
Total charged-off
0.48
%
0.04
%
Bank Owned Life Insurance
The Company held $24.6 million and $24.0 million in bank owned life insurance at December 31, 2023 and 2022, respectively. Bank owned life insurance increased $630,000, or 2.6%, to $24.6 million at December 31, 2023, as compared to December 31, 2022. The increase was primarily due to an increase in the cash value of the policies recorded as income in 2023.
Deposits
The Company’s deposit base is drawn from eleven full-service offices in its market area. The deposit base consists of demand deposits, money management and money market deposit accounts, savings, and time deposits. Average deposits increased by $1.3 million, or 0.12%, in 2023. For the year ended December 31, 2023, 57.2% of the Company's average deposit base of $1.1 billion consisted of core deposits. Core deposits, which exclude time deposits, are considered to be more stable and generally provide the Company with a lower cost of funds than time deposits. The Company will continue to emphasize retail and business core deposits in the future by providing depositors with a full range of deposit product offerings and will maintain its recent focus on deposit gathering within the Syracuse market.
Total deposits of $1.12 billion at December 31, 2023 consisted in part of $242.7 million in various forms of brokered money market and certificates of deposit accounts. Brokered deposits represented 21.7% of all deposits at December 31, 2023. Total deposits of $1.13 billion at December 31, 2022 consisted in part of $248.6 million in brokered money market and certificates of deposit accounts. Brokered deposits represented 22.1% of all deposits at December 31, 2022.
At December 31, 2023, consumer and business deposits increased by $25.2 million and $21.1 million, respectively, and municipal deposits decreased by $17.0 million, when compared to December 31, 2022. The year over year decrease in municipal deposits was primarily the result of the withdrawal of approximately $25.0 million (approximately 58% of the entity's total deposits with the Bank) in the third quarter of 2023 by a single large municipal depositor. Noninterest-bearing deposits, which are primarily demand deposits, were $170.2 million at year end, compared with $183.7 million on December 31, 2022. The increase in consumer and business deposits
- 49 -
during the year ended December 31, 2023, reflected the Bank’s increased market penetration among both non-business and business customers.
The following table sets forth our deposit balances by category, and as a percentage of total deposits for the periods indicated :
December 31,
(Dollars in thousands)
Savings accounts
$
113,543
10.0
%
$
134,880
12.0
%
$
131,176
12.4
%
Time accounts
377,570
33.7
%
314,109
27.9
%
253,564
24.0
%
Time accounts in excess of $250,000
95,272
8.5
%
71,696
6.4
%
67,450
6.4
%
Money management accounts
12,364
1.1
%
16,107
1.4
%
16,124
1.5
%
MMDA accounts
224,707
20.1
%
270,326
24.0
%
256,963
24.3
%
Demand deposit interest-bearing
119,321
10.7
%
127,395
11.3
%
130,816
12.4
%
Demand deposit noninterest-bearing
170,169
15.2
%
183,711
16.3
%
191,858
18.2
%
Mortgage escrow funds
7,121
0.7
%
7,206
0.7
%
7,395
0.8
%
Total Deposits
$
1,120,067
100.0
%
$
1,125,430
100.0
%
$
1,055,346
100.0
%
The Company has deposits that exceed the FDIC insurance limit of $250,000 of $403.2 million at December 31, 2023 and $501.2 million at December 31, 2022. At December 31, 2023, time deposit accounts in excess of $250,000 totaled $95.3 million, or 20.1% of time deposits and 8.5% of total deposits. At December 31, 2022, these deposits totaled $71.7 million, or 18.6% of time deposits and 6.4% of total deposits.
The following table indicates the amount of the Company’s time deposit accounts in excess of $250,000 by time remaining until maturity as of December 31, 2023:
(In thousands)
Remaining Maturity:
Three months or less
$
28,083
Three through six months
30,763
Six through twelve months
25,903
Over twelve months
10,524
Total
$
95,272
All municipal deposits, regardless of amount, are effectively insured, either through specific collateralization with securities held in third-party escrow or reciprocal deposit programs, as required under New York State law. Therefore, municipal deposits are not considered to be subject to the same risks of large unannounced withdrawals as consumer and business accounts for the reason of FDIC insurance coverage limitations. However, in 2023, the Bank's ability to garner municipal deposit balances came under increasing competitive pressure, primarily due to the rising interest rate environment and the entrance of new competitors within New York State. Management expects these trends to continue in the foreseeable future.
Deposit Activity
During 2023, the Bank experienced significant increases in its cost of deposits. This increase was due to the significant increases in interest rates experienced during the 2023 and the lagged effect of the significant increases in interest rates in 2022. The Bank also experienced substantially increased competition from directly marketed U.S. Treasury securities and various forms of money market funds, both of which were in position to be more immediately responsive to the rising rate environment than banks in general. In addition, new competitors, including fintech entities, and financial institutions, including credit unions, within the Bank’s local market were highly competitive for the Bank’s deposits. The Bank anticipates continued competitive pressure on its deposit rates for the foreseeable future.
We offer deposit accounts to consumers, business and local municipalities having a wide range of interest rates and terms. Our deposits consist of various types of transactional accounts such as savings accounts, money market accounts, NOW, and demand accounts as well as time accounts in the form of certificates of deposits. We solicit deposits in our market areas as well as online through our website. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Services (“CDARS”) and Insured Cash Sweep (“ICS”) networks. The Bank also has a substantial number of readily-available sources for brokered term deposits that it uses regularly as a secondary funding source.
The Bank primarily relies on competitive pricing policies, marketing and customer service to attract and retain these deposits. As noted above, the Bank also accepts deposits from deposit brokers. At December 31, 2023 our brokered deposits, including CDARS, totaled $242.7 million, or 21.7% of total deposits with an average rate of 3.91%, including the effects of interest rate hedging activities and a weighted average maturity of 22 months. At December 31, 2022 our brokered deposits, including CDARS, totaled $248.6 million, or
- 50 -
22.1% of total deposits with an average rate of 2.57%, including the effects of interest rate hedging activities and a weighted average maturity of 21 months. Our reliance on brokered deposits may increase the cost of funds, particularly in a rising interest rate environment.
The following table sets forth our brokered deposit balances and rates at December 31, 2023:
(Dollars in thousands)
Balance
Average Rate
Maturity Year:
$
148,722
4.55
%
34,624
2.11
%
34,703
2.38
%
8,773
3.04
%
15,884
5.63
%
$
242,706
3.91
%
Included in the brokered deposit balances, detailed above, are $46.3 million in deposits that can be called at the Bank's discretion, should that become economically advantageous in the future.
In addition to the term brokered deposits detailed above, the Bank had $40.0 million in overnight brokered funds, derived from a pool of individual depositors, at December 31, 2023. The interest rate paid for these funds is indexed to the overnight Fed funds effective rate plus 0.15%. These aggregate deposits are comprised of multiple individual deposits with balances small enough to be fully insured by the FDIC and the individual depositors with the aggregate pool can be readily substituted when withdrawals are made. These deposits are therefore considered to be highly stable in the aggregate. The Bank can exit this funding arrangement, in whole or in part, with 60 days prior notice to the issuing counterparty.
Excluding brokered deposits, all other deposits, collectively referred to as nonbrokered deposits, totaled $877.4 million, or 78.3% of total deposits with an average rate of 2.4% at December 31, 2023. Nonbrokered deposits, totaled $876.8 million, or 77.9% of total deposits with an average rate of 1.0% at December 31, 2022. Our core deposits, which herein are defined as transactional and savings accounts, that do not include certificates of deposit, were $607.2 million, or 69.2% of nonbrokered deposits, and $699.6 million, or 78.8% of nonbrokered deposits, at December 31, 2023 and December 31, 2022, respectively.
The following table sets forth our nonbrokered deposit activities in the periods indicated:
Years Ended December 31,
(Dollars in thousands)
Core Deposits
Certificates of Deposit
Total Deposits
Core Deposits
Certificates of Deposit
Total Deposits
Beginning balance
$
699,624
$
177,175
$
876,799
$
694,287
$
203,254
$
897,541
Net (withdrawals) deposits
(99,920
)
85,338
(14,582
)
2,849
(27,772
)
(24,923
)
Interest credited
7,522
7,622
15,144
2,488
1,693
4,181
Ending balance
$
607,226
$
270,135
$
877,361
$
699,624
$
177,175
$
876,799
Net (decrease) increase
$
(92,398
)
$
92,960
$
$
5,337
$
(26,079
)
$
(20,742
)
Percent change
-13.2
%
52.5
%
0.1
%
0.8
%
-12.8
%
-2.3
%
The Company’s management estimates that $45.0 million, or 48.4%, of the $93.0 million of the increase in the Bank’s certificates of deposit in 2023 were the result of transfers from the bank’s existing core deposit balances at December 31, 2022.
The following table sets forth our certificate of deposit balances and rates at December 31, 2023:
(Dollars in thousands)
Balance
Average Rate
Maturity Year:
$
202,292
4.23
%
40,982
2.97
%
9,764
4.54
%
1.76
%
2,093
3.05
%
After 2029
1.60
%
$
256,449
4.02
%
Deposit Concentrations
The Bank has a broadly diversified customer base for its consumer, business and municipal deposits. However, due to the nature of the Bank’s deposit gathering activities, particularly for certain business and municipal deposit accounts, it also has significant concentrations of deposits gathered from a relatively small number of large balance depositors. The Bank faces substantial competition for these deposits and these depositors are generally offered higher interest rates than other depositors. Withdrawals of large balances by these customers would require the Bank to replace the withdrawn funds with other funding obtained from sources, such as FHLB advances
- 51 -
or brokered deposits. These replacement funding activities would likely reduce the Bank’s overall available liquidity, as well increase its overall funding costs.
The following table sets forth certain statistics by customer type related to large balance customers within our nonbrokered deposit balances at the periods indicated:
At December 31,
(Dollars in thousands)
Consumer
Business
Municipal
Total Deposits
Consumer
Business
Municipal
Total Deposits
Year end balances:
25 largest customers by depositor type
$
74,801
$
67,942
$
140,687
$
283,430
$
90,218
$
66,280
$
147,774
$
304,272
100 largest customers, including the 25 largest customers by depositor type
133,080
122,528
152,666
408,274
148,716
122,166
160,373
431,255
All other customers by depositor type
389,646
79,441
-
469,087
366,814
78,730
-
445,544
Total deposits
$
522,726
$
201,969
$
152,666
$
877,361
$
515,530
$
200,896
$
160,373
$
876,799
Percentage of year end balances:
25 largest customers by depositor type
14.3
%
33.6
%
92.2
%
32.3
%
17.5
%
33.0
%
92.1
%
34.7
%
100 largest customers, including the 25 largest customers by depositor type
25.5
%
60.7
%
100.0
%
46.5
%
28.8
%
60.8
%
100.0
%
49.2
%
All other customers by depositor type
74.5
%
39.3
%
0.0
%
53.5
%
71.2
%
39.2
%
0.0
%
50.8
%
Borrowings
Borrowings are comprised primarily of advances and overnight borrowings at the FHLBNY.
The following table represents information regarding short-term borrowings for the years ended December 31:
(Dollars in thousands)
Maximum outstanding at any month end
$
125,680
$
60,333
$
12,500
Average amount outstanding during the year
49,601
12,492
3,677
Balance at the end of the period
125,680
60,333
12,500
Average interest rate during the year
5.42
%
2.48
%
0.28
%
Average interest rate at the end of the period
4.50
%
3.86
%
1.28
%
The following table represents information regarding long-term borrowings for the years ended December 31:
(Dollars in thousands)
Maximum outstanding at any month end
$
58,369
$
67,371
$
85,125
Average amount outstanding during the year
55,091
58,593
75,724
Balance at the end of the period
49,919
55,664
64,598
Average interest rate during the year
1.54
%
0.96
%
1.34
%
Average interest rate at the end of the period
1.84
%
1.39
%
1.12
%
Subordinated Debt
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the FDIC and the Federal Reserve. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd., with interest rates that reset quarterly, and are indexed to the 3-month the Secured Overnight Financing Rate ("SOFR") which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, plus1.91%. These securities have a five-year call provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2023 and 2022. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a
- 52 -
determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Debt (the “2020 Subordinated Debt”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Debt has a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month SOFR plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Debt at par, in whole or in part, at its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this transaction of $1.6 million was recorded in both the years ended December 31, 2023 and 2022.
Shareholders' Equity
The Company’s shareholders’ equity increased $8.5 million, or 7.7%, to $119.5 million at December 31, 2023 from $111.0 million at December 31, 2022. This increase was primarily due to a $4.8 million increase in retained earnings, a $1.0 million increase in additional paid in capital, a $2.6 million decrease in comprehensive loss and an increase of $180,000 of ESOP shares earned. The increase in retained earnings resulted from $9.3 million in net income recorded in 2023. Partially offsetting these increases in retained earnings were a $2.1 million nonrecurring charge to retained earnings related to the implementation of CECL, $1.7 million for cash dividends declared on our voting common stock, $497,000 for cash dividends declared on our non-voting common stock and $45,000 for cash dividends declared on our issued warrant, and $199,000 for the cumulative effect of affiliate capital allocation. Comprehensive loss decreased primarily as the result of decreased losses on available for sale securities of $2.6 million and a $354,000 adjustment to pension and post retirement, partially offset by a $350,000 loss on derivatives and hedging activities.
Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to support growth and expansion activities, while maintaining a strong capital position and exceeding regulatory standards. At December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a “well-capitalized” institution. See “Supervision and Regulation - Federal Regulations - Capital Requirements”
As a result of the Dodd-Frank Act, the Company’s ability to raise new capital through the use of trust preferred securities may be limited because these securities will no longer be included in Tier 1 capital. In addition, our ability to generate or originate additional revenue producing assets may be constrained in the future in order to comply with capital standards required by federal regulation. See Note 20 to the consolidated financial statements contained herein and the regulation and supervision section within Part I of this Annual Report on Form 10-K for further discussion on regulatory capital requirements.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
As of December 31, 2023, the Bank’s most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well-capitalized”, under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, the Bank must maintain specified total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The regulations also impose a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action (“PCA”) standards and imposes restrictions on dividend distributions and discretionary bonuses for senior officers if the buffer is not met (See Note 20 contained within the accompanying consolidated financial statements). In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. At December 31, 2023, the Bank exceeded all current regulatory required minimum capital ratios, including the capital buffer requirements.
- 53 -
LIQUIDITY
Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its ability to borrow from the FHLBNY, whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, or the sale of loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans.
For the year ended December 31, 2023, cash and cash equivalents increased by $11.9 million. The Company reported net cash flows from financing activities of $52.8 million generated principally by a $65.3 million increase in short term borrowings, offset by a decrease in brokered deposits of $5.0 million, customer deposits of $352,000, a decrease in net proceeds from long-term borrowings of $5.7 million, and an aggregate decrease in net cash of all other financing sources, including dividends paid to common shareholders, and the holder of the Warrant of $2.2 million. Additionally, $13.8 million was provided through operating activities generated principally by net income and proceeds from loan sales. These cash flows were primarily invested in: $112.8 million in purchases of investment securities in 2023, and $1.8 million net increases in loans outstanding.
Certificates of deposit due within one year of December 31, 2023 totaled $325.0 million, representing 68.7% of certificates of deposit at December 31, 2023, an increase from 56.0% at December 31, 2022. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2024.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and making payments on its subordinated debt. The Company may repurchase shares of its common stock. The Company’s primary sources of funds are the proceeds it retained from the Private Placement, the issuance of the 2020 Subordinated Debt, interest and dividends on securities and, potentially, dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without prior regulatory approval, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. The Company believes that this restriction will not have an impact on the Company's ability to meet its ongoing cash obligations. At December 31, 2023 and 2022, the Company had cash and cash equivalents of $47.1 million and $35.3 million, respectively.
The Bank has a number of existing credit facilities available to it. At December 31, 2023, total credit available under the existing lines of credit was approximately $236.7 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2023, the Company had $175.6 million of the available lines of credit utilized, including encumbrances supporting the outstanding letters of credit, described above, on its existing lines of credit with the remainder of $61.1 million available.
The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of December 31, 2023, management reported to the Board of Directors that the Bank was in compliance with its liquidity policy guidelines.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. At December 31, 2023, the Bank had $205.0 million in outstanding commitments to extend credit and standby letters of credit. See Note 18 within the Notes to consolidated financial statements contained herein.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required of a smaller reporting company.
- 54 -

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Condition - December 31, 2023 and 2022
Consolidated Statements of Income - Years ended December 31, 2023 and 2022
Consolidated Statements of Comprehensive Income - Years ended December 31, 2023 and 2022
Consolidated Statements of Changes in Shareholders’ Equity - Years ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows - Years ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
- 55 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview of Internal Control
Internal control processes and procedures help entities achieve important objectives and sustain and improve performance. The COSO Framework (as defined below) enables organizations to effectively and efficiently develop systems of internal control that adapt to changing business and operating environments, mitigate risks at acceptable levels and support sound decision making and governance of organizations. The COSO Framework defines internal control as “a process, effected by an entity’s Board of Directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance.” The COSO Framework provides three categories of objectives, which allow organizations to focus on differing aspects of internal control: (a) Operations Objectives, (b) Reporting Objectives and (c) Compliance Objectives.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial information through a program of ongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Under applicable SEC accounting related rules, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements would not be prevented or detected on a timely basis.
Management conducted the Evaluation based on the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
As a result of the Evaluation as of December 31, 2023, management has determined that there were no material weaknesses in the Company’s internal controls over financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
/s/ James A. Dowd
/s/ Walter F. Rusnak
James A. Dowd
Walter F. Rusnak
President and Chief Executive Officer
Senior Vice President, Chief Financial Officer
Oswego, New York
March 22, 2024
- 56 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pathfinder Bancorp, Inc.
Oswego, New York:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2023.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses
In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2023 as described in Notes 1 and 6 of the consolidated financial statements. See also explanatory paragraph above. The ASU requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on evaluation of the size of the portfolio, current risk characteristics, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The Company disclosed the impact of adoption of this standard on January 1, 2023 with a $1.9 million increase to the allowance for credit losses and a $2.1 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Provision expense for the year ending December 31, 2023 was $2.9 million and the allowance for credit losses as of December 31, 2023 was $15.98 million.
- 57 -
The Company’s methodology for estimating the allowance for credit losses on loans includes quantitative and qualitative components of the calculation. The Company’s loan portfolio is segmented by loan types that behave similarly during economic cycles. The quantitative analysis includes using a discounted cash flow (DCF) model for determining the allowance for credit losses. Economic forecasts are used in the model to estimate the probability of default and loss given default through regression which are key inputs into the DCF model calculation. Quantitative model assumptions include, but are not limited to the discount rate, prepayment speeds, and curtailments. The quantitative model output is adjusted with qualitative adjustments. Management develops a qualitative framework that serves as the basis for determining the reasonableness of the model’s output and makes qualitative adjustments as necessary. The allowance methodology is inherently complex and requires the use of significant management judgment.
We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the initial adoption and subsequent application processes, including segmentation, the economic forecasts used to calculate the regressions within the DCF model, the quantitative model assumptions as mentioned above, and the qualitative adjustments made using the qualitative framework.
The primary procedures performed to address this critical audit matter included the following:
•Evaluated management’s selection and application of the DCF model, including the evaluation of the reasonableness of the segmentation, the reasonable and supportable economic forecasts, the significant model assumptions, and the relevance and reliability of data used in the model, and the validation of the DCF model outputs.
•Evaluated management’s review of the appropriateness of the qualitative framework, the reasonableness of significant assumptions applied, the relevance and reliability of data used in the qualitative adjustments, and the mathematical accuracy of the qualitative adjustments calculation.
•Evaluated the reasonableness of management’s judgments related to the selection of the segmentation, DCF model, the reasonable and supportable economic forecasts, the significant model assumptions, and the relevance and reliability of the data used in the DCF model.
•Tested the mathematical accuracy and application of the DCF model to validate the DCF model outputs.
•Evaluated the reasonableness of qualitative adjustments, including evaluating the appropriateness of the qualitative framework, the assumptions and judgments applied in the determination of the qualitative adjustments, the relevance and reliability of data used in the qualitative adjustments, and the mathematical accuracy of the qualitative adjustments calculation.
•Performed a sensitivity analysis on the components of the calculation.
