Pathfinder Bancorp Inc

Previous wording

The Company is a Maryland corporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial 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” or “Agency”), 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 a noncontrolling interest within the consolidated financial statements. At March 31, 2024, the Company and subsidiaries had total consolidated assets of $1.45 billion, total consolidated liabilities of $1.33 billion and shareholders' equity of $121.8 million, plus noncontrolling interest of $814,000, which represents the 49% of FitzGibbons not owned by the Company.

Current wording

The Company is a Maryland corporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial 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” or “Agency”), 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 a noncontrolling interest within the consolidated financial statements. At June 30, 2024, the Company and subsidiaries had total consolidated assets of $1.45 billion, total consolidated liabilities of $1.32 billion and shareholders' equity of $123.3 million, plus noncontrolling interest of $826,000, which represents the 49% of FitzGibbons not owned by the Company.

Previous wording

The following discussion reviews the Company's financial condition at March 31, 2024 and the results of operations for the three month periods ended March 31, 2024 and 2023. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or any other period.

Current wording

The following discussion reviews the Company's financial condition at June 30, 2024 and the results of operations for the three and six month periods ended June 30, 2024 and 2023. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or any other period.

Previous wording

-41 - of Financial Condition and Results of Operations included in the 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2023 (“the consolidated annual financial statements”) as of December 31, 2023 and 2022 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.

Current wording

The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2024 (“the consolidated annual financial statements”) as of December 31, 2023 and 2022 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.

Previous wording

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of Pathfinder Bancorp, Inc. and its subsidiary, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions may be less favorable than expected; (2) competitive pressures among depository institutions may increase significantly; (3) changes in the interest rate environment may reduce interest margins; (4) loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (5) the impact of a pandemic or other health crises and the government's response to such pandemic or crises on our operations as well as those of our customers and on the economy generally and in our market area specifically; (6) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (7) legislative or regulatory changes or actions may adversely affect the businesses in which Pathfinder Bancorp, Inc. is engaged; (8) changes and trends in the securities markets may adversely impact Pathfinder Bancorp, Inc.; (9) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (10) difficulties in integrating any businesses that we may acquire, including our proposed acquisition of the East Syracuse branch of Berkshire Bank, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (11) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (12) our ability to prevent or mitigate fraudulent activity and cybersecurity threats; and (13) the outcome of any future regulatory and legal investigations and proceedings may not be anticipated.

Current wording

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of Pathfinder Bancorp, Inc. and its subsidiary, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions may be less favorable than expected; (2) competitive pressures among depository institutions may increase significantly; (3) changes in the interest rate environment may reduce interest margins; (4) loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (5) the impact of a pandemic or other health crises and the government's response to such pandemic or crises on our operations as well as those of our customers and on the economy generally and in our market area specifically; (6) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (7) legislative or regulatory changes or actions may adversely affect the businesses in which Pathfinder Bancorp, Inc. is engaged; (8) changes and trends in the securities markets may adversely impact Pathfinder Bancorp, Inc.; (9) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (10) difficulties in integrating any businesses that we may acquire, including our recently completed acquisition of the East Syracuse branch of Berkshire Bank, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (11) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (12) our ability to prevent or mitigate fraudulent activity

Previous wording

The most significant accounting policies followed by the Company are presented in Note 1 to the annual audited 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 quarterly 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

Current wording

The most significant accounting policies followed by the Company are presented in Note 1 to the annual audited 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 quarterly 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 taxes, pension obligations, the evaluation of investment securities for credit losses, the estimation of fair values for accounting and disclosure purposes, and the evaluation of goodwill for impairment 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.

Previous wording

The measurement of individually evaluated loans is measured by determining 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. For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime incurred loss for each risk-rating category. 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 March 31, 2024, the Bank’s position in individually evaluated loans consisted of 72 loans totaling $23.2 million. Of these loans, 17 loans, totaling $1.6 million, were valued using the present value of future cash flows method; and 55 loans, totaling $21.6 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 incurred loss for each risk-rating category.

Current wording

The measurement of individually evaluated loans is measured by determining 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. For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime incurred loss for each risk-rating category. 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 June 30, 2024, the Bank’s position in individually evaluated loans consisted of 58 loans totaling $19.3 million. Of these loans, 17 loans, totaling $3.1 million, were valued using the present value of future cash flows method; and 41 loans, totaling $16.2 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 incurred loss for each risk-rating category.