We have served as the Company’s auditor since 2011.
/s/ BONADIO & CO., LLP
Bonadio & Co., LLP
Syracuse, New York
March 22, 2024
- 58 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
December 31,
December 31,
(In thousands, except share and per share data)
ASSETS:
Cash and due from banks
$
12,338
$
13,939
Interest-earning deposits
36,394
21,343
Total cash and cash equivalents
48,732
35,282
Available-for-sale securities, at fair value
258,716
191,726
Held-to-maturity securities, at amortized cost (fair value of $168,034 and $181,491, respectively)
179,286
194,402
Marketable equity securities, at fair value
3,206
1,862
Federal Home Loan Bank stock, at cost
8,748
5,982
Loans
897,207
897,735
Loans held-for-sale
-
Less: Allowance for credit losses
15,975
15,319
Loans receivable, net
881,232
882,435
Premises and equipment, net
18,441
17,872
Assets held-for-sale
3,042
3,042
Operating lease right-of-use assets
1,526
2,098
Finance lease right-of-use assets
4,073
4,213
Accrued interest receivable
7,286
6,168
Foreclosed real estate
Intangible assets, net
Goodwill
4,536
4,536
Bank owned life insurance
24,641
24,012
Other assets
22,097
25,969
Total assets
$
1,465,798
$
1,399,921
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing
$
949,898
$
941,719
Noninterest-bearing
170,169
183,711
Total deposits
1,120,067
1,125,430
Short-term borrowings
125,680
60,333
Long-term borrowings
49,919
55,664
Subordinated debt
29,914
29,733
Accrued interest payable
2,245
Operating lease liabilities
1,711
2,417
Finance lease liabilities
4,381
4,422
Other liabilities
11,625
9,365
Total liabilities
1,345,542
1,288,339
Shareholders' equity:
Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,719,288 and 4,651,829 shares
issued and outstanding, respectively
Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 shares
issued and outstanding, respectively
Additional paid in capital
53,114
52,101
Retained earnings
76,060
71,322
Accumulated other comprehensive loss
(9,605
)
(12,172
)
Unearned ESOP
(135
)
(315
)
Total Pathfinder Bancorp, Inc. shareholders' equity
119,495
110,997
Noncontrolling interest
Total equity
120,256
111,582
Total liabilities and shareholders' equity
$
1,465,798
$
1,399,921
The accompanying notes are an integral part of the consolidated financial statements.
- 59 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Income
For the year ended
(In thousands, except per share data)
December 31, 2023
December 31, 2022
Interest and dividend income:
Loans, including fees
$
47,348
$
38,322
Debt securities:
Taxable
17,500
11,225
Tax-exempt
1,947
1,173
Dividends
Federal funds sold and interest earning deposits
Total interest and dividend income
67,663
51,098
Interest expense:
Interest on deposits
23,265
7,072
Interest on short-term borrowings
2,688
Interest on long-term borrowings
Interest on subordinated debt
1,941
1,749
Total interest expense
28,744
9,695
Net interest income
38,919
41,403
Provision for credit losses:
Loans
2,991
2,754
Held-to-maturity securities
(98
)
-
Unfunded commitments
-
Total provision for credit losses
2,930
2,754
Net interest income after provision for credit losses
35,989
38,649
Noninterest income:
Service charges on deposit accounts
1,249
1,126
Earnings and gain on bank owned life insurance
Loan servicing fees
Gains (losses) on sales and redemptions of investment securities
(169
)
Net realized (losses) gains on marketable equity securities
(255
)
Gains on sales of loans and foreclosed real estate
Gains (losses) on sale of premises and equipment
-
(250
)
Debit card interchange fees
Insurance agency revenue
1,304
1,128
Other charges, commissions & fees
1,096
1,771
Total noninterest income
5,190
5,914
Noninterest expense:
Salaries and employee benefits
15,920
16,022
Building and occupancy
3,563
3,380
Data processing
2,018
2,042
Professional and other services
2,019
1,528
Advertising
FDIC assessments
Audits and exams
Insurance agency expense
1,033
Community service activities
Foreclosed real estate expenses
Other expenses
2,240
2,452
Total noninterest expense
29,395
28,874
Income before provision for income taxes
11,784
15,689
Provision for income taxes
2,362
2,656
Net income attributable to noncontrolling interest and
Pathfinder Bancorp, Inc.
9,422
13,033
Net income attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp Inc.
$
9,293
$
12,932
Voting Earnings per common share - basic and diluted
$
1.51
$
2.13
Series A Non-Voting Earnings per common share- basic and diluted
$
1.51
$
2.13
Dividends per common share (Voting and Series A Non-Voting)
$
0.36
$
0.36
The accompanying notes are an integral part of the consolidated financial statements.
- 60 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the years ended
(In thousands)
December 31, 2023
December 31, 2022
Net Income
$
9,422
$
13,033
Other Comprehensive Income (Loss)
Retirement Plans:
Retirement plan net gains recognized in plan expenses
Plan gains (losses) not recognized in plan expenses
(1,380
)
Net unrealized gains (losses) on retirement plans
(1,378
)
Available-for-sale securities:
Unrealized holding gains (losses) arising during the period
1,538
(14,448
)
Reclassification adjustment for net losses included in net income
1,932
Net unrealized gains (losses) on available-for-sale securities
3,470
(14,288
)
Derivatives and hedging activities:
Unrealized holding (losses) gains arising during the period
(474
)
Net unrealized (losses) gains on derivatives and hedging activities
(474
)
Accretion of net unrealized losses on securities transferred to held-to-maturity(1)
-
(2
)
Other comprehensive income (loss), before tax
3,475
(14,762
)
Tax effect
(908
)
3,858
Other comprehensive income (loss), net of tax
2,567
(10,904
)
Comprehensive income
$
11,989
$
2,129
Comprehensive income, attributable to noncontrolling interest
$
$
Comprehensive income attributable to Pathfinder Bancorp, Inc.
$
11,860
$
2,028
Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income
Retirement plan net gains recognized in plan expenses
$
(58
)
$
-
Plan (gains) losses not recognized in plan expenses
(67
)
Unrealized holding (gains) losses on available-for-sale securities arising during the period
(402
)
3,775
Reclassification adjustment for net losses included in net income
(505
)
(42
)
Unrealized losses (gains) on derivatives and hedging arising during the period
(238
)
Income tax effect related to other comprehensive income
$
(908
)
$
3,858
(1)The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30, 2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.
The accompanying notes are an integral part of the consolidated financial statements.
- 61 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2023 and December 31, 2022
(In thousands, except share and per share data)
Common Stock
Non-Voting Common Stock
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Unearned ESOP
Non-controlling Interest
Total
Balance, January 1, 2023
$
$
$
52,101
$
71,322
$
(12,172
)
$
(315
)
$
$
111,582
Net income
-
-
-
9,293
-
-
9,422
Other comprehensive income, net of tax
-
-
-
-
2,567
-
-
2,567
ESOP shares earned (24,442 shares)
-
-
-
-
-
Stock based compensation
-
-
-
-
-
-
Stock options exercised
-
-
-
-
-
-
Common stock dividends declared ($0.36 per share)
-
-
-
(1,680
)
-
-
-
(1,680
)
Non-Voting common stock dividends declared ($0.36 per share)
-
-
-
(497
)
-
-
-
(497
)
Warrant dividends declared ($0.36 per share)
-
-
-
(45
)
-
-
-
(45
)
Adoption of ASU 2016-13 Current Expected Credit Losses
-
-
-
(2,134
)
-
-
-
(2,134
)
Cumulative effect of affiliate capital allocation
-
-
(199
)
-
-
-
Distributions from affiliates
-
-
-
-
-
-
(44
)
(44
)
Balance, December 31, 2023
$
$
$
53,114
$
76,060
$
(9,605
)
$
(135
)
$
$
120,256
Balance, January 1, 2022
$
$
$
51,044
$
60,946
$
(1,268
)
$
(495
)
$
$
110,633
Net income
-
-
-
12,932
-
-
13,033
Other comprehensive loss, net of tax
-
-
-
-
(10,904
)
-
-
(10,904
)
ESOP shares earned (24,442 shares)
-
-
-
-
-
Stock based compensation
-
-
-
-
-
-
Stock options exercised
-
-
-
-
-
Common stock dividends declared ($0.36 per share)
-
-
-
(1,646
)
-
-
-
(1,646
)
Non-Voting common stock dividends declared ($0.36 per share)
-
-
-
(497
)
-
-
-
(497
)
Warrant dividends declared ($0.36 per share)
-
-
-
(45
)
-
-
-
(45
)
Cumulative effect of affiliate capital allocation
-
-
(368
)
-
-
-
Distributions from affiliates
-
-
-
-
-
-
(36
)
(36
)
Balance, December 31, 2022
$
$
$
52,101
$
71,322
$
(12,172
)
$
(315
)
$
$
111,582
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,
(In thousands)
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.
$
9,293
$
12,932
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for credit losses
2,930
2,754
Deferred income tax expense
(367
)
Proceeds from sales of loans
5,785
8,035
Originations of loans held-for-sale
(5,550
)
(7,404
)
Realized (gains) losses on sales, redemptions and calls of:
Real estate acquired through foreclosure
-
Loans
(216
)
(137
)
Available-for-sale investment securities
(80
)
Held-to-maturity investment securities
Premise and Equipment
-
(130
)
Marketable securities
(352
)
Impairment of asset
-
Depreciation
1,397
1,067
Amortization of mortgage servicing rights
(38
)
(11
)
Amortization of deferred loan fees and costs
(268
)
Amortization of operating leases
(35
)
(372
)
Amortization of deferred financing from subordinated debt
Earnings on bank owned life insurance
(630
)
(589
)
Net amortization of premiums and discounts on investment securities
1,785
2,002
Amortization of intangible assets
Stock based compensation and ESOP expense
Net change in accrued interest receivable
(1,118
)
(1,648
)
Net change in other assets and liabilities
1,576
3,701
Net cash flows from operating activities
15,432
21,733
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale
(99,086
)
(52,375
)
Purchase of investment securities held-to-maturity
(13,682
)
(62,566
)
Purchase of Federal Home Loan Bank stock
(19,738
)
(15,896
)
Proceeds from redemption of Federal Home Loan Bank stock
16,972
14,103
Purchase of marketable securities
(1,598
)
(1,628
)
Proceeds from maturities and principal reductions of investment securities
available-for-sale
19,960
19,230
Proceeds from maturities and principal reductions of investment securities
held-to-maturity
28,138
27,148
Proceeds from sales, redemptions and calls of:
Available-for-sale investment securities
17,396
8,358
Held-to-maturity investment securities
2,206
Real estate acquired through foreclosure
-
Marketable securities
-
Net change in loans
(1,792
)
(66,302
)
Purchase of premises and equipment
(1,966
)
(1,898
)
Insurance proceeds from fixed assets
-
Disposal of premises and equipment
-
(3,311
)
Proceeds from sale of premises and equipment
-
Net cash outflows from investing activities
(54,788
)
(131,160
)
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FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money management
deposit accounts, MMDA accounts and escrow deposits
(75,254
)
5,337
Net change in time deposits
74,902
(26,079
)
Net change in brokered deposits
(5,011
)
90,826
Net change in short-term borrowings
65,347
47,833
Payments on long-term borrowings
(12,019
)
(18,227
)
Proceeds from long-term borrowings
6,274
9,293
Proceeds from exercise of stock options
Cash dividends paid to common voting shareholders
(1,690
)
(1,568
)
Cash dividends paid to common non-voting shareholders
(497
)
(469
)
Cash dividends paid on warrants
(45
)
(43
)
Change in noncontrolling interest, net
Net cash inflows from financing activities
52,806
107,560
Change in cash and cash equivalents
13,450
(1,867
)
Cash and cash equivalents at beginning of year
35,282
37,149
Cash and cash equivalents at end of year
$
48,732
$
35,282
CASH PAID DURING THE YEAR FOR:
Interest
$
27,474
$
1,754
Income taxes
3,159
3,218
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans
Transfer from net premises for held for sale investments
-
3,042
RESTRICTED CASH
Collateral deposits for hedge position included in cash and due from banks
-
1,600
The accompanying notes are an integral part of the consolidated financial statements.
- 64 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
Nature of Operations
The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Pathfinder Bank (the “Bank”). The Company is a Maryland corporation headquartered in Oswego, New York. On October 16, 2014, the Company completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public. As a result of the conversion, the mutual holding company and former mid-tier holding company were merged into Pathfinder Bancorp, Inc. The primary business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC (“FitzGibbons”), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.
The Company has seven branch offices located in Oswego County, four branch offices in Onondaga County and one limited purpose office in Oneida County. The Company is primarily engaged in the business of attracting deposits from the general public in the Company’s market area, and investing such deposits, together with other sources of funds, in loans secured by commercial real estate, business assets, one-to-four family residential real estate and investment securities.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has identified the allowance for credit losses, deferred income taxes, pension obligations, the annual evaluation of the Company’s goodwill for possible impairment and the evaluation of investment securities for other than temporary impairment and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments, and as such, could be the most subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examinations.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located primarily in Oswego and Onondaga counties of New York State. A large portion of the Company’s portfolio is centered in residential and commercial real estate. The Company closely monitors real estate collateral values and requires additional reviews of commercial real estate appraisals by a qualified third party for commercial real estate loans in excess of $400,000. All residential loan appraisals are reviewed by an individual or third party who is independent of the loan origination or approval process and was not involved in the approval of appraisers or selection of the appraiser for the transaction, and has no direct or indirect interest, financial or otherwise in the property or the transaction. Note 4 discusses the types of securities that the Company invests in. Note 5 discusses the types of lending that the Company engages in.
Advertising
The Company generally follows the policy of charging the costs of advertising to expense as incurred. Expenditures for new marketing and advertising material designs and/or media content, related to specifically-identifiable marketing campaigns are capitalized and expensed over the estimated life of the campaign. Such periods of time are generally 12-24 months in duration and do not exceed 36 months.
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Noncontrolling Interest
Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the minority owners of FitzGibbons.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits (with original maturity of three months or less).
Investment Securities
The Company classifies investment securities as either available-for-sale or held-to-maturity. The Company does not hold any securities considered to be trading. Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected as a separate component of shareholders’ equity, net of the applicable income tax effect. Held-to-maturity securities are those that the Company has the ability and intent to hold until maturity and are reported at amortized cost.
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums and discounts on securities are amortized and accreted into income using the interest method over the period to maturity.
The Company records its investment in marketable equity securities (“MES”) at fair value. Changes in the fair value of MES are recorded as additions to, or subtractions from, net income in the period that the change occurs. These changes in fair value are separately disclosed as gains (losses) on equity securities on the Consolidated Statements of Income.
Note 4 to the consolidated financial statements includes additional information about the Company’s accounting policies with respect to the impairment of investment securities.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula. The stock is carried at cost.
Transfers of Financial Assets
Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Loans
The Company grants mortgage, commercial, municipal, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding unpaid principal balances, less the allowance for credit losses plus net deferred loan origination costs. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the market area. Interest income is generally recognized when income is earned using the interest method. Nonrefundable loan fees received and related direct origination costs incurred are deferred and amortized over the life of the loan using the interest method, resulting in a constant effective yield over the loan term. Deferred fees are recognized into income and deferred costs are recorded to income immediately upon prepayment of the related loan.
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment consists of one-to-four family first-lien residential mortgages and construction loans. Commercial loans consist of the following classes: real estate, lines of credit, other commercial and industrial, and tax-exempt loans. Consumer loans include both home equity lines of credit and loans with junior liens and other consumer loans.
Allowance for Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requiring financial institutions, such as the Bank, to adopt the Current Expected Credit Loss (“CECL”) methodology according to a specified implementation timeline. In order to meet this timeline requirement, the Bank adopted the CECL methodology for calculating its ACL on January 1, 2023. The amended guidance replaced the previously-required allowance for loan and lease losses (“ALLL”) calculated under what was known as the Incurred Loss Model ("ILM"). The ACL represents a valuation account that is deducted from the amortized cost basis of includable financial assets to present their net carrying value at the amount expected to be collected over the entire life of those assets. The income statement now reflects the measurement of credit losses for newly recognized financial assets as well as expected increases, or decreases,
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of expected credit losses that have taken place during the reporting period. When determining the ACL, expected credit losses over the expected term of the financial asset will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amount. In addition, the amended guidance requires credit losses relating to assets such as held-to-maturity debt securities and open contractual funding commitments to be recorded through the ACL. Because the CECL methodology requires that reserves be established within the ACL for a broad range of financial assets, including all loans, through the entirety of their expected lives and also considers new items, such as open funding commitments, the initial ACL upon adoption would, in most cases, be expected to be greater than the ALLL that it replaced.
At December 31, 2022 the Company calculated its ALLL utilizing the ILM methodology, as required under GAAP on that date. As noted above, on January 1, 2023, the Company adopted the CECL model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total ALLL of $15.3 million, of which $4.8 million was related to specifically-identified loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis.
On January 1, 2023 the Company recorded a one-time CECL transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans, evaluated collectively in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to specifically-identified loans at December 31, 2022 was not affected by the transition to the CECL methodology at January 1, 2023. See Note 6 of the accompanying financial statements for a further discussion of this transition.
The January 1, 2023 transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.1 million, net of the effects of tax, on January 1, 2023, which was recorded in retained earnings on that date.
Management extensively reviews recent trends in historical losses, qualitative factors, including concentrations of loans to related borrowers and concentrations of loans by collateral type, and specific reserve requirements on loans individually evaluated in its determination of the adequacy of the credit losses. Therefore, the allowance for credit losses (ACL) represents management’s estimate of losses inherent in credit-exposed asset portfolios, including the loan portfolio, unfunded loan commitments and the investment securities portfolio classified as held-to maturity (HTM). The allowance is increased by the provision for credit losses, and decreased by charge-offs, net of recoveries. The ACL is established as of the date of the statement of condition and it is recorded as a reduction of either loans or HTM securities or as an other liability, in the case of unfunded loan commitments, in accordance with generally accepted accounting principles (GAAP).
The ACL is evaluated on a regular basis and established through charges to earnings in the form of a provision (benefit) for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Portfolio Segmentation and “Pooled Loans” Calculation
Loans are pooled based on their homogeneous risk characteristics. Once loans have been segmented into pools, a loss rate is applied to the amortized cost basis. The Company has divided its portfolio into discrete segments, as the loans within the segments have similar characteristics. Characteristics considered include: purpose, tenor, amortization, repayment source, payment frequency, collateral and recourse. The Company's identified portfolio segments include commercial loans/lines, commercial mortgages, consumer loans residential lines of credit, and residential loans, as well as certain subcategories of these loan types.
The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default with loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to expected future cash flows to the exposures at the projected point of loss occurrence, including estimates of borrower prepayment activity, that are adjusted to present value and these discounted expected losses become the quantitatively-derived portion of the ACL.
DCF analysis is reliant upon a variety of loan-level data, peripheral model outputs and key assumptions. The data fields required to create the contractual portion of the forward-looking cash flow schedule relate to the terms of each loan and include information regarding payment amount, payment frequency, interest rate, interest type, maturity date, amortization term, etc. Contractual terms must be adjusted for prepayments to arrive at expected cash flows. The Company modeled amortizing/installment notes with a prepayment rate, annualized to one-year. For loans where principal collection is dominated by borrower election, e.g., lines of credit, interest-only, etc., and not by contractual obligation, the Company modeled a statistical tendency to repay as a curtailment rate, normalized to a one-year rate.
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The Company uses forecasts to predict how modeled economic factors will perform. The Company currently elects to forecast economic factors over a period for which it can produce a reliable and defensible forecast from widely accepted economic forecast resources. After the forecast period, the following eight quarters are reverted on a straight-line basis to the economic factor’s average. The Company uses an eight-quarter straight-line reversion to reduce the potential for a spike impact on the model caused by a rapid reversion. Additionally, as the Company is past its point of forecast, a straight-line reversion represents a most-likely scenario absent a reasonable and supportable forecast.
In the Company’s analysis at the portfolio level, it found that the best model for predicting defaults considers economic metrics such as the National Unemployment Rate, the U.S. Federal Housing Finance Agency National House Price Index and the U.S. Retail Sales Index. With the large number of observations afforded by using peer data, the default curve is less sensitive to unusual loss events and has a much smoother shape. These metrics are considered to be extremely strong predictors of defaults and explain almost all variation in the default rate.
The reserve is calculated based on a life of loan basis. The life of loan is assumed with consideration of prepayments and contractual maturity dates. If a given loan does not have a populated maturity date, based upon historical experience, the Company elected to amortize the loan for a length of time equal to the average life of the loan’s segment before the remaining balance will balloon with the exception of Commercial Demand Lines of Credit where the Company uses one year, reflecting the demand nature of these exposures.
Management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions, levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration, and changes in regulatory environment, management, markets and product offerings. The Company quarterly assesses the magnitude of QF adjustments necessary to be applied to the quantitatively-derived ACL in order to incorporate forward-looking projections in its final evaluation of current expected credit losses.
Specifically-Identified Loans
Excluded from pooled analysis are loans to be individually evaluated due to the assets not maintaining similar risk characteristics to those in the designated pool segments. These loans are generally considered to be collateral dependent and, therefore, an analysis of the collateral position versus the pooled loan discounted cash flow approach better reflects the potential loss. Specifically-identified accounts include: loans over 90 days past due, loans to borrowers experiencing financial difficulty, loans placed on non-accrual status and classified assets with exposure greater than $300,000 for residential and consumer loans, and $100,000 for commercial lines and loans, commercial real estate and tax-exempt loans.
Held to Maturity (“HTM”) Debt Securities
The Company’s HTM debt securities are also required to utilize the current expected credit losses approach to estimate expected credit losses. The Company’s HTM debt securities included securities that are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. The Company also carries a portfolio of HTM municipal bonds and privately issued mortgage- and asset-backed securities. The Company measures its allowance for credit losses on HTM debt securities on a collective basis by major security type. The estimate is based on historical credit losses, if any, adjusted for current conditions and reasonable and supportable forecasts. The Company considers the nature of the collateral, potential future changes in collateral values and available loss information.
Available for Sale (“AFS”) Debt Securities
For AFS securities in an unrealized loss position, the Company first assesses whether (i) it intends to sell, or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security’s amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
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Accrued Interest Receivable
Accrued interest receivable balances are presented separately within other assets on the statement of financial condition. Accrued interest receivable that is included in the amortized cost of financial receivables and debt securities are excluded from related disclosure requirements. The Company does not measure an allowance for credit losses for accrued interest receivable as the Company writes off accrued interest receivable, in a timely manner, by reversing interest income. For commercial loans, the write off typically occurs upon becoming 90 days past due. For consumer loans, the write off typically occurs upon becoming 120 days past due. Historically, the Company has not experienced uncollectible accrued interest receivable on its investment securities. However, the Company would generally write off accrued interest receivable by reversing interest income if the Company does not reasonably expect to receive payments. Due to the timely manner in which accrued interest receivables are written off, the amounts of such write offs are immaterial.
Reserve for Unfunded Commitments
The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized as a provision for credit loss expense in the consolidated statements of income. The Unfunded Reserve is determined by estimating expected future fundings, under each segment, and applying the expected loss rates. Expected future fundings are based on historical averages of funding rates (i.e., the likelihood of draws taken). Average funding rates are determined based on the most recent 20 quarters (5 years) of actual fundings on lines of credit. The average funding rate for each segment is compared to the current funding rate on each line to determine the average fundings available to be drawn. The fund up rate (the difference between the average funding rate and the current funding rate) for each segment is then applied within the Current Expected Credit Losses (“CECL”) model to the unfunded commitment balance to estimate the expected future fundings under each segment. The loss rate derived for each segment in the current CECL calculation is then applied to the expected future fundings to derive the estimate of allowance for credit losses for unfunded commitments.
Income Recognition on Specifically-Identified and Nonaccrual Loans
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A loan may remain on accrual status if it is either well secured or guaranteed and in the process of collection. When a loan is placed on nonaccrual status, unpaid interest is reversed and recorded to interest income. Interest received on nonaccrual loans, including specifically-identified loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Nonaccrual loans are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
For nonaccrual loans, when future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis when payments are made. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for credit losses until prior charge-offs have been fully recovered.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under standby letters of credit. Such financial instruments are recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, ranging up to 40 years for premises and leasehold improvements and 10 years for equipment. Maintenance and repairs are recorded to operating expenses as incurred. The asset cost and accumulated depreciation are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income.
Foreclosed Real Estate
Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. Properties acquired through foreclosure, or by deed-in-lieu of foreclosure, are recorded at their fair value less estimated costs to sell. Fair value is typically determined based on evaluations by third parties. Costs incurred in connection with preparing the foreclosed real estate for disposition are capitalized to the extent that they enhance the overall fair value of the property. Any write-downs on the asset’s fair value less costs to sell at the date of acquisition are recorded to the
- 69 -
allowance for credit losses. Subsequent write downs and expenses of foreclosed real estate are included as a valuation allowance and recorded in noninterest expense.
Goodwill and Intangible Assets
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is evaluated annually or when there is a triggering event for impairment. Intangible assets, such as customer lists, are amortized over their useful lives, generally 15 years.
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the time of transfer of the related loans and are amortized in proportion to, and over the period of, estimated net servicing income or loss. The carrying value of the originated mortgage servicing rights is periodically evaluated for impairment or between annual evaluations under certain circumstances.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-based compensation issued. Compensation costs are recognized over the period that an employee provides service in exchange for the award. Compensation costs related to the Employee Stock Ownership Plan are dependent upon the average stock price and the shares committed to be released to plan participants through the period in which income is reported.
Retirement Benefits
The Company has a non-contributory defined benefit pension plan that covered substantially all employees. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. Pension expense under these plans is recorded to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans.
Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost are recognized in accumulated other comprehensive loss, net of tax effects, until they are amortized as a component of net periodic cost. Plan assets and obligations are measured as of the Company’s statement of condition date.
The Company has unfunded deferred compensation and supplemental executive retirement plans for selected current and former employees and officers that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code restrictions. These plans are nonqualified under the Internal Revenue Code, and assets used to fund benefit payments are not segregated from other assets of the Company, therefore, in general, a participant's or beneficiary's claim to benefits under these plans is as a general creditor.
The Bank sponsors an Employee Stock Ownership Plan (“ESOP”) covering substantially all full time employees. The cost of shares issued to the ESOP but not committed to be released to the participants is presented in the consolidated statement of condition as a reduction of shareholders’ equity. ESOP shares are released to the participants on an annual basis in accordance with a predetermined schedule. The Company records ESOP compensation expense based on the shares committed to be released and allocated to the participant’s accounts multiplied by the average share price of the Company’s stock over the period. Dividends related to unallocated shares are recorded as compensation expense.
Derivative Financial Instruments
Derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value. The accounting for changes in the fair value of a derivative depends on whether or not the derivative has been designated and qualifies as part of a hedging relationship. The Company acquires derivatives with the intent of designating and qualifying those instruments as part of hedging relationships to other balance sheet assets or liabilities. The specific accounting treatment for increases and decreases in the value of derivatives further depends upon the use of the specific derivatives. There are two primary types of interest rate derivatives that may be employed by the Company:
•Fair Value Hedge - As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value over the course of their economic lives prior to maturity. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the
- 70 -
fair value of the hedged asset or liability are expected to substantially offset each other and these changes are recognized currently in earnings.
•Cash Flow Hedge - Cash flows related to floating rate assets and liabilities will fluctuate with changes in the underlying rate index. When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any ineffective portion of a cash flow hedge is recognized currently in earnings.
Income Taxes
The provision for income taxes is based on taxes currently payable or refundable and deferred income taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
Earnings Per Share
Basic net income per share was calculated using the two-class method by dividing net income (less any dividends on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants. Note 3 provides more information related to earnings per share.
Segment Reporting
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons Agency is dissimilar in nature and management when compared to the Company’s other strategic business units which are judged to be similar in nature and management. The Company has determined that the FitzGibbons Agency is below the reporting threshold in size in accordance with Accounting Standards Codification 280. Accordingly, the Company has determined it has no reportable segments.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the statement of condition, such items, along with net income, are components of comprehensive income.
Accumulated other comprehensive loss represents the sum of these items, with the exception of net income, as of the balance sheet date and is represented in the table below.
As of December 31,
Accumulated Other Comprehensive Loss By Component:
Unrealized loss for pension and other postretirement obligations
$
(2,806
)
$
(3,286
)
Tax effect
Unrealized loss for pension and other postretirement obligations, net of tax
(2,073
)
(2,427
)
Unrealized loss on available-for-sale securities
(10,241
)
(13,710
)
Tax effect
2,677
3,583
Unrealized loss on available-for-sale securities, net of tax
(7,564
)
(10,127
)
Unrealized gain on hedging activities arising during the period
Tax effect
(13
)
(135
)
Unrealized gain on hedging activities, net of tax
Accumulated other comprehensive loss
$
(9,605
)
$
(12,172
)
Reclassifications
Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income as previously reported.
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Note 2: New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies promulgate GAAP to regulate the standards of accounting in the United States. From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements. The following table provides a description of standards that have not yet been adopted as of December 31, 2023, but could have an impact on the Company's consolidated financial statements upon adoption.
Standards Adopted as of December 31, 2023
Standard
Description
Required Date
of Implementation
Effect on Consolidated Financial Statements
Measurement of Credit Losses on Financial Instruments (ASU 2016-13: Financial Instruments-Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments)
The amended guidance replaced the previously-required (through December 31, 2022) incurred loss model for determining the allowance for credit losses with the current expected credit loss ("CECL") model. The new guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses now represents a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will now reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the reporting period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. In addition, the amended guidance requires credit losses relating to financial assets, such as debt securities categorized as held-to-maturity and noncancelable unfunded commitments to be recorded through the allowance for credit losses.
January 1, 2023
The Company adopted the new guidance on January 1, 2023. On that date, the Company recorded one-time CECL transition adjustments, thereby increasing the Company's allowance for credit losses on loans by $1.9 million, decreasing the recorded book value of held-to-maturity securities by $450,000 and increasing other liabilities by $552,000 for credit losses associated with unfunded contractual commitments on financial assets. As a component of these transition adjustments, the Company's deferred tax asset balance (a component of other assets on the Statement of Financial Conditions) increased by $754,000. These entries resulted in a one-time reduction in the Company's retained earnings (a component of Shareholders' Equity) of $2.1 million on the adoption date. In accordance with the new guidance these one-time transitional adjustments were not recorded as a component of the provision for credit losses in the first quarter of 2023 and, therefore, had no effect on reported net income in that quarterly reporting period.
Standard
Description
Required Date
of Implementation
Effect on Consolidated Financial Statements
Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method (ASU 2022-01)
The amendments allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. If multiple hedged layers are designated, the amendments require an analysis to be performed to support the expectation that the aggregate amount of the hedged layers is anticipated to be outstanding for the designated hedge periods. Only closed portfolios may be hedged under the portfolio layer method (that is, no assets can be added to the closed portfolio once established), however, designating new hedging relationships and dedesignating existing hedging relationships associated with the closed portfolio any time after the closed portfolio is established is permitted.
January 1, 2023
At January 1, 2023 the Company did not have any designated hedging relationships that would meet the criteria of a multiple hedged layers interest rate swap contract. Therefore the adoption of this standard had no impact on the Company’s consolidated statements of condition or income at the date of adoption. During 2023, the Company entered into an amortizing fixed-pay interest rate swap with an initial notional amount of $100.0 million and five fixed pay interest rate swaps with an aggregate notional amount of $50.0 million. Each of these transactions would qualify as multiple hedged layers fair value hedging contracts under the new standard. See Note 21 within the consolidated financial statements.
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Standards Not Yet Adopted as of December 31, 2023
Standard
Description
Required Date
of Implementation
Effect on Consolidated Financial Statements
Reference Rate Reform (ASU 2020-04: Facilitation of the Effects of Reference Rate Reform on Financial Reporting [Topic 848]: Deferral of the Sunset Date of Topic 848)
The amendments provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that reference a rate affected by reference rate reform and that are classified as held-to-maturity before January 1, 2020. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.
Upon issuance, January 7, 2021, through December 31, 2024, as amended by ASU 2022-06.
The adoption of this ASU is not expected to have a material impact to the Company's consolidated statements of condition or income.
Standard
Description
Required Date
of Implementation
Effect on Consolidated Financial Statements
Income taxes (Topic 740): Improvements to Income Tax Disclosures 2023-09
Amendments to ASC740 are being made to enhance the transparency and decision usefulness of income tax disclosures. The enhancements are made to provide information to better assess how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. The objective of these disclosure requirements is for an entity, particularly an entity operating in multiple jurisdictions, to disclose sufficient information to enable users of financial statements to understand the nature and magnitude of factors contributing to the difference between the effective tax rate and the statutory tax rate.
Public business entities are required to apply this guidance to annual periods beginning after December 15, 2024.
The adoption of this ASU is not expected to have a material impact to the Company's consolidated statements of condition or income.
NOTE 3: EARNINGS PER SHARE
Following shareholder approval received on June 4, 2021, the Company converted 1,380,283 shares of its Series B Convertible Perpetual Preferred Stock to an equal number of shares of its newly-created Series A Non-Voting Common Stock. The conversion, which was effective on June 28, 2021, represented 100% of the Company's Convertible Perpetual Preferred Stock outstanding at the time of the conversion and retired the Convertible Perpetual Preferred Stock in perpetuity.
The Company has voting common stock, non-voting common stock and a warrant that are all eligible to participate in dividends equal to the voting common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s non-voting common stock and warrant, are considered “participating securities.” The Company calculates net income available to voting common shareholders using the two-class method required for capital structures that include participating securities.
In applying the two-class method, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.
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Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented. Anti-dilutive stock options, not included in the computation below, were $-0- for the years ended 2023 and 2022, respectively.
The following table sets forth the calculation of basic and diluted earnings per share.
Years Ended
December 31,
(In thousands, except share and per share data)
Net income attributable to Pathfinder Bancorp, Inc.
$
9,293
$
12,932
Series A Non-Voting Common Stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
1,729
2,667
Net income available to common shareholders-Voting
$
7,022
$
9,723
Net income attributable to Pathfinder Bancorp, Inc.
$
9,293
$
12,932
Voting Common Stock dividends
1,680
1,646
Warrant dividends
Undistributed earnings allocated to participating securities
5,487
8,298
Net income available to common shareholders-Series A Non-Voting
$
2,081
$
2,943
Basic and diluted weighted average common shares outstanding-Voting
4,653
4,559
Basic and diluted weighted average common shares outstanding-Series A Non-Voting
1,380
1,380
Basic and diluted earnings per common share-Voting
$
1.51
$
2.13
Basic and diluted earnings per common share-Series A Non-Voting
$
1.51
$
2.13
- 74 -
NOTE 4: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
December 31, 2023
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
$
82,588
$
$
(3,259
)
$
80,083
State and political subdivisions
34,588
(1,809
)
32,924
Corporate
11,008
(365
)
10,919
Asset backed securities
20,251
-
(359
)
19,892
Residential mortgage-backed - US agency
25,446
(1,085
)
24,418
Collateralized mortgage obligations - US agency
13,058
(995
)
12,179
Collateralized mortgage obligations - Private label
81,812
(3,845
)
78,095
Total
268,751
1,476
(11,717
)
258,510
Equity investment securities:
Common stock - financial services industry
-
-
Total
-
-
Total available-for-sale
$
268,957
$
1,476
$
(11,717
)
$
258,716
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
$
3,760
$
-
$
(304
)
$
3,456
State and political subdivisions
16,576
(1,874
)
14,730
Corporate
45,427
(3,281
)
42,155
Asset backed securities
16,860
-
(1,180
)
15,680
Residential mortgage-backed - US agency
6,974
(665
)
6,324
Collateralized mortgage obligations - US agency
13,221
-
(1,293
)
11,928
Collateralized mortgage obligations - Private label
76,819
(3,178
)
73,761
Total
179,637
(11,775
)
168,034
Less: Allowance for credit losses
-
-
-
Total held-to-maturity
$
179,286
$
$
(11,775
)
$
168,034
- 75 -
December 31, 2022
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
$
32,533
$
$
(3,206
)
$
29,364
State and political subdivisions
48,002
(3,001
)
45,385
Corporate
11,803
(650
)
11,829
Asset backed securities
16,059
-
(659
)
15,400
Residential mortgage-backed - US agency
17,982
-
(1,582
)
16,400
Collateralized mortgage obligations - US agency
13,070
-
(1,362
)
11,708
Collateralized mortgage obligations - Private label
65,781
(4,355
)
61,434
Total
205,230
1,105
(14,815
)
191,520
Equity investment securities:
Common stock - financial services industry
-
-
Total
-
-
Total available-for-sale
$
205,436
$
1,105
$
(14,815
)
$
191,726
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
$
3,852
$
-
$
(280
)
$
3,572
State and political subdivisions
15,211
-
(2,340
)
12,871
Corporate
45,086
(2,586
)
42,502
Asset backed securities
19,158
-
(1,291
)
17,867
Residential mortgage-backed - US agency
7,489
-
(739
)
6,750
Collateralized mortgage obligations - US agency
15,109
-
(1,251
)
13,858
Collateralized mortgage obligations - Private label
88,497
(4,430
)
84,071
Total held-to-maturity
$
194,402
$
$
(12,917
)
$
181,491
A substantial percentage of the Company’s investments in mortgage-backed securities include pass-through securities and collateralized mortgage obligations issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. At December 31, 2023, the Company also held a total of 119 private-label mortgage-backed securities, collateralized mortgage obligations or asset-backed securities with an aggregate book balance of $195.7 million. At December 31, 2022, the Company also held a total of 100 private-label mortgage-backed securities, collateralized mortgage obligations or asset-backed securities with an aggregate book balance of $169.8 million. These investments are relatively short-duration securities with significant credit enhancements. The Company’s investments in state and political obligation securities are generally municipal obligations that are categorized as general obligations of the issuer that are supported by the overall taxing authority of the issuer, and in some cases are insured. The obligations issued by school districts are generally supported by state administered insurance funds or credit enhancement programs.