Previous wording

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 March 31, 2024, the Bank held $438.6 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 56.0% of the Bank’s entire loan portfolio. The Bank allocated $7.8 million to the ACL for these loans, including $4.0 million derived from the use of qualitative factors in the calculation. Given the concentration of ACL allocation to the total commercial loan portfolio and the significant judgments made by management in deriving the qualitative loss factors, management considers the impact that changes in judgments could have on the ACL. The ACL could increase (or decrease) by approximately $1.0 million, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at March 31, 2024 in the final recorded estimation of the ACL on loans recognized on the Statements of Financial Condition.

Current wording

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 June 30, 2024, the Bank held $461.2 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 52.0% of the Bank’s entire loan portfolio. The Bank allocated $7.5 million to the ACL for these loans, including $3.6 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 $900,000, 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 June 30, 2024 in the final recorded estimation of the ACL on loans recognized on the Statements of Financial Condition.

Previous wording

The Company carries all of its AFS investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities’ credit losses securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities portfolio, for both AFS and HTM securities for credit losses, management considers (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) if the present value of expected cash flows is insufficient to recover the entire amortized cost basis.

Current wording

The Company carries all of its AFS investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities’ credit losses securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities portfolio, for both AFS and HTM securities for credit losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be

Previous wording

Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the results of the December 31, 2023 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. Management will continuously evaluate all relevant economic and operational factors potentially affecting the Bank or the fair value of its assets, including goodwill. Should the pandemic or recent banking crisis, or the future economic consequences thereof, require a significant and sustained change in the operations of the Bank, re-evaluations of the Bank’s goodwill valuation will be conducted on a more frequent basis.

Current wording

Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the results of the December 31, 2023 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. Management will continuously evaluate all relevant economic and operational factors potentially affecting the Bank or the fair value of its assets, including goodwill. Should future economic consequences require a significant and sustained change in the operations of the Bank, re-evaluations of the Bank’s goodwill valuation will be conducted on a more frequent basis.

Previous wording

-44 - assume approximately $198 million in deposits. With respect to loans, the 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. The 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 the Bank equates to approximately 4.0% when applied to the aggregated Core Deposits and non-Core Deposits. The 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.

Current wording

On July 19, 2024, the Bank completed the previously announced purchase and assumption of the East Syracuse, NY branch of Berkshire Bank, the banking subsidiary of Berkshire Hills Bancorp, Inc. In connection with the purchase, the Bank assumed approximately $186 million in deposit liabilities and acquired approximately $30 million in loans. With respect to the purchased loans, the Bank paid an amount equal to the sum of 95% of the aggregate unpaid principal balances, measured as of the closing date, plus any accrued interest related to the loans through the closing date. The Bank also paid 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 assumed all non-Core Deposits associated with the branch, measured as of the closing date, at par value. The total deposit premium paid by the Bank therefore equates to approximately 3.8% when applied to the aggregated Core Deposits and non-Core Deposits. The average cost of deposits acquired in the East Syracuse branch acquisition was approximately 1.99% (excluding the effects of future Core Deposit Intangible amortization). The Company intends to utilize the additional liquidity obtained with this acquisition to pay down approximately $150 million of borrowings that had an average cost of approximately 5.33% at June 30, 2024, which is expected to benefit total funding costs beginning in the third quarter of 2024. Finally, the Bank assumed Berkshire Bank’s existing commercial lease for the real property associated with the branch with an annual lease payment of approximately $946,000, excluding property taxes and certain other associated property related obligations that the Bank also assumed, and purchased the personal property and fixtures located within the branch facility for approximately $264,000.

Previous wording

The following represents the significant highlights of the Company’s operating results between the first quarter of 2024 and the first quarter of 2023.

Current wording

The following represents the significant highlights of the Company’s operating results between the second quarter of 2024 and the second quarter of 2023.

Previous wording

Total assets decreased $12.1 million, or 0.8% to $1.45 billion at March 31, 2024 as compared to December 31, 2023, primarily driven by lower interest-earning deposits balances and loans.

Current wording

Total assets decreased $19.6 million, or 1.3% to $1.45 billion at June 30, 2024 as compared to December 31, 2023, primarily driven by lower cash and cash equivalents balances, held-to-maturity securities, and loans.

Previous wording

Asset quality metrics, as measured by net loan charge-offs, decreased in the first quarter of 2024 in comparison to the fourth quarter of 2023. The annualized net loan charge-offs to average loans ratio was 0.01% at March 31, 2024, compared to 0.47% at December 31, 2023, and 0.01% at March 31, 2023.

Current wording

Asset quality metrics, as measured by net loan charge-offs, decreased in the second quarter of 2024 in comparison to the fourth quarter of 2023. The annualized net loan charge-offs to average loans ratio was 0.02% at June 30, 2024, compared to 0.47% at December 31, 2023, and 0.06% at June 30, 2023.

Previous wording

Nonperforming loans to total loans were 2.2% at March 31, 2024, compared to 1.9% at December 31, 2023 and 2.1% at March 31, 2023. Correspondingly, the ratio of the allowance for credit losses to nonperforming loans was 84.8% at March 31, 2024, as compared to 92.7% at December 31, 2023, and 93.6% at March 31, 2023.

Current wording

Nonperforming loans to total loans were 2.8% at June 30, 2024, compared to 1.9% at December 31, 2023 and 2.3% at June 30, 2023. Correspondingly, the ratio of the allowance for credit losses to nonperforming loans was 69.0% at June 30, 2024, as compared to 92.7% at December 31, 2023, and 92.4% at June 30, 2023.

Previous wording

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve requirements on loans individually evaluated, in its determination of the adequacy of the ACL. For the three months ended March 31, 2024, $726,000 was recorded in PCL as compared to $692,000 in the same prior year three month period. The provision in the quarter ended March 31, 2024 was reflective of the qualitative factors used in determining the adequacy of the ACL and changes in the levels of delinquent and nonaccrual loans. The first quarter PCL reflects an addition to reserves considering loan growth and asset quality metrics. The

Current wording

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve requirements on loans individually evaluated, in its determination of the adequacy of the ACL. For the three months ended June 30, 2024, $290,000 was recorded in PCL, reflecting a decrease of $850,000 compared to the same period in 2023. The quarter ended June 30, 2023, provision for credit losses of $1.1 million was attributed to two large commercial real estate and commercial loan relationships experiencing credit deterioration. The quarter ended June 30, 2024 provision for credit losses included an increase in specific reserves of approximately $665,000, partially offset by improvement in certain qualitative and other factors that resulted in a net increase in the provision for loans of $304,000. The remaining components in provision for credit losses was a net reduction of $14,000.

Previous wording

In comparing the year-over-year first quarter periods, the Company’s return on average assets decreased 16 basis points to 0.59% due to the combined effects of the decrease in net income (the numerator in the ratio), and an increase in average assets (the denominator in the ratio). Average assets increased mostly due to an increase of $62.7 million in the average balances of taxable investment securities in the first quarter of 2024, as compared to the same quarter of 2023.

Current wording

In comparing the year-over-year second quarter periods, the Company’s return on average assets decreased only one basis point to 0.56% due to the combined effects of a modest gain in net income (the numerator in the ratio), outpaced slightly by a small increase in average assets (the denominator in the ratio). Average assets increased mostly due to an increase of $64.7 million in the average balances of taxable investment securities in the second quarter of 2024, as compared to the same quarter of 2023.

Previous wording

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and resultant yield information in the tables have 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. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.

Current wording

The following tables set forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and resultant yield information in the tables have 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. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.

Previous wording

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. Total deposits increased by $20.7 million, or 1.8% from December 31, 2023. The increase in consumer and business deposits during the quarter ended March 31, 2024, reflected the Bank’s increased market penetration among both non-business and business customers. For the quarter ended March 31, 2024, 57.0% of the Company's 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.

Current wording

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. Total deposits decreased by $18.8 million, or 1.7% from December 31, 2023. The decrease in deposits during the six months ended June 30, 2024 was primarily due to seasonal fluctuations of municipal depositors. At June 30, 2024, 55.9% of the Company's deposit base of $1.10 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.

Previous wording

The following table sets forth our nonbrokered and brokered deposit activities in the periods indicated:

Current wording

The following table sets forth our nonbrokered and brokered deposit activities at the dates indicated:

Previous wording

The Company recorded $726,000 in provision for credit losses for the three month period ended March 31, 2024, as compared to $692,000 for the three month period ended March 31, 2023. The provisioning in the first quarter of 2024 and 2023 reflects management’s determination of the appropriate level of additions to reserves, the composition of the loan portfolio, changes in quantifiable econometric data statistically correlated to historical charge-off rates, subjective

Current wording

The Company recorded $290,000 in provision for credit losses for the three month period ended June 30, 2024, as compared to $1.1 million for the three month period ended June 30, 2023. The provisioning in the second quarter of 2024 and 2023

Previous wording

-46 - credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios.