The amortized cost and estimated fair value of debt investment securities at December 31, 2023 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Available-for-Sale
Held-to-Maturity
Amortized
Estimated
Amortized
Estimated
(In thousands)
Cost
Fair Value
Cost
Fair Value
Due in one year or less
$
10,100
$
10,358
$
2,420
$
2,402
Due after one year through five years
9,197
8,741
18,568
18,173
Due after five years through ten years
39,941
36,586
43,458
39,368
Due after ten years
89,197
88,133
18,177
16,078
Sub-total
148,435
143,818
82,623
76,021
Residential mortgage-backed - US agency
25,446
24,418
6,974
6,324
Collateralized mortgage obligations - US agency
13,058
12,179
13,221
11,928
Collateralized mortgage obligations - Private label
81,812
78,095
76,819
73,761
Totals
$
268,751
$
258,510
$
179,637
$
168,034
- 76 -
The Company’s debt investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, is as follows:
December 31, 2023
Less than Twelve Months
Twelve Months or More
Total
Number of
Number of
Number of
Individual
Unrealized
Fair
Individual
Unrealized
Fair
Individual
Unrealized
Fair
(Dollars in thousands)
Securities
Losses
Value
Securities
Losses
Value
Securities
Losses
Value
Available-for-Sale Portfolio
US Treasury, agencies and GSE's
$
(13
)
$
5,990
$
(3,246
)
$
25,794
$
(3,259
)
$
31,784
State and political subdivisions
-
-
-
(1,809
)
26,432
(1,809
)
26,432
Corporate
-
-
-
(365
)
4,351
(365
)
4,351
Asset backed securities
(65
)
5,907
(294
)
13,985
(359
)
19,892
Residential mortgage-backed - US agency
(14
)
2,477
(1,071
)
14,931
(1,085
)
17,408
Collateralized mortgage obligations - US agency
-
-
-
(995
)
8,123
(995
)
8,123
Collateralized mortgage obligations - Private label
(274
)
18,067
(3,571
)
46,483
(3,845
)
64,550
Totals
$
(366
)
$
32,441
$
(11,351
)
$
140,099
$
(11,717
)
$
172,540
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's
-
$
-
$
-
$
(304
)
$
3,456
$
(304
)
$
3,456
State and political subdivisions
(2
)
(1,872
)
12,718
(1,874
)
13,293
Corporate
(61
)
(3,220
)
33,532
(3,281
)
33,971
Asset backed securities
(8
)
2,877
(1,172
)
10,652
(1,180
)
13,529
Residential mortgage-backed - US agency
-
-
-
(665
)
4,942
(665
)
4,942
Collateralized mortgage obligations - US agency
-
-
-
(1,293
)
11,928
(1,293
)
11,928
Collateralized mortgage obligations - Private label
(38
)
5,827
(3,140
)
60,260
(3,178
)
66,087
Totals
$
(109
)
$
9,718
$
(11,666
)
$
137,488
$
(11,775
)
$
147,206
December 31, 2022
Less than Twelve Months
Twelve Months or More
Total
Number of
Number of
Number of
Individual
Unrealized
Fair
Individual
Unrealized
Fair
Individual
Unrealized
Fair
(Dollars in thousands)
Securities
Losses
Value
Securities
Losses
Value
Securities
Losses
Value
Available-for-Sale Portfolio
US Treasury, agencies and GSE's
-
$
-
$
-
$
(3,206
)
$
26,167
$
(3,206
)
$
26,167
State and political subdivisions
(830
)
12,601
(2,171
)
20,128
(3,001
)
32,729
Corporate
(269
)
5,720
(381
)
1,319
(650
)
7,039
Asset backed securities
(148
)
5,473
(511
)
9,926
(659
)
15,399
Residential mortgage-backed - US agency
(131
)
2,747
(1,451
)
13,653
(1,582
)
16,400
Collateralized mortgage obligations - US agency
(238
)
4,009
(1,124
)
7,700
(1,362
)
11,709
Collateralized mortgage obligations - Private label
(1,684
)
20,429
(2,671
)
33,707
(4,355
)
54,136
Totals
$
(3,300
)
$
50,979
$
(11,515
)
$
112,600
$
(14,815
)
$
163,579
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's
$
(280
)
$
3,573
-
$
-
$
-
$
(280
)
$
3,573
State and political subdivisions
(871
)
7,277
(1,469
)
5,077
(2,340
)
12,354
Corporate
(1,786
)
29,213
(800
)
6,803
(2,586
)
36,016
Asset backed securities
(625
)
9,742
(666
)
3,674
(1,291
)
13,416
Residential mortgage-backed - US agency
(736
)
6,577
(3
)
(739
)
6,684
Collateralized mortgage obligations - US agency
(1,236
)
12,965
(15
)
(1,251
)
13,857
Collateralized mortgage obligations - Private label
(2,719
)
58,061
(1,711
)
12,532
(4,430
)
70,593
Totals
$
(8,253
)
$
127,408
$
(4,664
)
$
29,085
$
(12,917
)
$
156,493
Credit-related Impairment
The Company conducts a formal review of investment securities on a quarterly basis for the presence of credit-related impairment. The Company assesses whether credit-related impairment is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, impairment is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related impairment is recognized in earnings while non-credit-related price depreciation for securities categorized as available-for-sale not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related market price depreciation is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of credit-related impairment, when present, is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings, as well as the portion recorded in OCI.
Management does not believe any unrealized losses in individual investment securities within the portfolio as of December 31, 2023 represent credit-related impairment. There were a total of 97 securities classified as available-for-sale with an aggregate amortized historical cost of $151.4 million and an unrealized aggregate loss of $11.3 million, or -7.5%, that were in an unrealized loss position for 12 months or longer at December 31, 2023. In addition, there were123 securities classified as held-to-maturity with an aggregate amortized historical cost of $149.2 million and an unrealized aggregate loss of $11.7 million, or -7.8%, that were in an unrealized loss position for 12 months or longer at December 31, 2023. In total, therefore, at December 31, 2023 there were 220 securities with an aggregate book value of $300.6 million and an aggregate fair value of $277.6 million, representing a loss of $23.0 million, or -7.7%, that were in an unrealized loss position for 12 months or more on that date.
All of the securities which have been in an unrealized loss position for 12 months or more at December 31, 2023 have been individually analyzed and none of the securities are considered to be impaired. These securities have unrealized losses primarily due to fluctuations
- 77 -
in general interest rates or changes in expected prepayments. In all cases, price improvement in future periods will be realized as the issuances approach maturity. Of the 220 securities in an unrealized loss position for 12 months or more at December 31, 2023, 48 securities, with aggregate amortized cost balances of $76.7 million and representing 25.5% of the aggregate amortized cost of all securities in an unrealized loss position for 12 months or more, are issued by the United States government or GSEs (collectively, "government-issued securities") and are therefore either explicitly or implicitly guaranteed as to the timely payment of contractual principal and interest These positions are deemed to have no credit impairment, thus, the disclosed unrealized losses relate primarily to changes in prevailing interest rates.
The following table depicts a roll forward of the allowance for credit losses on held-to-maturity investment securities for the year ended December 31, 2023:
(In thousands)
Government Issued and Government Sponsored Enterprise Securities
Mortgage and Asset-backed Securities
Securities Issued By State and Political Subdivisions
Corporate Securities
Total
Balance, December 31, 2022
$
-
$
-
$
-
$
-
$
-
Adjustment for the adoption of ASU 2016-13
-
Provision for credit losses
-
(40
)
(59
)
(98
)
Allowance on purchased financial assets with credit deterioration
-
-
-
-
-
Charge-offs of securities
-
-
-
-
-
Recoveries
-
-
-
-
-
Balance, December 31, 2023
$
-
$
-
$
$
$
The Company monitors the credit quality of the debt securities categorized as held-to-maturity primarily through the use of credit ratings. These assessments are made on a quarterly basis. The following table summarizes the amortized cost of debt securities categorized as held-to-maturity at December 31, 2023, aggregated by credit quality indicators:
(In thousands)
AAA or equivalent
$
42,476
AA or equivalent, including securities issued by the United States Government or Government Sponsored Enterprises
49,479
A or equivalent
19,021
BBB or equivalent
16,304
BB or equivalent
Unrated
51,374
Total
$
179,637
Additional Disclosures
Proceeds of $18.0 million and $11.0 million, respectively on sales and redemptions of securities for the years ended December 31, 2023 and 2022 resulted in net realized gains (losses) detailed below:
(In thousands)
Realized gains on investments
$
2,022
$
Realized losses on investments
(1,960
)
(206
)
$
$
(169
)
As of December 31, 2023 and December 31, 2022, securities with a fair value of $110.3 million and $99.8 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $114.3 million and $38.1 million were pledged against certain borrowing arrangements.
Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or originating, these types of investments.
- 78 -
NOTE 5: LOANS
Major classifications of loans are as follows:
December 31,
December 31,
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
$
257,604
$
257,656
Construction
1,355
5,085
Loans held-for-sale
-
Total residential mortgage loans
258,959
262,760
Commercial loans:
Real estate
358,707
345,330
Lines of credit
72,069
82,050
Other commercial and industrial
89,803
77,273
Paycheck Protection Program loans
Tax exempt loans
3,430
4,280
Total commercial loans
524,167
509,136
Consumer loans:
Home equity and junior liens
34,858
34,007
Other consumer
79,797
92,851
Total consumer loans
114,655
126,858
Total loans
897,781
898,754
Less net deferred loan fees
1,000
Less allowance for credit losses
15,975
15,319
Loans receivable, net
$
881,232
$
882,435
- 79 -
Future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by type of loan and the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral type within major categories as of December 31, 2023.
(Dollars in thousands)
Balance
Number
of Loans
Average
Loan
Balance
Minimum/
Maximum
Loan Balance
Allowance for Credit Losses
Percent
of
Total
Loans
Residential Mortgage Loans
$
258,959
2,522
$
$
-
$
4,871
$
2,466
%
Commercial Real Estate:
Multi Family (5 or More)
$
75,741
$
1,148
$
$
8,530
$
1,214
%
Mixed Use
50,022
5,951
%
Office Space
38,824
4,037
%
Hotels and Motels
29,524
3,280
11,500
%
1-4 Family
25,089
-
2,407
%
Retail Space
22,721
4,756
%
Recreation/ Golf Course/ Marina
19,290
1,015
4,543
%
Auto Dealership
13,259
1,326
-
5,084
%
Nursing Home
11,900
5,950
3,800
8,100
%
Self Storage/Mini Storage
11,892
3,964
11,428
%
Manufacturing/Industrial
9,634
3,356
%
Land
7,550
3,753
%
Warehouse
7,304
2,311
%
Assisted Living
7,180
7,180
7,180
7,180
%
Restaurant
5,793
1,056
%
Auto Repair
5,696
2,054
%
Hospitals
4,755
1,585
2,973
%
Property for Community Service
3,121
1,040
1,580
%
All Others
9,412
3,583
%
Total Commercial Real Estate Loans
$
358,707
$
$
-
$
11,500
$
5,751
%
Commercial and Industrial:
Secured Term Loans
$
78,928
$
-
$
4,019
$
1,471
%
Unsecured Term Loans
10,875
-
%
Secured Lines of Credit
48,569
-
5,000
2,211
%
Unsecured Lines of Credit
23,500
-
3,000
1,070
%
Total Commercial and
Industrial Loans
$
161,872
$
$
-
$
5,000
$
4,955
%
Tax Exempt Loans
$
3,430
$
$
$
2,215
$
%
Paycheck Protection Program Loans
$
$
$
$
$
-
%
Consumer:
Home Equity Lines of Credit
$
34,858
1,026
$
$
-
$
$
%
Vehicle
11,032
1,417
-
%
Consumer Secured
29,523
%
Consumer Unsecured
37,767
1,940
-
1,015
%
All Others
1,475
-
%
Total Consumer Loans
$
114,655
5,524
$
$
-
$
$
2,802
%
Net deferred loan fees
-
-
-
-
-
-
Unallocated allowance for
credit losses
(15,975
)
-
-
-
-
-
-
Total Loans
$
882,380
9,505
$
$
15,975
%
From time to time, the Bank acquires diversified pools of loans, originated by unrelated third parties, as part of the Company’s overall balance sheet management strategies. These acquisitions took place with nine separate transactions, that occurred between 2017 and 2019, with an additional six transactions occurring in 2021.
The following table summarizes the purchased loan pool positions, held by the Bank in purchased loans at year end (month and date of acquisition in parentheses):
- 80 -
(In thousands, except number of loans)
December 31, 2023
Original Balance
Current Balance
Unamortized Premium/ (Discount)
Number of Loans
Maturity Range
Cumulative net charge-offs
Commercial and industrial loans (6/2019)
$
6,800
$
1,600
$
-
2-6 years
$
-
Home equity lines of credit (8/2019)
21,900
4,500
1-26 years
-
Unsecured consumer loan pool 2 (11/2019)
26,600
0-2 years
-
Residential real estate loans (12/2019)
4,300
4,500
17-25 years
-
Unsecured consumer loan pool 1 (12/2019)
5,400
1,000
-
1-3 years
-
Unsecured consumer installment loans pool 3 (12/2019)
10,300
0-9 years
Secured consumer installment loans pool 4 (12/2020)
14,500
10,600
(1,252
)
21-25 years
-
Unsecured consumer loans pool 5 (1/2021)
24,400
15,600
(450
)
7-22 years
-
Revolving commercial line of credit 1 (3/2021)
11,600
12,400
0-1 year
-
Secured consumer installment loans (11/2021)
21,300
18,000
(2,923
)
17-24 years
-
Revolving commercial line of credit 2 (11/2021) paid in full at 12/11/23
10,500
-
-
-
-
-
Unsecured consumer loans pool 6 (11/2021)
22,200
18,200
(2,292
)
7-24 years
-
Total
$
179,800
$
87,400
$
(6,504
)
3,093
$
(In thousands, except number of loans)
December 31, 2022
Original Balance
Current Balance
Unamortized Premium/ (Discount)
Number of Loans
Maturity Range
Cumulative net charge-offs
Automobile loans (1/2017) paid in full at 6/30/23
$
50,400
$
4,200
$
0-4 years
$
Commercial and industrial loans (6/2019)
6,800
2,100
-
3-7 years
-
Home equity lines of credit (8/2019)
21,900
6,000
1-27 years
-
Unsecured consumer loan pool 2 (11/2019)
26,600
1,500
0-2 years
-
Residential real estate loans (12/2019)
4,300
3,900
16-22 years
-
Unsecured consumer loan pool 1 (12/2019)
5,400
1,600
-
1-4 years
-
Unsecured consumer installment loans pool 3 (12/2019)
10,300
1,000
0-9 years
Secured consumer installment loans pool 4 (12/2020)
14,500
11,300
(1,484
)
23-24 years
-
Unsecured consumer loans pool 5 (1/2021)
24,400
17,300
(485
)
8-24 years
-
Revolving commercial line of credit 1 (3/2021)
11,600
11,400
0-1 year
-
Secured consumer installment loans (11/2021)
21,300
19,700
(3,237
)
18-25 years
-
Revolving commercial line of credit 2 (11/2021) paid in full at 12/11/23
10,500
15,000
0-1 year
-
Unsecured consumer loans pool 6 (11/2021)
22,200
20,200
(2,441
)
8-24 years
-
Total
$
230,200
$
115,200
$
(7,004
)
4,063
$
- 81 -
As of December 31, 2023 and December 31, 2022, residential mortgage loans with a carrying value of $113.6 million and $110.3 million, respectively, have been pledged by the Company to the FHLBNY under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.
Risk Characteristics of Portfolio Segments
Each portfolio segment generally carries its own unique risk characteristics.
The residential mortgage loan segment is impacted by general economic conditions, unemployment rates in the Bank’s service area, real estate values and the forward expectation of improvement or deterioration in economic conditions. First and second lien residential mortgages, acquired via purchase are impacted by general economic conditions, unemployment rates in the general areas in which the loan collateral is located, real estate values in those areas and the forward expectation of improvement or deterioration in economic conditions.
The commercial loan segment is impacted by general economic conditions but, more specifically, the industry segment in which each borrower participates. Unique competitive changes within a borrower’s specific industry, or geographic location could cause significant changes in the borrower’s revenue stream, and therefore, impact its ability to repay its obligations. Commercial real estate is also subject to general economic conditions but changes within this segment typically lag changes seen within the consumer and commercial segment. Included within this portfolio are both owner occupied real estate, in which the borrower occupies the majority of the real estate property and upon which the majority of the sources of repayment of the obligation is dependent upon, and non-owner occupied real estate, in which several tenants comprise the repayment source for this portfolio segment. The composition and competitive position of the tenant structure may cause adverse changes in the repayment of debt obligations for the non-owner occupied class within this segment.
The consumer loan segment is impacted by general economic conditions, unemployment rates in the geographic areas in which borrowers and loan collateral are located, and the forward expectation of improvement or deterioration in economic conditions.
Real estate loans, including residential mortgages, commercial real estate loans and home equity, comprised 72.7% and 71.4% of the total loans held in the portfolio in 2023 and 2022, respectively. Loans secured by real estate generally provide strong collateral protection and thus significantly reduce the inherent credit risk in the portfolio.
Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.
Description of Credit Quality Indicators
The Company utilizes an eight tier risk rating system to evaluate the quality of its loan portfolio. Loans that are risk rated “1” through “4” are considered “Pass” loans. In accordance with regulatory guidelines, loans rated “5” through “8” are termed “criticized” loans and loans rated “6” through “8” are termed “classified” loans. A description of the Company’s credit quality indicators follows.
For Commercial Loans:
1.Prime: A loan that is fully secured by properly margined Pathfinder Bank deposit account(s) or an obligation of the US Government. It may also be unsecured if it is supported by a very strong financial condition and, in the case of a commercial loan, excellent management. There exists an unquestioned ability to repay the loan in accordance with its terms.
2.Strong: Desirable relationship of somewhat less stature than Prime grade. Possesses a sound documented repayment source, and back up, which will allow repayment within the terms of the loan. Individual loans backed by solid assets, character and integrity. Ability of individual or company management is good and well established. Probability of serious financial deterioration is unlikely.
3.Satisfactory: Stable financial condition with cash flow sufficient for debt service coverage. Satisfactory loans of average strength having some deficiency or vulnerability to changing economic or industry conditions but performing as agreed with documented evidence of repayment capacity. May be unsecured loans to borrowers with satisfactory credit and financial strength. Satisfactory provisions for management succession and a secondary source of repayment exists.
4.Satisfactory Watch: A four is not a criticized or classified credit. These credits do not display the characteristics of a criticized asset as defined by the regulatory definitions. A credit is given a Satisfactory Watch designation if there are matters or trends observed deserving attention somewhat beyond normal monitoring. Borrowing obligations may be handled according to agreement but could be adversely impacted by developing factors such as industry conditions, operating problems, pending litigation of a significant nature or declining collateral quality and adequacy.
- 82 -
5.Special Mention: A warning risk grade that portrays one or more weaknesses that may be tolerated in the short term. Assets in this category are currently protected but are potentially weak. This loan would not normally be booked as a new credit, but may have redeeming characteristics persuading the Bank to continue working with the borrower. Loans accorded this classification have potential weaknesses which may, if not checked or corrected, weaken the company’s assets, inadequately protect the Bank’s position or effect the orderly, scheduled reduction of the debt at some future time.
6.Substandard: The relationship is inadequately protected by the current net worth and cash flow capacity of the borrower, guarantor/endorser, or of the collateral pledged. Assets have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. The relationship shows deteriorating trends or other deficient areas. The loan may be nonperforming and expected to remain so for the foreseeable future. Relationship balances may be adequately secured by asset value; however a deteriorated financial condition may necessitate collateral liquidation to effect repayment. This would also include any relationship with an unacceptable financial condition requiring excessive attention of the officer due to the nature of the credit risk or lack of borrower cooperation.
7.Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or improbable. The possibility of some loss is extremely high, however its classification as an anticipated loss is deferred until a more exact determination of the extent of loss is determined. Loans in this category must be on nonaccrual.
8.Loss: Loans are considered uncollectible and of such little value that continuance as bankable assets is not warranted. It is not practicable or desirable to defer writing off this basically worthless asset even though partial recovery may be possible in the future.
For Residential Mortgage and Consumer Loans:
Residential mortgage and consumer loans are assigned a “Pass” rating unless the loan has demonstrated signs of weakness as indicated by the ratings below.
1.Special Mention: All loans sixty days past due are classified Special Mention. The loan is not upgraded until it has been current for six consecutive months.
2.Substandard: All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been current for six consecutive months.
3.Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or improbable. The possibility of some loss is extremely high.
The risk ratings for classified loans are evaluated at least quarterly for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial, residential mortgage or consumer loans. See further discussion of risk ratings in Note 1.
The following tables present the classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:
- 83 -
Revolving
Term Loans By Origination Year
Revolving
loans converted
(In thousands)
Prior
Loans
to term loans
Total
Commercial Real Estate:
Pass
$
43,823
$
67,743
$
55,395
$
29,222
$
51,270
$
85,218
$
-
$
-
$
332,671
Special Mention
-
14,016
-
-
-
-
-
14,813
Substandard
3,006
2,339
4,085
-
-
11,065
Doubtful
-
-
-
-
-
-
-
Total Commercial Real Estate
46,829
82,259
57,734
29,961
51,666
90,258
-
-
358,707
Commercial Lines of Credit:
Pass
-
-
-
-
-
-
62,824
7,141
69,965
Special Mention
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
1,276
Doubtful
-
-
-
-
-
-
-
Total Commercial Lines of Credit
-
-
-
-
-
-
63,996
8,073
72,069
Other Commercial and Industrial:
Pass
27,433
16,735
6,457
5,541
7,828
11,994
4,195
-
80,183
Special Mention
2,490
-
-
-
-
-
2,805
Substandard
1,124
2,362
-
-
5,410
Doubtful
1,405
-
-
-
-
-
-
-
1,405
Total Other Commercial and Industrial
31,358
17,859
7,634
6,362
8,039
14,356
4,195
-
89,803
Paycheck Protection Program Loans
Pass
-
-
-
-
-
-
-
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total Paycheck Protection Program Loans
-
-
-
-
-
-
-
Tax Exempt Loans
Pass
-
-
3,168
-
-
3,430
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total Tax Exempt Loans
-
-
3,168
-
-
3,430
- 84 -
Revolving
Term Loans By Origination Year
Revolving
loans converted
(In thousands)
Prior
Loans
to term loans
Total
1-4 family first-lien residential mortgages:
Pass
$
17,403
$
31,591
$
51,027
$
39,454
$
18,491
$
94,594
$
-
$
-
$
252,560
Special Mention
-
-
1,601
-
-
2,692
Substandard
-
-
1,168
-
-
1,797
Doubtful
-
-
-
-
-
-
Total 1-4 family first-lien residential mortgages
17,403
31,591
52,766
40,383
18,949
96,512
-
-
257,604
Construction:
Pass
1,355
-
-
-
-
-
-
-
1,355
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total Construction
1,355
-
-
-
-
-
-
-
1,355
Home Equity and Junior Liens:
Pass
8,317
1,880
1,404
2,228
18,177
34,107
Special Mention
-
-
-
-
-
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total Home Equity and Junior Liens
8,317
1,880
1,470
2,283
18,798
34,858
Other Consumer:
Pass
68,434
3,876
3,103
1,381
1,536
1,340
-
-
79,670
Special Mention
-
-
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total Other Consumer
68,458
3,924
3,125
1,390
1,540
1,360
-
-
79,797
Net Deferred Loan Fees
(289
)
(12
)
(82
)
(344
)
-
-
(574
)
Total loans
$
173,536
$
137,573
$
122,717
$
79,176
$
80,852
$
207,593
$
86,989
$
8,771
$
897,207
Nonaccrual and Past Due Loans
Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be performing.
Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.
- 85 -
An age analysis of loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of December 31, 2023 and 2022, are detailed in the following tables:
As of December 31, 2023
30-59 Days
60-89 Days
90 Days
Total
Total Loans
(In thousands)
Past Due
Past Due
and Over
Past Due
Current
Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages
$
1,462
$
2,269
$
1,770
$
5,501
$
252,103
$
257,604
Construction
-
-
-
-
1,355
1,355
Loans held-for-sale
-
-
-
-
-
-
Total residential mortgage loans
1,462
2,269
1,770
5,501
253,458
258,959
Commercial loans:
Real estate
5,385
5,053
10,634
348,073
358,707
Lines of credit
-
1,104
70,965
72,069
Other commercial and industrial
5,347
6,340
12,009
77,794
89,803
Paycheck Protection Program loans
-
-
-
-
Tax exempt loans
-
-
-
-
3,430
3,430
Total commercial loans
10,912
12,317
23,747
500,420
524,167
Consumer loans:
Home equity and junior liens
34,427
34,858
Other consumer
2,948
4,315
75,482
79,797
Total consumer loans
1,194
3,140
4,746
109,909
114,655
Total loans
$
13,568
$
3,199
$
17,227
$
33,994
$
863,787
$
897,781
As of December 31, 2022
30-59 Days
60-89 Days
90 Days
Total
Total Loans
(In thousands)
Past Due
Past Due
and Over
Past Due
Current
Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages
$
1,627
$
$
$
3,179
$
254,477
$
257,656
Construction
-
-
-
-
5,085
5,085
Loans held-for-sale
-
-
-
-
Total residential mortgage loans
1,627
3,179
259,581
262,760
Commercial loans:
Real estate
4,974
3,499
9,327
336,003
345,330
Lines of credit
1,280
1,584
3,162
78,888
82,050
Other commercial and industrial
4,721
1,738
7,458
69,815
77,273
Paycheck Protection Program loans
-
-
-
-
Tax exempt loans
-
-
-
-
4,280
4,280
Total commercial loans
10,975
3,437
5,535
19,947
489,189
509,136
Consumer loans:
Home equity and junior liens
33,688
34,007
Other consumer
1,904
2,534
90,317
92,851
Total consumer loans
2,183
2,853
124,005
126,858
Total loans
$
13,016
$
4,313
$
8,650
$
25,979
$
872,775
$
898,754
- 86 -
Nonaccrual loans as of December 31, 2023 and 2022, segregated by class of loan, were as follows:
December 31,
December 31,
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
$
1,770
$
1,112
1,770
1,112
Commercial loans:
Real estate
5,053
3,504
Lines of credit
Other commercial and industrial
6,340
1,884
12,317
5,720
Consumer loans:
Home equity and junior liens
Other consumer
2,948
1,904
Total consumer loans
3,140
2,183
Total nonaccrual loans
$
17,227
$
9,015
There were no loans past due ninety days or more and still accruing interest at December 31, 2023 or 2022.
When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for credit losses, an associated increase to the allowance for credit losses or as a charge-off to the allowance for credit losses in the current period.
- 87 -
Impaired Loans:
The following table summarizes impaired loans information by portfolio class at:
December 31, 2022
Unpaid
Recorded
Principal
Related
(In thousands)
Investment
Balance
Allowance
With no related allowance recorded:
1-4 family first-lien residential mortgages
$
1,048
$
1,048
$
-
Commercial real estate
5,283
5,386
-
Commercial lines of credit
2,218
2,218
-
Other commercial and industrial
2,780
2,829
-
Home equity and junior liens
-
With an allowance recorded:
1-4 family first-lien residential mortgages
Commercial real estate
2,625
2,625
Commercial lines of credit
3,059
3,066
2,957
Other commercial and industrial
1,998
1,998
1,285
Home equity and junior liens
Total:
1-4 family first-lien residential mortgages
1,498
1,498
Commercial real estate
7,908
8,011
Commercial lines of credit
5,277
5,284
2,957
Other commercial and industrial
4,778
4,827
1,285
Home equity and junior liens
Totals
$
20,179
$
20,338
$
4,793
The following table presents the average recorded investment in impaired loans for the year ended December 31:
(In thousands)
1-4 family first-lien residential mortgages
$
1,232
Commercial real estate
7,285
Commercial lines of credit
1,951
Other commercial and industrial
3,155
Home equity and junior liens
Other consumer
-
Total
$
14,270
The following table presents the cash basis interest income recognized on impaired loans for the year ended December 31:
(In thousands)
1-4 family first-lien residential mortgages
$
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Other consumer
-
Total
$
- 88 -
The following table summarizes all activity related to the ACL from December 31, 2022 to December 31, 2023 and to the recorded PCL for year ended December 31, 2023:
CECL Transition
ILM ALLL December 31, 2022
Adjustment January 1, 2023
CECL Reserve January 1, 2023
Q1 2023 Charge-Offs
Q1 2023 Recoveries
Q1 2023 PCL
Reserves as of March 31, 2023
Q2 2023 Charge-Offs
Q2 2023 Recoveries
Q2 2023 PCL
Reserves as of June 30, 2023
Q3 2023 Charge-Offs
Q3 2023 Recoveries
Q3 2023 PCL
Reserves as of Sept 30, 2023
Q4 2023 Charge-Offs
Q4 2023 Recoveries
Q4 2023 PCL
Reserves as of Dec 31, 2023
ACL - Loans
Specifically identified
$
4,793
$
-
$
3,328
$
-
$
-
$
$
3,861
$
$
-
$
$
4,486
$
1,650
$
-
$
$
3,528
$
-
$
-
$
$
3,716
Overdraft
1,465
1,766
1,882
1,425
-
-
(80
)
-
Pooled under ILM
9,497
(9,497
)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Pooled - quantitative
6,313
6,313
6,575
(135
)
6,447
5,710
6,203
Pooled - qualitative
3,965
3,965
-
-
(397
)
3,568
3,855
-
-
3,944
-
-
(378
)
3,566
Purchased
1,029
1,102
2,131
-
(15
)
2,097
-
-
2,126
-
-
-
2,126
-
-
-
2,126
Unallocated
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total ACL - Loans
$
15,319
$
1,883
$
17,202
$
$
$
$
17,867
$
$
$
1,185
$
18,796
$
3,874
$
$
$
15,765
$
$
$
$
15,975
ACL - Held-To-Maturity
-
-
-
-
-
-
(29
)
-
-
-
-
(74
)
Other Liabilities - Unfunded Commitments
-
-
-
-
-
-
(16
)
-
-
-
-
$
15,319
$
2,886
$
18,205
$
$
$
$
18,870
$
$
$
1,140
$
19,754
$
3,874
$
$
$
16,758
$
$
$
$
16,917
Collateral Dependent Disclosures
The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
•Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
•Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.
- 89 -
•Home equity lines of credit are generally secured by second mortgages on residential real estate property.
•Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.
The following table details the amortized cost of collateral dependent loans:
(In thousands)
December 31, 2023
Commercial and industrial
$
7,788
Commercial real estate
11,814
Residential (1-4 family) first mortgages
Home equity loans and lines of credit
Consumer loans
Total loans
$
20,981
Paycheck Protection Program (“PPP”)
The Bank participated in all rounds of the PPP funded by the U.S. Treasury Department and administered by the U.S. SBA pursuant to the CARES Act and subsequent legislation. The Bank received $4.0 million in fees from the SBA associated with PPP lending activities during 2020 and 2021 and recognized $-0- and $707,000 of those fees in 2023 and 2022, respectively.
- 90 -
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
As discussed in Note 1, on January 1, 2023, the Bank accounted for all credit loss exposures using the CECL methodology. A nonrecurring adjustment from ILM to CECL was made on January 1, 2023, increasing the ACL at January 1, 2023 by $2.1 million in determining the beginning ACL for the quarter ended March 31, 2023. This transition adjustment was recorded in retained earnings on January 1, 2023, and therefore will be a subtraction from tangible book value, after tax effects of approximately $1.7 million.
Changes in the allowance for credit losses for the year ended December 31, 2023, and information pertaining to the allocation of the allowance for credit losses and balances of the allowance for credit losses and loans receivable based on individual and collective impairment evaluation by loan portfolio class at the indicated dates, are summarized in the tables below. An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.
December 31, 2023
1-4 family
first-lien
Other
Paycheck
residential
Commercial
Commercial
commercial
Protection
(In thousands)
mortgage
Construction
real estate
lines of credit
and industrial
Program
Allowance for credit losses:
Beginning Balance
$
$
-
$
5,881
$
3,990
$
2,944
$
-
Adoption of New Accounting Standards
1,396
(1,744
)
Charge-offs
(121
)
-
-
(1,247
)
(2,862
)
-
Recoveries
-
-
Provisions (credits)
(382
)
(111
)
1,591
(1,166
)
2,978
-
Ending balance
$
1,608
$
$
5,751
$
1,674
$
3,281
$
-
Ending balance: related to loans
individually evaluated
$
$
-
$
$
$
1,617
$
-
Ending balance: related to loans
collectively evaluated
$
1,470
$
$
4,782
$
$
1,664
$
-
Loans receivables:
Ending balance
$
257,604
$
1,355
$
358,707
$
72,069
$
89,803
$
Ending balance: individually
evaluated
$
1,675
$
-
$
12,314
$
1,139
$
6,749
$
-
Ending balance: collectively
evaluated
$
255,929
$
1,355
$
346,393
$
70,930
$
83,054
$
Home equity
Other
Tax exempt
and junior liens
consumer
Total
Allowance for credit losses:
Beginning Balance
$
$
$
1,046
$
15,319
Adoption of New Accounting Standards
(97
)
1,243
1,886
Charge-offs
-
(5
)
(341
)
(4,576
)
Recoveries
-
-
Provisions
(16
)
2,991
Ending balance
$
$
$
2,145
$
15,975
Ending balance: related to loans
individually evaluated
$
-
$
$
-
$
3,716
Ending balance: related to loans
collectively evaluated
$
$
$
2,145
$
12,259
Loans receivables:
Ending balance
$
3,430
$
34,858
$
79,797
$
897,781
Ending balance: individually
evaluated
$
-
$
$
-
$
22,587
Ending balance: collectively
evaluated
$
3,430
$
34,148
$
79,797
$
875,194
Changes in the allowance for loan losses under the ILM methodology for the year ended December 31, 2022, and information pertaining to the allocation of the allowance for loan losses and balances of the allowance for loan losses and loans receivable based on individual
- 91 -
and collective impairment evaluation by loan portfolio class at the indicated dates, are summarized in the tables below. An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.
December 31, 2022
1-4 family
first-lien
Other
Paycheck
residential
Commercial
Commercial
commercial
Protection
(In thousands)
mortgage
Construction
real estate
lines of credit
and industrial
Program
Allowance for loan losses:
Beginning Balance
$
$
-
$
5,308
$
$
2,762
$
-
Charge-offs
(29
)
-
(48
)
(51
)
(486
)
-
Recoveries
-
-
-
-
Provisions (credits)
(129
)
-
3,106
-
Ending balance
$
$
-
$
5,881
$
3,990
$
2,944
$
-
Ending balance: related to loans
individually evaluated for impairment
$
$
-
$
$
2,957
$
1,285
$
-
Ending balance: related to loans
collectively evaluated for impairment
$
$
-
$
5,535
$
1,033
$
1,659
$
-
Loans receivables:
Ending balance
$
257,656
$
5,085
$
345,330
$
82,050
$
77,273
$
Ending balance: individually
evaluated for impairment
$
1,498
$
-
$
7,908
$
5,278
$
4,777
$
-
Ending balance: collectively
evaluated for impairment
$
256,158
$
5,085
$
337,422
$
76,772
$
72,496
$
Home equity
Other
Tax exempt
and junior liens
consumer
Unallocated (1)
Total
Allowance for loan losses:
Beginning Balance
1,297
12,935
Charge-offs
-
-
(147
)
-
(761
)
Recoveries
-
-
-
Provisions
-
(33
)
(199
)
(984
)
2,754
Ending balance
$
$
$
1,046
$
-
$
15,319
Ending balance: related to loans
individually evaluated for impairment
$
-
$
$
-
$
-
$
4,793
Ending balance: related to loans
collectively evaluated for impairment
$
$
$
1,046
$
-
$
10,526
Loans receivables:
Ending balance
$
4,280
$
34,007
$
92,851
$
$
898,754
Ending balance: individually
evaluated for impairment
$
-
$
$
-
$
-
$
20,179
Ending balance: collectively
evaluated for impairment
$
4,280
$
33,289
$
92,851
$
$
878,575
(1)The ending balance of the loans receivable for the unallocated portion of the allowance includes loans held-for-sale. At December 31, 2022, the Bank had loans held-for-sale with a principal balance of $19,000. These loans were still part of the portfolio as of December 31, 2022. Based on ASC 948, Mortgage Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the held-for-sale category at lower of cost or fair value.
The Company’s methodology for determining its allowance for credit losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for credit losses needed for this general pool of loans. The qualitative factors include:
•Changes in national and local economic trends;
•The rate of growth in the portfolio;
•Trends of delinquencies and nonaccrual balances;
- 92 -
•Changes in loan policy; and
•Changes in lending management experience and related staffing.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for credit losses analysis and calculation.
The allocation of the allowance for credit losses summarized on the basis of the Company’s CECL calculation methodology was as follows:
December 31, 2023
1-4 family
first-lien
Other
residential
Commercial
Commercial
commercial
(In thousands)
mortgage
Construction
real estate
lines of credit
and industrial
Specifically reserved
$
$
-
$
$
$
1,617
Historical loss rate
1,537
2,645
1,026
Qualitative factors
(66
)
2,137
Total
$
1,608
$
$
5,751
$
1,674
$
3,281
Home equity
Other
Tax exempt
and junior liens
consumer
Total
Specifically reserved
$
-
$
$
1,817
$
5,842
Historical loss rate
6,589
Qualitative factors
-
3,544
Total
$
$
$
2,145
$
15,975
The allocation of the allowance for loan losses summarized on the basis of the Company’s ILM calculation methodology was as follows:
December 31, 2022
1-4 family
first-lien
Other
residential
Commercial
Commercial
commercial
(In thousands)
mortgage
Construction
real estate
lines of credit
and industrial
Specifically reserved
$
$
-
$
$
2,957
$
1,285
Historical loss rate
-
(32
)
-
Qualitative factors
-
5,567
1,033
1,562
Total
$
$
-
$
5,881
$
3,990
$
2,944
Home equity
Other
Tax exempt
and junior liens
consumer
Total
Specifically reserved
$
-
$
$
-
$
4,793
Historical loss rate
-
1,099
Qualitative factors
9,427
Total
$
$
$
1,046
$
15,319
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2023 and 2022, the Bank serviced 518 and 503 residential mortgage loans for others, respectively. The unpaid principal balances of mortgage loans serviced for others were $54.5 million and $52.2 million at December 31, 2023 and 2022, respectively. The balance of capitalized servicing rights included in other assets at December 31, 2023 and 2022, was $330,000 and $368,000, respectively.
- 93 -
The following summarizes mortgage servicing rights capitalized and amortized:
(In thousands)
Mortgage servicing rights capitalized
$
$
Mortgage servicing rights amortized
NOTE 8: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 is as follows:
(In thousands)
Land
$
2,661
$
2,063
Buildings
20,784
20,406
Furniture, fixtures and equipment
17,889
17,337
Construction in progress
42,092
40,126
Less: Accumulated depreciation
23,651
22,254
$
18,441
$
17,872
Depreciation expense in 2023 and 2022 was $1.4 million and $1.1 million, respectively.
NOTE 9: FORECLOSED REAL ESTATE
A summary of foreclosed real estate at December 31 is as follows:
(Dollars in thousands)
Number of
properties
December 31,
Number of
properties
December 31,
Foreclosed real estate
$
$
At December 31, 2023 and 2022, the Company reported $1.3 million and $542,000, respectively, in real estate loans in the process of foreclosure.
NOTE 10: GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is evaluated annually for impairment or between annual evaluations in certain circumstances. Management performs an annual assessment of the Company’s goodwill to determine whether or not any impairment of the carrying value may exist.
Of the $4.5 million of goodwill carried on the Company’s books as of December 31, 2023, $3.8 million of this amount was due to prior periods acquisitions of bank branches and $696,000, initially and currently classified as an identifiable intangible asset, was due to the 2013 acquisition of the FitzGibbons Agency by PRMC and the 2015 acquisition of the Huntington Agency.
In 2020, the Company retained expert, independent consultants to evaluate the recorded goodwill for impairment. The Company updated those evaluations using internal modeling processes for the year ended December 31, 2023. The Company is permitted to assess market-based, prospective analyses and other qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than the carrying value. Based on the results of the assessments made by management, with prior input from the retained consultants, it was determined that the carrying value of goodwill in the amount of $4.5 million is not impaired as of December 31, 2023.
The identifiable intangible asset of $85,000 as of December 31, 2023 was due to the acquisition of the FitzGibbons and Huntington Agencies and represents the amortized carrying amount of the customer lists intangible. The weighted average remaining amortization period of this intangible asset is 3.18 years.
- 94 -
The gross carrying amount and annual amortization for this identifiable intangible asset are as follows:
December 31,
(In thousands)
Gross carrying amount
$
$
Accumulated amortization
(158
)
(142
)
Net amortizing intangibles
$
$
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
(In thousands)
$
Thereafter
Total
$
NOTE 11: DEPOSITS
A summary of deposits at December 31 is as follows:
(In thousands)
Savings accounts
$
113,543
$
134,880
Time accounts
377,570
314,109
Time accounts in excess of $250,000
95,272
71,696
Money management accounts
12,364
16,107
MMDA accounts
224,707
270,326
Demand deposit interest-bearing
119,321
127,395
Demand deposit noninterest-bearing
170,169
183,711
Mortgage escrow funds
7,121
7,206
Total Deposits
$
1,120,067
$
1,125,430
At December 31, 2023, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
$
324,531
75,882
44,404
9,581
17,950
Thereafter
Total
$
472,842
- 95 -
In addition to deposits obtained from its business operations within its target market areas, the Bank also obtains brokered deposits through various programs administered by IntraFi Network and through other unaffiliated third-party financial institutions.
At December 31,
(In thousands)
Nonbrokered
Brokered
Total
Nonbrokered
Brokered
Total
Savings accounts
$
113,543
$
-
$
113,543
$
134,880
$
-
$
134,880
Time accounts
174,864
202,706
377,570
105,478
208,631
314,109
Time accounts of $250,000 or more
95,272
-
95,272
71,696
-
71,696
Money management accounts
12,364
-
12,364
16,107
-
16,107
MMDA accounts
224,707
-
224,707
270,326
-
270,326
Demand deposit interest-bearing
79,321
40,000
119,321
87,395
40,000
127,395
Demand deposit noninterest-bearing
170,169
-
170,169
183,711
-
183,711
Mortgage escrow funds
7,121
-
7,121
7,206
-
7,206
Total Deposits
$
877,361
$
242,706
$
1,120,067
$
876,799
$
248,631
$
1,125,430
NOTE 12: BORROWED FUNDS
The composition of borrowings (excluding subordinated debt) at December 31 is as follows:
(In thousands)
Short-term:
FHLB advances
$
125,680
$
60,333
Total short-term borrowings
$
125,680
$
60,333
Long-term:
FHLB advances
$
49,919
$
55,664
Total long-term borrowings
$
49,919
$
55,664
The principal balances, interest rates and maturities of the outstanding long-term borrowings, all of which are at a fixed rate, at December 31, 2023 are as follows:
Term
Principal
Rates
(Dollars in thousands)
Advances with FHLB
Due within 1 year
$
22,851
0.39 - 5.03%
Due within 2 years
23,883
0.52 - 4.92%
Due within 10 years
3,185
0.53 - 4.96%
Total advances with FHLB
$
49,919
Total long-term fixed rate borrowings
$
49,919
At December 31, 2023, scheduled repayments of long-term debt are as follows:
(In thousands)
$
22,851
23,883
3,185
Total
$
49,919
The Company has access to FHLBNY advances, under which it can borrow at various terms and interest rates. Residential mortgage loans with a carrying value of $113.6 million, securities with a carrying value of $90.7 million and FHLB stock with a carrying value of $8.7 million have been pledged by the Company under a blanket collateral agreement to secure the Company’s borrowings at December 31, 2023. The total outstanding indebtedness under borrowing facilities with the FHLB cannot exceed the total value of the assets pledged under the blanket collateral agreement. The Company has a $17.3 million line of credit available at December 31, 2023 with the Federal Reserve Bank of New York through its Discount Window and has pledged various corporate and municipal securities against the line. The Company has $15.0 million in lines of credit available with two other correspondent banks. $10.0 million of that line of credit is available on an unsecured basis and the remaining $5.0 million must be collateralized with investment securities. Interest on the lines is determined at the time of borrowing.
- 96 -
NOTE 13: SUBORDINATED DEBT
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Debt (the “2020 Subordinated Debt”) to certain qualified institutional investors. The 2020 Subordinated Debt has a maturity date of October 15, 2030 and initially bears interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month Secured Overnight Financing Rate ("SOFR") plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Debt at par, in whole or in part, at its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Debt is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and preferred stock and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020 Subordinated Debt through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date calculated under this method. Accordingly, interest expense related to this indebtedness of $1.6 million was recorded in both years ended December 31, 2023 and December 31, 2022.
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the FDIC and FRB. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd., whose interest rate resets quarterly, and are indexed to the 3-month Secured Overnight Funding Rate ("SOFR") plus 1.91%. These securities have a five-year call provision. The Company paid $361,000 and $178,000 in interest expense related to this issuance in 2023 and 2022, respectively. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2023 and 2022. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
The composition of subordinated debt at December 31 is as follows:
(In thousands)
Subordinated debt
Junior subordinated debenture
$
5,155
$
5,155
Subordinated debt
$
25,000
$
25,000
Deferred Financing Charges
(241
)
(422
)
Total subordinated debt
$
29,914
$
29,733
The principal balances, interest rates and maturities of the subordinated debt at December 31, 2023 are as follows:
Term
Principal
Rates
(Dollars in thousands)
Subordinated debt:
Due within 8 years
$
25,000
5.5%
Due within 15 years
5,155
3-Month LIBOR + 1.65%
Total subordinated debt
$
30,155
Scheduled repayments of the subordinated debt at December 31, 2023 are as follows:
(In thousands)
$
-
25,000
-
-
-
Thereafter
5,155
Total
$
30,155
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NOTE 14: Employee Benefits and Deferred Compensation and Supplemental Retirement Plans
The Company has a noncontributory defined benefit pension plan covering substantially all employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In addition, the Company provides certain health and life insurance benefits for a limited number of eligible retired employees. The healthcare plan is contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory. Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.
The following tables set forth the changes in the plans’ benefit obligations, fair value of plan assets and the plans’ funded status as of December 31:
Pension Benefits
Postretirement Benefits
(In thousands)
Change in benefit obligations:
Benefit obligations at beginning of year
$
9,442
$
12,720
$
$
Service cost
-
-
-
-
Interest cost
Plan participants' contribution
-
-
Actuarial (gain) loss
(3,368
)
(7
)
(164
)
Benefits paid
(632
)
(375
)
(22
)
(45
)
Benefit obligations at end of year
9,586
9,442
Change in plan assets:
Fair value of plan assets at beginning of year
16,311
20,531
-
-
Actual return on plan assets
1,429
(3,845
)
-
-
Benefits paid
(632
)
(375
)
(45
)
Plan participants' contribution
-
-
Employer contributions
-
-
(22
)
Fair value of plan assets at end of year
17,108
16,311
-
-
Funded (unfunded) status - asset (liability)
$
7,522
$
6,869
$
(120
)
$
(136
)
The funded status of the pension was recorded within other assets on the statement of condition. The unfunded status of the postretirement plan is recorded within other liabilities on the statement of condition.
Amounts recognized in accumulated other comprehensive loss as of December 31 are as follows:
Pension Benefits
Postretirement Benefits
(In thousands)
Net loss (gain)
$
2,909
$
3,389
$
(103
)
$
(103
)
Tax Effect
(27
)
(27
)
$
2,149
$
2,503
$
(76
)
$
(76
)
Gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of assets are amortized over the average remaining service period of active participants.
The Company utilized the actual projected cash flows of the participants in both plans for the years ended December 31, 2023 and December 31, 2022. The following points address the approach taken.
1.An analysis of the defined benefit pension plan’s expected future cash flows and high-quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefits yielded a single discount rate of 5.94% at December 31, 2023.
2.An analysis of the postretirement health plan’s expected future cash flows and high-quality fixed-income investments currently available and expected to be available during the period to maturity of the retiree medical benefits yielded a single discount rate of 5.94% at December 31, 2023.
3.Each discount rate was developed by matching the expected future cash flows of the Bank to high quality bonds. Every bond considered has earned ratings of at least AA by Fitch Group, AA by Standard & Poor’s, or Aa2 by Moody’s Investor Services.
- 98 -
The accumulated benefit obligation for the defined benefit pension plan was $9.6 million and $9.4 million at December 31, 2023 and 2022, respectively. The postretirement plan had an accumulated benefit obligation of $120,000 and $136,000 at December 31, 2023 and 2022, respectively.
The significant assumptions used in determining the benefit obligations as of December 31, are as follows:
Pension Benefits
Postretirement Benefits
Weighted average discount rate
5.94
%
6.09
%
5.94
%
6.09
%
Rate of increase in future compensation levels
-
-
-
-
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plan. The annual rates of increase in the per capita cost of covered medical and prescription drug benefits for future years were assumed to be 4.60% for 2023, gradually decreasing to 4.30% in 2028 and remain at that level thereafter.
The composition of the net periodic benefit plan (benefit) cost for the years ended December 31 is as follows:
Pension Benefits
Postretirement Benefits
(In thousands)
Service cost
$
-
$
-
$
-
$
-
Interest cost
Expected return on plan assets
(965
)
(1,068
)
-
-
Amortization of transition obligation
-
-
-
-
Amortization of net losses
-
(5
)
Amortization of unrecognized past service liability
-
-
(2
)
(5
)
Net periodic benefit plan (benefit) cost
$
(174
)
$
(603
)
$
$
The significant assumptions used in determining the net periodic benefit plan cost for years ended December 31, were as follows:
Pension Benefits
Postretirement Benefits
Weighted average discount rate
6.09
%
6.09
%
5.94
%
6.09
%
Expected long term rate of return on plan assets
6.00
%
6.00
%
-
-
Rate of increase in future compensation levels
-
-
-
-
The long term rate of return on assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 6.5% to 8.5% and 2.0% to 4.0%, respectively. The long-term inflation rate was estimated to be 2.5%. When these overall return expectations are applied to the plan’s target allocation, the expected rate of return was determined to be in the range of 5.0% to 7.0%. Management chose to use a 6.00% expected long-term rate of return in 2023 and a 6.0% expected long-term rate of return in 2024 reflecting current economic conditions and expected rates of return. Based on the $17.1 million fair value of plan assets at December 31, 2023, each 50 basis point decrease in the expected long-term rate of return would reduce after tax net income at a 2024 expected state and federal combined statutory tax rate of 26.1% by approximately $63,000.
The estimated net actuarial income that will be amortized from accumulated other comprehensive income into net periodic benefit plan income during 2024 is $299,000. The estimated amortization of the unrecognized transition obligation and actuarial income for the postretirement health plan in 2024 is $120,000. The expected net periodic benefit plan benefit for 2024 is estimated to be $299,000 for both retirement plans in aggregate.
Plan assets are invested in three diversified investment portfolios of the Pentegra Retirement Trust (the “Trust”, formerly known as RSI Retirement Trust), a private placement investment fund. The Trust has been given discretion by the Plan Sponsor to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Trust’s Investment Policy Statement. The Plan is structured to utilize a Liability Driven Investment (LDI) approach which seeks to fund the current and future liabilities of the Plan and aims to mitigate funded status and contribution volatility.
The Plan’s asset allocation targets to hold 48% of assets in equity securities via investment in the Long-Term Growth - Equity Portfolio (‘LTGE’), 16% in intermediate-term investment grade bonds via investment in the Long-Term Growth - Fixed-Income Portfolio (‘LTGFI’), 35% in long duration bonds via the Liability Focused Fixed-Income Portfolio (‘LFFI’), and 1% in a cash equivalents portfolio (for liquidity).
LTGE is a diversified portfolio that invests in a number of actively and passively managed equity-focused mutual funds and collective investment trusts. The Portfolio holds a diversified mix of equity funds in order to gain exposure to the U.S. and non-U.S. equity markets. LTGFI is a diversified portfolio that invests in a number of fixed-income mutual funds and collective investment trusts. The Portfolio invests primarily in intermediate-term bond funds with a focus on Core Plus fixed-income investment approaches. LFFI is a
- 99 -
diversified high quality fixed-income portfolio that currently invests in passively managed collective investment trusts that hold long duration bonds.
The investment objectives, investment strategies and risks of each of the daily valued and unitized Portfolios and the funds held within the Portfolios are detailed in the Private Placement Memorandum and the Trust’s Investment Policy Statement.
The overall long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow. The LTGE and LTGFI Portfolios are designed to provide long-term growth of equity and fixed-income assets with the objective of achieving an investment return in excess of the cost of funding the active life, deferred vested, and all 30-year term and longer obligations of retired lives in the Trust. The LFFI Portfolio is designed to fund the Trust’s estimated retired lives class of liabilities for 30 years. Risk/volatility is further managed by the distinct investment objectives of each of the Trust’s Portfolios.
Pension plan assets measured at fair value are summarized below:
At December 31, 2023
(In thousands)
Level 1
Level 2
Level 3
Total Fair
Value
Asset Category:
Mutual Funds - Equity
Large-cap (a)
$
2,885
$
-
$
-
$
2,885
Mid-cap / Small-cap (a)
-
-
International Equity (a)
1,442
-
-
1,442
Equity -Total
5,050
-
-
5,050
Fixed Income Funds
Government Securities (b) (c)
7,990
-
8,583
Investment Grade Bonds (d) (e)
1,498
-
1,827
Fixed Income-Total
8,319
2,091
-
10,410
Cash Equivalents (f) (g)
1,634
-
1,648
Total
$
15,003
$
2,105
$
-
$
17,108
*Includes cash equivalents investments in equity and fixed income strategies
a)This category includes exchange-traded funds representing equity markets.
b)This category includes nominal U. S Treasuries.
c)This category includes U.S. Agencies and U.S. TIPS.
d)This category includes exchange traded funds with fixed income as the underlying exposure.
e)This category includes investment grade corporate bonds and municipal bonds.
f)This category includes a fully collateralized money market fund.
g)This category includes an ex-dividend that will be paid in cash and accrued interest for the money market fund.
- 100 -
At December 31, 2022
(In thousands)
Level 1
Level 2
Level 3
Total Fair
Value
Asset Category:
Mutual Funds - Equity
Large-cap value (a)
$
-
$
1,659
$
-
$
1,659
Large-cap Growth (b)
-
1,239
-
1,239
Large-cap Core (c)
-
-
Mid-cap Value (d)
-
-
Mid-cap Growth (e)
-
-
Mid-cap Core (f)
-
-
Small-cap Value (g)
-
-
Small-cap Growth (h)
-
-
Small-cap Core (i)
-
-
International Equity (j)
-
2,199
-
2,199
Equity -Total
-
7,983
-
7,983
Fixed Income Funds
Fixed Income - US Core (k)
-
2,007
-
2,007
Intermediate Duration (l)
-
3,347
-
3,347
Long Duration (m)
-
2,568
-
2,568
Fixed Income-Total
-
7,922
-
7,922
Cash Equivalents-Money market*
-
Total
$
$
16,257
$
-
$
16,311
*Includes cash equivalents investments in equity and fixed income strategies
a)This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70 stocks.
b)This category seeks long-term capital appreciation by investing primarily in large growth companies based in the U.S.
c)This fund tracks the performance of the S&P 500 index by purchasing the securities represented in the index in approximately the same weightings as the index.
d)This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Value Index.
e)This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Growth Index.
f)This category seeks to track the performance of the S&P Midcap 400 Index.
g)This category consists of a selection of investments based on the Russell 2000 Value Index.
h)This category consists of a mutual fund invested in small capitalization growth companies along with a fund invested in a selection of investments based on the Russell 2000 Growth Index.
i)This category consists of a mutual fund investing in readily marketable securities of U.S. companies with market capitalizations within the smallest 10% of the market universe, or smaller than the 1000th largest US company.
j)This category invests primarily in medium to large non-US companies in developed and emerging markets. Under normal circumstances, at least 80% of total assets will be invested in equity securities, including common stocks, preferred stocks, and convertible securities.
k)This category currently includes equal investments in three mutual funds, two of which usually hold at least 80% of fund assets in investment grade fixed income securities, seeking to outperform the Barclays US Aggregate Bond Index while maintaining a similar duration to that index. The third fund targets investments of 50% or more in mortgage-backed securities guaranteed by the US government and its agencies.
l)This category consists mostly of a fund which seeks to track the Barclays Capital US Corporate A or Better 5-20 Year, Bullets only Index, along with a diversified mutual fund holding fixed income securities rated A or better.
m)This category consists of a fund that seeks to approximate the performance of the Barclays Capital US Corporate A or Better, 20+ Year Bullets Only Index over the long term.
- 101 -
For the fiscal year ending December 31, 2024, the Company expects to contribute approximately $13,000 to the postretirement plan.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from both retirement plans:
Pension
Postretirement
(In thousands)
Benefits
Benefits
Total
Years ending December 31:
$
$
$
Thereafter
3,651
3,702
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $449,000 and $433,000 for 2023 and 2022, respectively. In addition, the Company made $349,000 and $337,000 of safe harbor contributions to the plan in 2023 and 2022, respectively.
The Company maintains optional deferred compensation plans for its directors and certain executive officers, whereby fees and income normally received are deferred and paid by the Company based upon a payment schedule commencing between the ages of 65 and 70 and continuing monthly for 10 years. At December 31, 2023 and 2022, other liabilities include approximately $3.3 million and $3.2 million, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2023 and 2022 amounted to approximately $341,000 and $355,000, respectively.
To assist in the funding of the Company’s benefits under the supplemental executive retirement plan and deferred compensation plans, the Company is the owner of single premium life insurance policies on selected participants. At December 31, 2023 and 2022, the cash surrender values of these policies were $24.6 million and $24.0 million, respectively.
The Bank adopted a Defined Contribution Supplemental Executive Retirement Plan (the “SERP”), effective January 1, 2014. The SERP benefits certain key senior executives of the Bank who are selected by the Board to participate, including our named executive officers. The SERP is intended to provide a benefit from the Bank upon retirement, death, disability or voluntary or involuntary termination of service (other than “for cause”), subject to the requirements of Section 409A of the Internal Revenue Code. Accordingly, the SERP obligates the Bank to make a contribution to each executive’s account on the last business day of each calendar year. In addition, the Bank, may, but is not required to, make additional discretionary contributions to the executive’s accounts from time to time. All executives currently participating in the plan, including the named executive officers, are fully vested in the Bank’s contribution to the plan. In the event the executive is terminated involuntarily or resigns for good reason within 24 months following a change in control, the Bank is required to make additional annual contributions the lesser of: (1) three years or (2) the number of years remaining until the executive’s benefit age, subject to potential reduction to avoid an excess parachute payment under Code Section 280G. In the event of the executive’s death, disability or termination within 24 months after a change in control, the executive’s account will be paid in a lump sum to the executive or his beneficiary, as applicable. In the event the executive is entitled to a benefit from the SERP due to retirement or other termination of employment, the benefit will be paid either in a lump sum or in 10 annual installments as detailed in his or her participant agreement. At December 31, 2023 and 2022, other liabilities included $694,000 and $635,000, respectively, accrued under this plan.
- 102 -
NOTE 15: Stock Based Compensation PlanS
In May 2016, the Board of Directors of the Company approved the grant of stock option awards to its directors, executive officers, senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of Shareholders on May 4, 2016 when 263,605 shares were authorized for award.
Activity in the stock option plans is as follows:
Options Outstanding
Shares Exercisable
Number of
Weighted Average
Number of
Weighted Average
(Shares in thousands)
Shares
Exercise Price
Shares
Exercise Price
Outstanding at January 1, 2022
$
10.98
$
11.05
Granted
-
-
-
-
Newly vested
-
-
10.73
Exercised
(37
)
-
(37
)
-
Forfeited
(4
)
11.35
-
-
Expired
-
-
-
-
Outstanding at December 31, 2022
$
10.94
$
10.98
Granted
-
$
-
-
$
-
Newly vested
-
-
-
Exercised
(58
)
-
(58
)
-
Forfeited
-
-
-
-
Expired
-
-
-
-
Outstanding at December 31, 2023
$
11.03
$
11.03
The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options prior to the expiration date. The intrinsic value can change based on fluctuations in the market value of the Company’s stock. The intrinsic value of the stock options was $626,000 and $1.8 million at December 31, 2023 and December 31, 2022, respectively.
At December 31, 2023 and 2022, the average remaining contractual life of outstanding options and shares exercisable was 3.5 years and 3.5 years, respectively.
Restricted Stock Unit Grants
In May 2016, the Board of Directors of the Company approved the grant of restricted stock units to its directors, executive officers, senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of Shareholders on May 4, 2016 when 105,442 shares were authorized for award. A total of 31,635 restricted stock units were granted to the nine directors of the Company and 8,436 restricted stock units, ("RSUs") in total, were granted to two officers. The units vest ratably over five years (20% per year for each year of the participant’s service with the Company). In addition, on that date a total of 46,570 restricted stock units were granted to the Chief Executive Officer, two executive officers and three senior officers. The units vested ratably over seven years (approximately 14.28% per year for each year of the participant’s service with the Company) with the exception of one senior officer whose units vested upon retirement on August 1, 2017.
In September 2020, the Board of Directors of the Company approved the grant of 1,000 restricted stock units to one officer. The units vest ratably over three years (approximately 33.3% per year for each year of the participant’s service with the Company).
In October 2020, the Board of Directors of the Company approved the grant of 17,801 restricted stock units to three senior officers and four officers. The units vest ratably over three years (approximately 33.3% per year for each year of the participant’s service with the Company).
The compensation expense of the stock option awards and restricted stock units is based on the fair value of the instruments on the date of grant. The Company recorded compensation expense in the amount of $92,000 and $157,000 in 2023 and 2022, respectively, and is expected to record $-0- in expenses related to the RSUs in 2024 and 2025.
NOTE 16: EMPLOYEE STOCK OWNERSHIP PLAN
The Bank established the Pathfinder Bank Employee Stock Ownership Plan (“the Plan”, or "the ESOP") to purchase stock of the Company for the benefit of its employees. In July 2011, the Plan received a $1.1 million loan from Community Bank, N.A., guaranteed by the Company, to fund the Plan’s purchase of 125,000 shares of the Company’s treasury stock. The loan was being repaid in equal quarterly installments of principal plus interest over ten years beginning October 1, 2011. Interest accrued at the Wall Street Journal
- 103 -
Prime Rate plus 1.00%, and was secured by the unallocated shares of the ESOP stock. This loan was refinanced in connection with the Conversion and Offering that occurred on October 16, 2014.