Current wording

-57 - reflects management’s determination of the appropriate level of additions to reserves, the composition of the loan portfolio, changes in quantifiable econometric data statistically correlated to historical charge-off rates, subjective qualitative assessments of changes in a broad array of factors including changes to underwriting criteria, loan staffing and local market conditions. This represents a $850,000 decrease in provision for credit losses in the second quarter of 2024, as compared to the same period in 2023. This decrease can be primarily attributed to the significant $1.1 million provision for credit losses in the second quarter of 2023, which related to two large commercial real estate and commercial loan relationships experiencing credit deterioration, which necessitated a higher provision to recognize the effects of increased risk within these relationships. The quarter ended June 30, 2024 provision for credit losses included an increase in specific reserves of approximately $665,000, partially offset by improvement in certain qualitative and other factors that resulted in a net increase in the provision for loans of $304,000. The remaining components in provision for credit losses was a net reduction of $14,000. The Bank's credit sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for credit losses.

Previous wording

The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of delinquent loans to total loans increased to 5.5% at March 31, 2024 as compared to 3.7% at December 31, 2023. Delinquent loans (numerator) increased $15.3 million while total loan balances (denominator) decreased $5.7 million at March 31, 2024, as compared to December 31, 2023. The increase in past due loans was driven by a $13.9 million increase in loans delinquent 30-59 days and over past due, and an increase of $2.4 million in loans delinquent 90 days and over at March 31, 2024, offset by a decrease of $890,000 in loans delinquent 60-89 days, as compared to December 31, 2023. The increase of $2.7 million primarily consisted of increases in commercial real estate, commercial lines of credit and commercial loans.

Current wording

The Company measures delinquency based on the amount of past due loans (defined as loans equal to or greater than 30 days past due) as a percentage of total loans. The ratio of delinquent loans to total loans was 4.8%, 5.5% and 3.8% at June 30, 2024, March 31, 2024 and December 31, 2023, respectively. Delinquent loans (numerator) increased $15.3 million from December 31, 2023 to March 31, 2024, but subsequently decreased by $7.1 million at June 30, 2024. Total loan balances (denominator) decreased $5.7 million and $3.4 million at March 31, 2024 and June 30 2024, respectively. The increase from December 31, 2023 to March 31, 2024 was driven by loans delinquent 30-59 days, which increased by $13.8 million. The decrease from March 31, 2024 to June 30, 2024 was attributed to a decrease of $15.7 million in loans delinquent 30-59 days partially offset by increases in both the 60-89 days and 90 days and over of $3.8 million and $4.8 million, respectively.

Previous wording

Total noninterest expense for the first quarter of 2024 was $7.7 million, an increase of $182,000, or 2.4%, compared to the same three month period in 2023. This rise was driven primarily by a $146,000, or 3.5%, increase in salaries and employee benefits. The adjustments to salary structures and commissions, particularly tied to insurance and investment services, reflect the Bank's strategic efforts to enhance its competitive edge in the market and address the demands of an inflationary environment with respect to attracting and retaining employees.

Current wording

The increase in salaries and benefits of $639,000 in the six months ended June 30, 2024 was driven by the aforementioned increases in headcount and wage inflation, and reflect the Bank's strategic efforts to enhance its competitive edge in the market and address the demands of an inflationary environment with respect to attracting and retaining employees.

Previous wording

Income tax expense decreased $137,000 to $532,000, with an effective tax rate of 19.7%, for the quarter ended March 31, 2024, as compared to $669,000 with an effective tax rate of 20.0% for the same three month period in 2023. The decrease in income tax expense for the quarter ended March 31, 2024, as compared to the same quarter in 2023, was primarily driven by a decrease of $479,000 in income before taxes. The effective income tax rate decreased .03% to 19.7% for the three months ended March 31, 2024 as compared to 20.0% for the same three month period in 2023. The decrease in the tax rate

Current wording

Income tax expense decreased $49,000 to $481,000, with an effective tax rate of 19.3%, for the quarter ended June 30, 2024, as compared to $530,000 with an effective tax rate of 21.2% for the same three month period in 2023. The decrease in income tax expense for the quarter ended June 30, 2024, as compared to the same quarter in 2023, was primarily driven by an increase in fluctuations in permanent tax differences The effective income tax rate decreased 1.9% to 19.3% for the three months ended June 30, 2024 as compared to 21.2% for the same three month period in 2023. The decrease in the tax

Previous wording

-52 - in the first quarter of 2024, as compared to the same quarter in 2023, was primarily related to fluctuations in permanent tax differences.

Current wording

-60 - rate in the second quarter of 2024, as compared to the same quarter in 2023, was primarily related to fluctuations in permanent tax differences.

Previous wording

The effective income tax rate decreased 0.3% to 19.7% for the three months ended March 31, 2024 as compared to 20.0% for the same three month period in 2023. The decrease in the tax rate in the first quarter of 2024, as compared to the same quarter in 2023, was primarily related to fluctuations in permanent tax differences.

Current wording

Income tax expense decreased $186,000 to $1.0 million, with an effective tax rate of 19.5%, for the six months ended June 30, 2024, as compared to $1.2 million with an effective tax rate of 20.5%, for the same six month period in 2023. The decrease in income tax expense for the six months ended June 30, 2024, as compared to the same six month period in 2023, was primarily driven by the year-over-year decrease in income before taxes coupled with increases in permanent tax differences. The effective income tax rate decreased 1.0% to 19.5% for the six months ended June 30, 2024 as compared to 20.5% for the same six month period in 2023. The decrease in the tax rate in the six months ended June 30, 2024, as compared to the same period in 2023, was primarily related to fluctuations in permanent tax differences.

Previous wording

The Company’s tax liability is a function of the 21% statutory federal tax rate, the level of pretax income, the varying effects of New York State income taxes, and is partially reduced by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits. In addition, the tax effects of certain incentive stock option activity may reduce the Company’s effective tax rate on a sporadic basis.

Current wording

The Company’s tax liability is a function of the 21% statutory federal tax rate, the level of pretax income, the varying effects of New York State income taxes, and is partially reduced by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of historic and low income housing tax credits. In addition, the tax effects of certain incentive stock option activity may reduce the Company’s effective tax rate on a sporadic basis.

Previous wording

Basic and diluted earnings per Voting and Series A Non-Voting share were $0.34 per share for the first quarter of 2024, as compared to $0.43 per basic and diluted Voting and Series A Non-Voting share for the same quarter of 2023. The decrease in earnings per share between these two periods was due to the decrease in net income between these two time periods. Further information on earnings per share can be found in Note 3 of the unaudited consolidated financial statements of this Form 10-Q.

Current wording

Basic and diluted earnings per Voting and Series A Non-Voting share were $0.66 for the six month period ended June 30, 2024, as compared to $0.75 for the same prior year period. The decrease in earnings per share between these two periods was due to the decrease in net income between these two time periods. Further information on earnings per share can be found in Note 3 of the unaudited consolidated financial statements of this Form 10-Q.

Previous wording

Total assets decreased $12.1 million, or 0.83%, to $1.45 billion at March 31, 2024 as compared to December 31, 2023. This decrease was due primarily to decreases in loans and total cash and cash equivalents.

Current wording

Total assets decreased $19.6 million, or 1.34%, to $1.45 billion at June 30, 2024 as compared to December 31, 2023. This decrease was due primarily to decreases in cash and cash equivalents and total loans, partially offset by an increase in investment securities.

Previous wording

Loans totaled $891.5 million at March 31, 2024, a decrease of $5.7 million, or 0.63%, compared to $897.2 million at December 31, 2023. This was primarily due to decreases of $5.3 million in total residential mortgage loans and $1.8 million in total consumer loans, partially offset by increases of $1.4 million in commercial loans. Total cash and cash equivalents totaled $29.2 million at March 31, 2024, a decrease of $19.5 million, or 40.0%, compared to $48.7 million at December 31, 2023. This was due to decreases of $20.7 million in interest-earning deposits, slightly offset by increases in cash and due from banks of $1.2 million.