In connection with the Conversion and Offering, the ESOP purchased 105,442 shares issued in the offering by obtaining a loan from the Company which was used to purchase both the additional shares and refinance the remaining outstanding balance on the loan from Community Bank N.A. There were 138,982.5 shares associated with the refinanced loan resulting in a total of 244,424.5 shares associated with the new loan provided by the Company.
The ESOP loan from the Company has a ten year term and is being repaid in equal payments of principal and interest under a fixed rate of interest equal to 3.25% which was the prime rate of interest on the date of the closing of the offering. This ESOP loan from the Company, also referred to as an internally leveraged ESOP, does not appear as a liability on the Company’s Consolidated Statement of Condition as of December 31, 2023 in accordance with ASC 718-40-25-9d.
In accordance with the payment of principal on the loan, a proportionate number of shares are allocated to the employees over the ten year time horizon of the loan. Participants’ vesting interest in the shares of Company stock is at the rate of 20% per year. Compensation expense is recorded based on the number of shares released to the participants times the average market value of the Company’s stock over that same period. Dividends on unallocated shares, recorded as compensation expense on the income statement, are made available to the participants' account. The Company recorded $379,000 and $489,000 in compensation expense in 2023 and 2022, respectively, including $10,000 and $19,000 for dividends on unallocated shares in these same time periods. At December 31, 2023, there were 18,332 unearned ESOP shares with a fair value of $257,000.
NOTE 17: Income Taxes
The provision for income taxes for the years ended December 31, is as follows:
(In thousands)
Current
$
2,729
$
2,517
Deferred
(367
)
$
2,362
$
2,656
The provision for income taxes includes the following
(In thousands)
Federal Income Tax
$
2,295
$
2,342
State Tax
$
2,362
$
2,656
- 104 -
The components of the net deferred tax asset (liability), included in other assets as of December 31, are as follows:
(In thousands)
Assets:
Deferred compensation
$
1,102
$
1,051
Allowance for credit losses
4,423
4,004
Postretirement benefits
Subordinated debt interest
Loan origination fees
Investment securities
2,676
3,583
Stock-based compensation
Lease Liabilities
Other
Total
9,390
9,997
Liabilities:
Prepaid pension
(1,966
)
(1,795
)
Cash flow hedges
(17
)
(135
)
Depreciation
(1,675
)
(2,097
)
Accretion
(214
)
(494
)
Intangible assets
(1,004
)
(1,004
)
Mortgage servicing rights
(86
)
(96
)
Right-of-use assets
(398
)
(549
)
Prepaid expenses and transaction fees
(101
)
(112
)
Total
(5,461
)
(6,282
)
Net deferred tax asset
$
3,929
$
3,715
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the statutory carry back period. A valuation allowance is provided when it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and the projected future level of taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible.
Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for their future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.
In 2023, the Company’s effective tax rate was 20.8%, as compared to 17.5% in 2022. A reconciliation of the federal statutory income tax rate to the effective income tax rate for the years ended December 31, is as follows:
Federal statutory income tax rate
21.0
%
21.0
%
State tax, net of federal benefit
0.4
1.6
Tax-exempt interest income
(1.2
)
(1.3
)
Increase in value of bank owned life insurance less premiums paid
(1.1
)
(0.8
)
Change in valuation allowance
-
(0.4
)
Federal credits
(0.6
)
(0.6
)
Other
1.5
(2.5
)
Effective income tax rate - Pathfinder Bancorp, Inc.
20.0
%
17.0
%
Noncontrolling interest
0.8
0.5
Effective income tax rate
20.8
%
17.5
%
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NOTE 18: Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of condition. The contractual amount of those commitments to extend credit reflects the extent of involvement the Company has in this particular class of financial instrument. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of the instrument. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
At December 31, 2023 and 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:
Contract Amount
(In thousands)
Commitments to grant loans
$
41,878
$
50,605
Unfunded commitments under lines of credit
157,150
155,453
Unfunded commitments related to construction loans in progress
4,342
7,142
Standby letters of credit
1,657
2,845
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies but may include residential real estate and income-producing commercial properties. Loan commitments outstanding at December 31, 2023 with variable interest rates and fixed interest rates were approximately $151.0 million and $42.3 million, respectively. These outstanding loan commitments carry current market rates.
Unfunded commitments under standby letters of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.
NOTE 19: Dividends and Restrictions
The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In addition to state law requirements and the capital requirements discussed in Note 20, regulatory matters, regulations and policies limit the circumstances under which the Bank may pay dividends. The amount of retained earnings legally available under these regulations approximated $41.4 million as of December 31, 2023. Dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. The Bank made no dividend payments to the Company in the years ended December 31, 2023 or December 31, 2022.
Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its banking operations. This strong capital position serves to support growth and expansion activities while at the same time exceeding regulatory standards. At December 31, 2023, the Bank met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action (“PCA”) standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is now fully
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implemented at 2.5% of risk-weighted assets. At December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
NOTE 20: Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
As of December 31, 2023, the Bank’s most recent notification from the FDIC categorized the Bank as “well-capitalized”, under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
As noted above, the regulations also impose a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action (“PCA”) standards and imposes restrictions on dividend distributions and discretionary bonuses if the buffer is not met. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. At December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
The Bank’s actual capital amounts and ratios as of December 31, 2023 and 2022 are presented in the following table.
Actual
Minimum For
Capital Adequacy
Purposes
Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions
Minimum for
Capital Adequacy
With Buffer
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2023:
Total Core Capital (to Risk-Weighted Assets)
$
155,922
15.05
%
$
82,860
8.00
%
$
103,575
10.00
%
$
108,753
10.50
%
Tier 1 Capital (to Risk-Weighted Assets)
$
142,927
13.80
%
$
62,145
6.00
%
$
82,860
8.00
%
$
88,038
8.50
%
Tier 1 Common Equity (to Risk-Weighted Assets)
$
142,927
13.80
%
$
46,609
4.50
%
$
67,324
6.50
%
$
72,502
7.00
%
Tier 1 Capital (to Assets)
$
142,927
10.11
%
$
56,548
4.00
%
$
70,685
5.00
%
$
70,685
5.00
%
As of December 31, 2022:
Total Core Capital (to Risk-Weighted Assets)
$
145,760
15.14
%
$
77,029
8.00
%
$
96,286
10.00
%
$
101,100
10.50
%
Tier 1 Capital (to Risk-Weighted Assets)
$
133,683
13.88
%
$
57,772
6.00
%
$
77,029
8.00
%
$
81,843
8.50
%
Tier 1 Common Equity (to Risk-Weighted Assets)
$
133,683
13.88
%
$
43,329
4.50
%
$
62,586
6.50
%
$
67,400
7.00
%
Tier 1 Capital (to Assets)
$
133,683
9.67
%
$
55,314
4.00
%
$
69,142
5.00
%
$
69,142
5.00
%
The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary bank that supports growth and expansion activities while at the same time exceeding regulatory standards. At December 31, 2023, the Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a total risk-based capital ratio exceeding 10%.
The Federal Reserve Board regulations previously required banks to maintain non-interest-earning reserves on deposit at the Federal Reserve Bank (“FRB”), against their transaction accounts (primarily negotiable order of withdrawal (“NOW”) and regular checking accounts). In March 2020, due to a change in its approach to monetary policy due to the COVID-19 pandemic, the Federal Reserve Board announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future.
NOTE 21: INTEREST RATE DERIVATIVES
The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards and the agreements contain master netting, collateral and/or settlement and escrow provisions protecting the at-risk party. Based on
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adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at December 31, 2023. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no material derivative contracts not designated as hedging agreements at December 31, 2023 or December 31, 2022.
As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by changes in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. In a fair value hedge, the fair value of the derivative (the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s Consolidated Statements of Condition with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to the interest income or interest expense of the respective hedged item in the current period.
Cash flows related to floating rate assets and liabilities will fluctuate with changes in underlying rate indices. When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on cash flow hedges is recorded as an adjustment to the interest income or interest expense of the respective hedged item in the current period.
Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap (or floor) contracts. The Company uses interest rate swaps, cap or floor contracts as part of its interest rate risk management strategies. Interest rate swaps involve the receipt of variable (or fixed) amounts from a counterparty in exchange for the Company making fixed (or variable) payments over the life of the agreements without the exchange of the underlying notional amount. An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest rate exceeds the contractually agreed upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in interest rates above the strike price. Similarly, an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit from any rise in interest rates above the strike price.
The Company records various hedges in the Consolidated Statement of Condition at fair value. The Company’s accounting treatment for these derivative instruments is based on the instruments hedge designation, either fair value or cash flow, determined at the inception of each derivative instrument's contractual term. The following tables show the Company’s outstanding fair value hedges at December 31, 2023 and December 31, 2022:
(In thousands)
Hedge-Adjusted Carrying Amount of the Hedged Assets at
December 31, 2023
Cumulative Amount of Fair Value Hedging Adjustment Subtracted from Carrying Amount of the Hedged Assets at December 31, 2023
Hedge-Adjusted Carrying Amount of the Hedged Assets at
December 31, 2022
Cumulative Amount of Fair Value Hedging Adjustment Subtracted from Carrying Amount of the Hedged Assets at December 31, 2022
Line item on the balance sheet in which the hedged item is included:
Available-for-sale securities (1)
$
95,887
$
3,113
$
68,741
$
8,240
Loans receivable (2)
$
156,836
$
$
37,196
$
1,477
(1)The $95.9 million carrying amount of hedged assets represents the hedge-adjusted amortized cost basis of specifically-identified high grade municipal and GSE-backed securities designated as the underlying assets for the hedging relationships. The notional amount of the designated hedges were $89.1 million and $66.8 million at December 31, 2023 and December 31, 2022, respectively. The fair value of the derivatives (an unrealized gain, receivable from derivative counterparties), recorded in other assets, resulted in a net asset position of $3.1 million and $8.2 million at December 31, 2023 and December 31, 2022, respectively. The Company’s participation in these fair value hedging transactions increased interest income by $2.1 million and $565,000, in the years ended December 31, 2023 and 2022, respectively.
(2)The $156.8 million carrying amount of hedged assets represents the hedge-adjusted amortized cost of a designated pool of residential mortgages and the aggregate hedge-adjusted amortized cost of four specified purchased consumer loan pools. These pools of loans were designated as the underlying assets for the hedging relationships in which the hedged underlying asset's notional amounts were the amortized cost projected to be remaining at the end of the contractual term of the hedging instruments. The amount of the designated hedged items were $141.0 million and $19.2 million at December 31, 2023 and December 31, 2022, respectively. At December 31, 2023, the fair value of the derivatives recorded in other assets (an unrealized gain, receivable from derivative counterparties) resulted in a net asset position of $603,000, recorded by the Company in other assets. The Company’s participation in these fair value hedging transactions increased interest income by $2.3 million and $188,000, in the years ended December 31, 2023 and 2022, respectively. Details of the two hedging strategies are presented below:
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a.On April 7, 2023 the Bank entered into an amortizing swap transaction with an initial notional amount of $100.0 million whereby the Bank will receive 3-month SOFR monthly based on the notional amount of the swap contract at the beginning of each month until the swap transaction expires in 2035. The notional amount declines monthly according to a predetermined amortization schedule and was $91.0 million at December 31, 2023. The Bank will pay a fixed rate of 3.208% to the contract's counterparty throughout the life of the contract based on each month's beginning notional balance.
b.On December 7, 2023, the Bank entered into five fixed-pay interest rate swap contracts with a total notional amount of $50.0 million, whereby the Bank will receive 3-month SOFR monthly until the respective maturity dates of the contracts. The contracts expire in annual increments on December 1 of 2025 ($5.0 million, fixed rate of 4.463%), 2026 ($5.0 million, fixed rate of 4.136%), 2027 ($10.0 million, fixed rate of 3.973%), 2028 ($15.0 million, fixed rate of 3.887%), and 2029 ($15.0 million, fixed rate of 3.845%). The fair value of these swap contracts, included as an addition to the carrying value of certain consumer loans was a negative $721,000 (an amount payable to the swap counterparty) at December 31, 2023. This payable amount is included in the loan related totals above.
In February 2020, the Company entered into an interest rate cap contract, designated as a cash flow hedging transaction at its inception, in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rises in short-term interest rates above the contractual level. The Company paid $228,000 in a one-time premium for the cap contract and has no further contractual obligations to the contractual counterparty over the remaining life of the contract. The premium was expected to be amortized ratably over the contractual term of the cap contract through its maturity date in February 2023. In September of 2021, the Company determined that the specific underlying funding stream, for which the interest rate cap was originally intended to hedge, was no longer going to be a continuing component of the Bank’s overall funding strategies. Therefore, although the cap contract continued to remain in force, it was no longer considered to be a hedge against any specific funding liability and the Company re-designated the cap as a free-standing derivative and marked the fair value of the cap to market during each reporting period through earnings. The re-designation of the interest rate cap contract to a free-standing derivative resulted in the recognition of a $157,000 increase in interest expense in 2021, prior to its re-designation. The cap contract was terminated in April 2022 resulting in a gain, recorded as other noninterest income, of $26,000.
In March 2020, the Bank entered into an interest rate swap contract with an unaffiliated counterparty that expired in May 2023. The contract was designated as a cash flow hedge at its inception. The notional amount of the swap was $40.0 million and the Bank paid a fixed rate of 1.39% to the counterparty and received a variable payment equivalent to the published three-month LIBOR index rate to be paid by the swap counterparty through the expiration date of the contract. The hedged instrument was a planned series of 90-day revolving borrowings totaling $40.0 million that were obtained in the brokered certificate of deposit market.
On three occasions in May 2023, the Bank entered into fixed-pay interest rate swap contracts with a total notional amount of $40.0 million, whereby the Bank will receive 1-month SOFR monthly until the respective maturity dates of the contracts. The contracts were designated as cash flow hedging transactions at their inception. The contracts expire in annual increments on May 1 of 2026 ($20.0 million, fixed rate of 3.663%), 2026 ($10.0 million, fixed rate of 4.287%), and 2027 ($10.0 million, fixed rate of 3.845%). The fair value of these swap contracts, included as an addition to other comprehensive income was $45,000 (an amount that was receivable from the swap's counterparty) at December 31, 2023. This receivable is included in the table below.
The following table shows the pre-tax position of the Company’s derivatives designated as cash flow hedges in OCI at December 31:
(In thousands)
Fair market value adjustment gain/(loss) - interest rate swap
$
$
Total gain (loss) in comprehensive income
$
$
For the years ended
(In thousands)
December 31, 2023
December 31, 2022
Balance as of January 1:
$
$
(387
)
Amount of unrealized gains recognized in other
comprehensive income
(474
)
Gain (loss) in other comprehensive income:
$
$
The amounts of hedge ineffectiveness, recognized during the year ended December 31, 2023 for cash flow hedges were not material to the Company’s consolidated results of operations. A portion of, or the entire amount included in accumulated other comprehensive loss would be reclassified into current earnings should a portion of, or the entire hedge, no longer be considered effective. Management believes that the hedges will remain fully effective during the remaining term of the respective hedging contracts. The changes in the fair values of the interest rate hedging agreements primarily result from the effects of changing market index interest rates and the reduction of the time each quarter between the measurement date and the contractual maturity date of the hedging instrument.
The Company manages its potential credit exposure on interest rate swap transactions by entering into bilateral credit support agreements with each contractual counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold
- 109 -
amounts. At December 31, 2023 the Company was in a net receivable position with its swap counterparty (a large regional bank) and was therefore not required to place collateral funds in escrow.
NOTE 22: Fair Value MEASUREMENTS
Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.
The Company used the following methods and significant assumptions to estimate fair value:
Investment securities: The fair values of securities available-for-sale are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.
The Bank holds two corporate investment securities with an aggregate amortized historical cost of $4.1 million and an aggregate fair market value of $4.3 million as of December 31, 2023. The securities had a valuation that is determined using published net asset values (NAV) derived by an analysis of the security’s underlying assets. The securities are comprised primarily of broadly-diversified real estate loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable through tender offers made by their respective issuers, the liquidation value of the securities may be below their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled redemption. The Company anticipates that these securities will be redeemed by their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of these investments.
The Company also holds two limited partnership investments managed by an unrelated third party with an aggregate fair market value of $3.2 million. The investments are funds comprised of marketable equity securities, primarily focused on community banks and financial technology companies. These investments are recorded at fair value at the end of each reporting period using Level 1 valuation techniques. Unrealized changes in the fair value of these investments are recorded as components of periodic net income in the period in which the changes occur.
Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are calculated based on a discounted cash flow model. All future floating rate cash flows are projected and both floating rate and fixed rate cash flows are discounted to the valuation date. The benchmark interest rate curve utilized for projecting cash flows and applying appropriate discount rates is built by obtaining publicly available third party market quotes for various swap maturity terms.
Individually evaluated loans: Specifically-identified loans are those loans in which the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for
- 110 -
similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Specifically-identified loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for credit losses is allocated to specifically-identified loans if the value of such loans is deemed to be less than the unpaid balance.
The following tables summarize assets measured at fair value on a recurring basis as of December 31, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:
December 31, 2023
Total Fair
(In thousands)
Level 1
Level 2
Level 3
Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
$
-
$
80,083
$
-
$
80,083
State and political subdivisions
-
32,924
-
32,924
Corporate
-
6,576
-
6,576
Asset backed securities
-
19,892
-
19,892
Residential mortgage-backed - US agency
-
24,418
-
24,418
Collateralized mortgage obligations - US agency
-
12,179
-
12,179
Collateralized mortgage obligations - Private label
-
78,095
-
78,095
Total
-
254,167
-
254,167
Equity investment securities:
Common stock - financial services industry
-
-
Other Securities:
Corporate issuances measured at NAV
-
-
-
4,343
Total available-for-sale securities
$
$
254,167
$
-
$
258,716
Marketable equity securities measured at NAV
$
-
$
-
$
3,206
Interest rate swap derivative fair value hedges (unrealized gain carried as receivable from derivative counterparties)
$
-
$
5,160
$
-
$
5,160
Interest rate swap derivative cash flow hedges (unrealized gain carried as receivable from derivative counterparties)
$
-
$
$
-
$
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December 31, 2022
Total Fair
(In thousands)
Level 1
Level 2
Level 3
Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
$
-
$
29,364
$
-
$
29,364
State and political subdivisions
-
45,385
-
45,385
Corporate
-
7,066
-
7,066
Asset backed securities
-
15,400
-
15,400
Residential mortgage-backed - US agency
-
16,400
-
16,400
Collateralized mortgage obligations - US agency
-
11,708
-
11,708
Collateralized mortgage obligations - Private label
-
61,434
-
61,434
Total
$
-
$
186,757
$
-
$
186,757
Equity investment securities:
Common stock - financial services industry
-
-
Other Securities:
Corporate issuances measured at NAV
-
-
-
4,763
Total available-for-sale securities
$
$
186,757
$
-
$
191,726
Marketable equity securities measured at NAV
$
-
$
-
$
1,862
Interest rate swap derivative fair value hedges (unrealized gain carried as receivable from derivative counterparties)
$
-
$
9,717
$
-
$
9,717
Interest rate swap derivative cash flow hedges (unrealized gain carried as receivable from derivative counterparties)
$
-
$
$
-
$
The following tables summarize assets measured at fair value on a nonrecurring basis as of December 31, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:
December 31, 2023
Total Fair
(In thousands)
Level 1
Level 2
Level 3
Value
Individually evaluated loans
$
-
$
-
$
9,722
$
9,722
Foreclosed real estate
-
-
December 31, 2022
Total Fair
(In thousands)
Level 1
Level 2
Level 3
Value
Impaired loans
$
-
$
-
$
2,328
$
2,328
Foreclosed real estate
-
-
- 112 -
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value.
Quantitative Information about Level 3 Fair Value Measurements
Valuation
Unobservable
Range
Techniques
Input
(Weighted Avg.)
At December 31, 2023
Individually evaluated loans
Appraisal of collateral
Discounted Cash Flow
10% - 75% (21%)
Foreclosed real estate
Appraisal of collateral
Costs to Sell
21% - 24% (22%)
Quantitative Information about Level 3 Fair Value Measurements
Valuation
Unobservable
Range
Techniques
Input
(Weighted Avg.)