Current wording

Total cash and cash equivalents totaled $31.8 million at June 30, 2024, a decrease of $16.9 million, or 34.7%, compared to $48.7 million at December 31, 2023. This decline was due to a decrease of $16.6 million in interest-earning deposits, slightly offset by an increase in cash and due from banks of $316,000. Loans totaled $888.3 million at June 30, 2024, a decrease of $8.9 million, or 1.0%, compared to $897.2 million at December 31, 2023. This decrease was primarily due to decreases of $8.5 million in total residential mortgage loans and $3.6 million in total consumer loans, partially offset by an increase of $3.1 million in commercial loans.

Previous wording

Total decreases in assets were partially offset by an increase in investment securities, including investment in FHLB-NY stock, of $12.1 million, or 2.7%, to $462.0 million at March 31, 2024, as compared to December 31, 2023. This was due to increases of $20.3 million in available-for-sale securities and $136,000 in marketable equity securities, partially offset by decreases of $6.6 million in held-to-maturity securities and $1.7 million in FHLB-NY stock.

Current wording

Total decreases in assets were partially offset by an increase in investment securities, including investment in FHLB-NY stock, of $3.8 million, or 0.8%, to $453.7 million at June 30, 2024, as compared to December 31, 2023. This increase was due to increases of $16.3 million in available-for-sale securities and $587,000 in marketable equity securities, partially offset by decreases of $13.0 million in held-to-maturity securities and $46,000 in FHLB-NY stock.

Previous wording

Shareholders' equity increased by $2.3 million, or 1.9%, from $119.5 million at December 31, 2023, to $121.8 million on March 31, 2024. This increase was primarily due to the Company’s recorded net income of $2.1 million and a decrease in accumulated other comprehensive loss of $743,000, partially reduced by declared dividends to shareholders of $622,000.

Current wording

Shareholders' equity increased by $3.8 million, or 3.2%, from $119.5 million at December 31, 2023, to $123.3 million at June 30, 2024. This increase was primarily due to the Company’s recorded net income of $4.1 million, and a decrease in accumulated other comprehensive loss of $819,000, partially reduced by declared dividends to shareholders of $1.2 million.

Previous wording

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary bank are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP. 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. The Company provides, below, an explanation of the calculations, as supplemental information, for non-GAAP measures included in the consolidated annual financial statements. In addition, the Company provides a reconciliation of its subsidiary bank’s disclosed regulatory capital measures, below.

Current wording

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted

Previous wording

As indicated in the table above, nonperforming assets at March 31, 2024 were $19.7 million, and were $2.4 million higher than the $17.4 million reported at December 31, 2023 and $411,000 higher than the $19.3 million reported at March 31, 2023. The increase in the nonperforming loans on March 31, 2024, as compared to December 31, 2023, was primarily the result of the downgrade of one commercial real estate loan with a balance of $1.4 million, $900,000 in commercial and consumer loan relationships, and $200,000 in other loans in the aggregate.

Current wording

As indicated in the table above, nonperforming assets at June 30, 2024 were $24.6 million, and were $7.2 million higher than the $17.4 million reported at December 31, 2023 and $4.0 million higher than the $20.6 million reported at June 30, 2023. The increase in the nonperforming loans on June 30, 2024, as compared to December 31, 2023, was driven by the downgrade of one commercial real estate loan with a balance of $1.4 million, deterioration of several commercial loan relationships totaling $4.8 million, and $1.1 million in consumer relationships.

Previous wording

The allowance for credit losses on loans represents management’s estimate of the lifetime losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for credit losses was $16.7 million and $16.0 million at March 31, 2024 and December 31, 2023, respectively. The ratio of the allowance for credit losses to total loans was 1.87% as of March 31, 2024, as compared to 1.78% at December 31, 2023 and 1.96% at March 31, 2023. Management performs a quarterly evaluation of the allowance for credit losses based on quantitative and qualitative factors and has determined that the current level of the allowance for credit losses is adequate to absorb the losses in the loan portfolio as of March 31, 2024.

Current wording

The allowance for credit losses on loans represents management’s estimate of the lifetime losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for credit losses was $16.9 million and $16.0 million at June 30, 2024 and December 31, 2023, respectively. The ratio of the allowance for credit losses to total loans was 1.89% as of June 30, 2024, as compared to 1.78% at December 31, 2023 and 2.07% at June 30, 2023. Management performs a quarterly evaluation of the allowance for credit losses based on quantitative and qualitative factors and has determined that the current level of the allowance for credit losses is adequate to absorb the losses in the loan portfolio as of June 30, 2024.