At December 31, 2022
Impaired loans
Appraisal of collateral
Discounted Cash Flow
5% - 35% (17%)
(Sales Approach)
Costs to Sell
7% - 14% (12%)
Foreclosed real estate
Appraisal of collateral
Appraisal Adjustments
15% - 15% (15%)
(Sales Approach)
Costs to Sell
6% - 9% (8%)
Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash and cash equivalents - The carrying amounts of these assets approximate their fair value and are classified as Level 1.
Federal Home Loan Bank stock - The carrying amount of these assets approximates their fair value and are classified as Level 2.
Net loans - For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Loan value estimates include judgments based on expected prepayment rates. The measurement of the fair value of loans, including individually evaluated loans, is classified within Level 3 of the fair value hierarchy.
Accrued interest receivable and payable - The carrying amount of these assets approximates their fair value and are classified as Level 1.
Deposits - The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are
- 113 -
estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.
Borrowings - Fixed/variable term structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.
Subordinated debt - The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.
The carrying amounts and fair values of the Company’s financial instruments as of December 31 are presented in the following table:
December 31, 2023
December 31, 2022
Fair Value
Carrying
Estimated
Carrying
Estimated
(In thousands)
Hierarchy
Amounts
Fair Values
Amounts
Fair Values
Financial assets:
Cash and cash equivalents
$
48,732
$
48,732
$
35,282
$
35,282
Investment securities - available-for-sale
254,167
254,167
186,757
186,757
Investment securities - available-for-sale
NAV
4,343
4,343
4,763
4,763
Investment securities - marketable securities
NAV
3,206
3,206
1,862
1,862
Investment securities - held-to-maturity
179,286
168,034
194,402
181,491
Federal Home Loan Bank stock
8,748
8,748
5,982
5,982
Net loans
881,232
823,052
882,435
844,892
Accrued interest receivable
7,286
7,286
6,168
6,168
Interest rate derivative cash flow hedge receivable/(payable)
Interest rate derivative fair value hedges receivable - AFS investments
3,113
3,113
8,240
8,240
Interest rate derivative fair value hedges receivable - loans
2,047
1,477
1,477
1,477
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA
$
607,301
$
607,301
$
699,624
$
699,624
Time Deposits
512,766
517,514
425,806
393,676
Borrowings
175,599
174,071
115,997
112,877
Subordinated debt
29,914
28,026
29,733
27,378
Accrued interest payable
2,245
2,245
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NOTE 23: Parent Company - Financial Information
The following represents the condensed financial information of Pathfinder Bancorp, Inc. as of and for the years ended December 31:
Statements of Condition
(In thousands)
Assets
Cash
$
5,336
$
9,638
Investments
3,206
1,862
Investment in bank subsidiary
138,704
126,733
Investment in non-bank subsidiary
Premise and equipment, net
-
Assets held-for-sale
3,042
3,042
Other assets
Total assets
151,050
142,174
Liabilities and Shareholders' Equity
Accrued liabilities
Subordinated debt
29,914
29,733
Shareholders' equity
120,256
111,582
Total liabilities and shareholders' equity
$
151,050
$
142,174
Statements of Income
(In thousands)
Income
Dividends from non-bank subsidiary
$
$
Dividends from marketable equity security
-
(Loss) gain on marketable securities
(255
)
Impairment on premise and equipment
-
(380
)
Operating, net
Total income
(52
)
Expenses
Interest
1,941
1,749
Operating, net
1,299
Total expenses
2,665
3,048
Loss before taxes and equity in undistributed net
income of subsidiaries
(2,717
)
(2,928
)
Tax benefit
Loss before equity in undistributed net income of subsidiaries
(2,160
)
(2,400
)
Equity in undistributed net income of subsidiaries
11,453
15,332
Net income
$
9,293
$
12,932
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Statements of Cash Flows
(In thousands)
Operating Activities
Net Income
$
9,293
$
12,932
Equity in undistributed net income of subsidiaries
(11,453
)
(15,332
)
Stock based compensation and ESOP expense
Amortization of deferred financing from subordinated loan
Gains on marketable securities
(352
)
Impairment of fixed asset
-
Net change in other assets and liabilities
Net cash used in operating activities
(1,111
)
(1,201
)
Investing Activities
Purchase of investments
(1,598
)
(1,628
)
Proceeds from sales of marketable equity securities
-
Disposal of premises and equipment
-
(3,311
)
Transfer of fixed asset to held-for-sale
-
3,042
Proceeds from insurance claim for premises and equipment
-
Purchase of premises and equipment
(9
)
Net cash used in investing activities
(1,589
)
(1,132
)
Financing activities
Proceeds from exercise of stock options
Cash dividends paid to common shareholders
(1,684
)
(1,568
)
Cash dividends paid to non-voting common shareholders
(497
)
(469
)
Cash dividends paid on warrants
(45
)
(43
)
Net cash used in financing activities
(1,603
)
(1,662
)
Change in cash and cash equivalents
(4,302
)
(3,995
)
Cash and cash equivalents at beginning of year
9,638
13,633
Cash and cash equivalents at end of year
$
5,336
$
9,638
NOTE 24: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at December 31, 2023 or 2022.
The following represents the activity associated with loans to related parties during the years ended:
December 31,
December 31,
(In thousands)
Balance at the beginning of the year
$
32,531
$
22,427
Originations and related party additions
4,360
15,278
Principal payments and related party removals
(4,149
)
(5,174
)
Balance at the end of the period
$
32,742
$
32,531
Deposit accounts of related parties at December 31, 2023 and 2022 were $20.0 million and $19.5 million, respectively.
NOTE 25: ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities held for sale represent land, buildings and land improvements less accumulated depreciation that are being held with a specific intention to sell at some future date. The Company records assets and liabilities held for sale in accordance with ASC 360, Property, Plant, and Equipment, at the lower of the individual asset's carrying value or estimated fair value, less estimated cost to sell. Fair value is based on the estimated proceeds from the sale for an individual asset utilizing recent purchase offers, market comparables and/or data obtained from reliable commercial real estate appraisals. Management's estimate as to fair value is regularly reviewed and subject to changes in the commercial real estate markets and other factors.
The Company holds a real estate parcel, including a partially-developed mixed use commercial structure, with a carrying value of $3.4 million. The asset has been classified as held-for-sale and is under contract as of the filing date. It is the Company's intention to complete the sale of this asset during 2024. For the year ended December 31, 2022, the Company recorded an impairment charge of $379,000 on this asset to reflect its estimated realizable value upon sale.
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NOTE 26: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the table below.
For the year ended December 31, 2023
(In thousands)
Net Unrealized Loss on Retirement Plans
Unrealized Loss on Available-for-Sale Securities
Unrealized Gain on Derivatives and Hedging Activities
Unrealized Gain on Securities Transferred to Held-to-Maturity
Total
Beginning balance
$
(2,427
)
$
(10,127
)
$
$
-
$
(12,172
)
Other comprehensive income (loss) before reclassifications
1,136
(350
)
-
Amounts reclassified from AOCI
1,427
-
-
1,591
Ending balance
$
(2,073
)
$
(7,564
)
$
$
-
$
(9,605
)
For the year ended December 31, 2022
(In thousands)
Net Unrealized Loss on Retirement Plans
Unrealized Loss on Available-for-Sale Securities
Unrealized Gain on Derivatives and Hedging Activities
Unrealized Gain on Securities Transferred to Held-to-Maturity
Total
Beginning balance
$
(1,412
)
$
$
(286
)
$
$
(1,268
)
Other comprehensive (loss) income before reclassifications
(1,017
)
(10,673
)
(2
)
(11,024
)
Amounts reclassified from AOCI
-
-
Ending balance
$
(2,427
)
$
(10,127
)
$
$
-
$
(12,172
)
The following table presents the amounts reclassified out of each component of AOCI for the indicated annual period:
Amount Reclassified
from AOCI (1)
(Unaudited)
(In thousands)
For the years ended
Details about AOCI (1) components
Affected Line Item in the Statement of Income
December 31, 2023
December 31, 2022
Retirement plan items
Retirement plan net losses
recognized in plan expenses (2)
Salaries and employee benefits
$
(222
)
$
(2
)
Tax effect
Provision for income taxes
-
Net Income
$
(164
)
$
(2
)
Available-for-sale securities
Realized losses on sale of securities
Net gains on sales and redemptions
of investment securities
$
(1,932
)
$
(160
)
Tax effect
Provision for income taxes
Net Income
$
(1,427
)
$
(118
)
(1)Amounts in parentheses indicates debits in net income.
(2)These items are included in net periodic pension cost.
See Note 14 for additional information.
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NOTE 27: NONINTEREST INCOME
The Company has included the following table regarding the Company’s noninterest income for the years ended December 31, 2023 and 2022:
For the years ended
(In thousands)
December 31, 2023
December 31, 2022
Service charges on deposit accounts
Insufficient funds fees
$
$
Deposit related fees
ATM fees
Total service charges on deposit accounts
1,249
1,126
Fee Income
Insurance agency revenue
1,304
1,128
Investment services revenue
ATM fees surcharge
Banking house rents collected
Total fee income
2,190
2,032
Card income
Debit card interchange fees
Merchant card fees
Total card income
Mortgage fee income and realized gain on sale of loans
and foreclosed real estate
Loan servicing fees
Net gains on sales of loans and foreclosed real estate
Total mortgage fee income and realized gain on sale of
loans and foreclosed real estate
Total
4,603
4,595
Earnings and gains on bank owned life insurance
Net (losses) gains on sale and redemption of investment
securities
(169
)
Net realized (losses) gains on marketable equity securities
(255
)
Net (losses) gains on sale of premises and equipment
-
(250
)
Other miscellaneous income
Total noninterest income
$
5,190
$
5,914
The following is a discussion of key revenues within the scope of ASC 606:
•Service charges on deposit accounts - Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.
•Fee income - Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The Company earns investment advisory fee income by providing investment management services to customers under investment management contracts. As the direction of investment management accounts is provided over time, the performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.
•Card income - Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by unaffiliated card processing networks. Interchange fees are based on purchase volumes transacted and certain other factors and are recognized as transactions occur.
•Mortgage fee income and realized gain on sale of loans and foreclosed real estate - Revenue from mortgage fee income and realized gain on sale of loans and foreclosed real estate is earned through the origination of residential and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of SBA loans, and sales of foreclosed real estate, and is earned as the individual transactions occur.
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NOTE 28: LEASES
The Company has operating and finance leases for certain banking offices and land under noncancelable agreements. Our leases have remaining lease terms that vary from less than one year up to 30 years, some of which include options to extend the leases for various renewal periods. All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal options will be exercised.
The components of lease expense are as follows:
For the years ended
(In thousands)
December 31, 2023
December 31, 2022
Operating lease cost
$
$
Finance lease cost
Supplemental cash flow information related to leases was as follows:
For the years ended
(In thousands)
December 31, 2023
December 31, 2022
Cash paid for amount included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
$
Operating cash flows from finance leases
Financing cash flows from finance leases
Supplemental balance sheet information related to leases was as follows:
(In thousands, except lease term and discount rate)
December 31, 2023
December 31, 2022
Operating Leases:
Operating lease right-of-use assets
$
1,526
$
2,098
Operating lease liabilities
1,711
2,417
Finance Leases:
Finance lease right-of-use assets
$
4,073
$
4,213
Finance lease liability
4,381
4,422
Weighted Average Remaining Lease Term:
Operating Leases
17.22 years
18.28 years
Finance Leases
27.35 years
28.35 years
Weighted Average Discount Rate:
Operating Leases
3.88
%
3.85
%
Finance Leases
9.40
%
9.41
%
Maturities of lease liabilities were as follows:
Twelve Months Ending December 31,
(In thousands)
$
Thereafter
5,256
Total minimum lease payments
$
6,091
The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $206,000 and $228,000 for the years ended December 31, 2023 and 2022, respectively. All lease agreements are accounted for as operating leases.
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NOTE 29: SUBSEQUENT EVENTS
On March 4, 2024 Pathfinder Bank entered into a purchase and assumption agreement (the “Purchase Agreement”) with Berkshire Bank, the banking subsidiary of Berkshire Hills Bancorp, Inc. (“Berkshire Bank”). Under the Purchase Agreement, Pathfinder Bank will acquire approximately $32 million in loans and one branch location (along with associated personal property and fixtures), and will assume approximately $198 million in deposits. With respect to loans, Pathfinder Bank will pay an amount equal to the sum of 95% of the aggregate unpaid principal balances, measured as of the closing date, plus any accrued interest through closing on the loans. Pathfinder Bank will pay a 5.8% premium on the aggregate amount of non-time deposits associated with the branch, measured as of the closing date (the “Core Deposits”), and will assume all non-Core Deposits associated with the branch, measured as of the closing date, at par value. The total deposit premium to be paid by Pathfinder Bank equates to approximately 4.0% when applied to the aggregated Core Deposits and non-Core Deposits. Pathfinder Bank will assume Berkshire Bank’s existing commercial lease for the real property associated with the branch (including anticipated annual lease payment costs of approximately $946,000). The transaction is expected to close by the end of the third quarter of 2024 and is subject to receipt of regulatory approvals and certain other customary closing conditions.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) (the Company’s principal executive officer and principal financial officer), management conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023. The term “disclosure controls and procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the filing of the Annual Report on Form 10-K as of December 31, 2023, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective at December 31, 2023.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We did not make any changes in internal control over financial reporting during the quarter ended December 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B: OTHER INFORMATION
During the fourth quarter of 2023, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)Information concerning the directors of the Company is incorporated herein by reference to Proposal 1 of the Company’s Proxy Statement for the Annual Meeting of Shareholders.
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(b)Information concerning the officers and directors compliance with Section 16(a) of the Securities Exchange Act is incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the caption “Delinquent Section 16(a) Reports”.
(c)Information concerning the Company’s Code of Ethics is incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the caption “Code of Ethics”.
(d)Information concerning the Company’s Audit Committee and “financial expert” thereof is incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the caption “Audit Committee”.
(e)Set forth below is information concerning the Executive Officers of the Company at December 31, 2023.
Name
Age
Positions Held With the Company
James A. Dowd, CPA
President and Chief Executive Officer
Ronald Tascarella
Executive Vice President, Chief Banking Officer
Walter F. Rusnak, CPA, CGMA
Senior Vice President, Chief Financial Officer
Daniel R. Phillips
Senior Vice President, Chief Information Officer
William O' Brien
Senior Vice President, Chief Risk Officer and Corporate Secretary
Robert Butkowski
Senior Vice President, Chief Operating Officer

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11: EXECUTIVE COMPENSATION
(a)Information with respect to management compensation and transactions required under this item is incorporated by reference hereunder in the Company's Proxy Materials for the Annual Meeting of Shareholders under the caption "Compensation Committee".
(b)Information concerning director compensation is incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the caption “Directors Compensation”.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Shareholders under the caption "Voting Securities and Principal Holders Thereof."

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Shareholders under the captions “Independence and Diversity of Directors” and "Transactions with Certain Related Persons”.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent registered public accounting firm is Bonadio & Co., LLP, Syracuse, NY, Auditor Firm ID 1884. The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Shareholders under the caption "Audit and Related Fees".
- 121 -
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements - The Company’s consolidated financial statements, for the years ended December 31, 2023 and 2022, together with the Report of Independent Registered Public Accounting Firm are filed as part of this Form 10-K report. See “Item 8: Financial Statements and Supplementary Data.”
(a)(2)
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is inapplicable or has been included in “Item 7: Management Discussion and Analysis.”
(b)
Exhibits
2.1
Purchase and Assumption Agreement dated as of March 4, 2024, by and between Berkshire Bank and Pathfinder Bank (Incorporated herein by reference to Exhibit 1.1 to Pathfinder Bancorp, Inc.'s Current Report on Form 8-K, file no. 001-36695, filed on March4, 2024).
3.1
Articles of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to Pathfinder Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, originally filed on June 11, 2014)
3.2
Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to Pathfinder Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
3.3
Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. designating the Company’s Series B Convertible Perpetual Preferred Stock, par value $0.01 per share (Incorporated herein by reference to Exhibit 3.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on May 9, 2019)
3.4
Amendment to the Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. designating the Series B Convertible Perpetual Preferred Stock, $0.01 par value per share (Incorporated by reference to Exhibit 3.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on November 17, 2020)
3.5
Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. creating Class A Non-Voting Common Stock, par value $0.01 per share (Incorporated by reference to Exhibit 3.1 to Pathfinder Bancorp Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on June 10, 2021)
4.1
Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 4 to Pathfinder Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
4.2
Indenture between Pathfinder Bancorp, Inc., a federal corporation, and Wilmington Trust Company, as trustee, dated March 22, 2007 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
4.3
Supplemental Indenture between Pathfinder Bancorp, Inc. and Wilmington Trust Company, as trustee, dated October 16, 2014 (Incorporated herein by reference to Exhibit 4.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
4.4
Warrant Agreement, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, L.P., dated May 8, 2019 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on May 9, 2019)
4.5
Description of Common Stock (Incorporated herein by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 file no 000-36695, filed on March 23, 2020)
4.6
Indenture, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and UMB Bank, National Association, as trustee (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 15, 2020)
4.7
Form of 5.50% Fixed-to-Floating Rate Subordinated Note due 2030 of Pathfinder Bancorp, Inc. (included in Exhibit 4.6)
10.1
2003 Executive Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
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10.2
2003 Trustee Deferred Fee Plan (Incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
10.5
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and James A. Dowd effective February 24, 2014 (Incorporated by reference to Exhibit 10.15 to Pathfinder Bancorp, Inc.’s Current Report Form 8-K, file no. 000-23601, filed on February 25, 2014)
10.6
Amended and Restated Declaration of Trust among Pathfinder Bancorp, Inc., a federal corporation, as Sponsor, Wilmington Trust Company, as Delaware and Institutional Trustee, and the administrative trustees of the Pathfinder Statutory Trust II (Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
10.7
Amendment two to the Trustee Deferral Fee Plan (Incorporated by reference to Exhibit 10.17 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
10.8
Amendment one to the Executive Deferral Compensation Plan (Incorporated by reference to Exhibit 10.18 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
10.9
Amendment one to the Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.19 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
10.10
Subordinated Loan Agreement (Incorporated herein by reference to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 19, 2015)
10.11
2016 Pathfinder Bancorp, Inc. Equity Incentive Plan (Incorporated by reference to Appendix A to Pathfinder Bancorp, Inc.’s Proxy Statement, file no. 001-36695, filed on March 29, 2016.
10.12
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Ronald Tascarella effective February 24, 2014 (Incorporated by reference to Exhibit 10.14 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 30, 2018).
10.13
Senior Executive Split Dollar Life Insurance Plan (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
10.14
Change of Control Agreement between Pathfinder Bank and James A. Dowd (Incorporated by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
10.15
Change of Control Agreement between Pathfinder Bank and Ronald Tascarella (Incorporated by reference to Exhibit 10.3 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
10.16
Securities Purchase Agreement, by and between Pathfinder Bancorp, Inc. and the Purchasers Identified on the Signature Pages Thereto, dated May 8, 2019 (Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on May 9, 2019)
10.17
Registration Rights Agreement, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, L.P., dated May 8, 2019 (Incorporated herein by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on May 9, 2019)
10.18
Form of Subordinated Note Purchase Agreement, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and the Several Purchasers (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 15, 2020)
10.19
Form of Registration Rights Agreement, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and the Several Purchasers (Incorporated by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 15, 2020)
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10.20
Exchange Agreement, dated as of November 13, 2020, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, LP. (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on November 17, 2020)
10.21
Separation Agreement and General Release by and Between Pathfinder Bancorp, Inc. and Thomas W. Schneider, Dated September 28, 2022 (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp Inc.'s Current Report on Form 8-K, file no. 001-36695, filed on October 7, 2022).
10.22
Amendment to the Registration Rights Agreement (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.'s Current Report on Form 8-K, file no. 001-36695, filed on May 8, 2023).
Code of Ethics (Incorporated by reference to Exhibit 14 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, file no. 000-23601, filed on March 31, 2004)
Subsidiaries of Registrant
Consent of Bonadio & Co., LLP
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Policy Relating to Recovery of Erroneously Awarded Compensation
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition as of December 31, 2023 and 2022, (ii) the Consolidated Statements of Income for the years ended December 31, 2023 and 2022, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2023 and 2022, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2023 and 2022, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022, and (vi) the Notes to the Consolidated Financial Statements
Cover Page Interactive Data File (embedded within the Inline XBRL document)