Previous wording

At March 31, 2024 and December 31, 2023, the Company had $23.2 million and $22.6 million in loans, respectively, which were individually analyzed, having established specific reserves of $3.8 million and $3.7 million, respectively, on these loans. The $100,000 increase in specifically-identified loans between these two dates was the result of a small number of general loans placed into nonaccrual status.

Current wording

At June 30, 2024 and December 31, 2023, the Company had $19.4 million and $22.6 million in loans, respectively, which were individually analyzed, having established specific reserves of $4.4 million and $3.7 million, respectively, on these loans. The $1.2 million decrease in specifically identified loans between these two dates was the result of a single relationship charge-off.

Previous wording

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 totaled $42.7 million at March 31, 2024, a decrease of $400,000, as compared to $43.1 million at December 31, 2023. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered specifically-identified.

Current wording

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 totaled $40.6 million at June 30, 2024, an increase of $2.5 million, as compared to $43.1 million at December 31, 2023. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered specifically-identified.

Previous wording

Through the first three months of 2024, as indicated in the consolidated statement of cash flows, the Company reported net cash flow from operating activities of $504,000 and net cash outflow of $7.4 million related to investing activities. The net cash outflow from investing activities was generated principally by a $13.0 million increase in net investment activity, a $230,000 increase in premises and equipment and a decrease of $5.7 million in net loan activity. The Company reported net cash outflows from financing activities of $12.6 million, primarily due to a $38.2 million decrease in net borrowings, a $26.0 million decrease in deposits, and an aggregate decrease of $502,000 in net cash from all other financing sources, including dividends paid to common voting and non-voting shareholders and warrants of $560,000.

Current wording

Through the first six months of 2024, as indicated in the consolidated statement of cash flows, the Company reported net cash flow from operating activities of $2.0 million and net cash inflows of $3.1 million related to investing activities. The net cash inflows from investing activities was generated principally by an increase of $9.0 million in net loan activity, offset by a $4.9 million decrease in net investment activity, and a $1.1 million decrease in premises and equipment. The Company reported net cash outflows from financing activities of $22.1 million, primarily due to a $18.8 million decrease in net deposit balances, a $2.2 million decrease in borrowings, and an aggregate decrease of $1.1 million in net cash from all other financing sources, including dividends paid to common voting and non-voting shareholders and warrants of $1.2 million.

Previous wording

The Bank’s management monitors liquidity on a continuous basis through a broad range of internal programs and considers effective liquidity management to be one of its primary objectives. At March 31, 2024 the Bank had deposits of $1.15 billion, of which a portion were nominally uninsured, as they were above the insurance limits established by the Federal Deposit Insurance Corporation (“FDIC”) on that date. Of the nominally uninsured deposits at March 31, 2024, $72.7 million were insured through a long-standing reciprocal deposit program managed by a third-party entity. In addition, $140.5 million in municipal deposits are fully protected against principal loss by a collateral program whereby the Bank places high-quality securities with an independent custodian as collateral. The Bank had $126.9 million in deposits, representing 11.1% of all deposits, that were considered to be uninsured at March 31, 2024.

Current wording

The Bank’s management monitors liquidity on a continuous basis through a broad range of internal programs and considers effective liquidity management to be one of its primary objectives. At June 30, 2024 the Bank had deposits of $1.10 billion, of which a portion were nominally uninsured, as they were above the insurance limits established by the Federal Deposit Insurance Corporation (“FDIC”) on that date. Of the nominally uninsured deposits at June 30, 2024, $56.7 million were insured through a long-standing reciprocal deposit program managed by a third-party entity. In addition, $100.1 million in municipal deposits are fully protected against principal loss by a collateral program whereby the Bank places high-quality securities with an independent custodian as collateral. The Bank had $139.4 million in deposits, representing 12.7% of all deposits, that were considered to be uninsured at June 30, 2024.

Previous wording

The Company has a number of existing credit facilities available to it. At March 31, 2024, total credit available under the existing lines of credit was approximately $225.5 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. At March 31, 2024, the Company had $137.4 million of the available lines of credit utilized on its existing lines of credit with the remainder of $88.1 million available.

Current wording

The Company has a number of existing credit facilities available to it. At June 30, 2024, total credit available under the existing lines of credit was approximately $242.8 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. At June 30, 2024, the Company had $173.4 million of the available lines of credit utilized on its existing lines of credit with the remainder of $69.4 million available.