Pathfinder Bancorp, Inc.

Previous wording

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.

Current wording

On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual holding company form of organization to the stock holding company form of organization (the “Conversion”). Following the completion of the Conversion, the Company was created substantially in its current form and Pathfinder Bancorp, MHC ceased to exist. The Company had 6,125,649 and 6,099,571 shares of voting and non-voting common stock in aggregate outstanding at December 31, 2024 and December 31, 2023, respectively.

Previous wording

-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.

Current wording

-27 - non-voting convertible common stock. Castle Creek will need the approval or non-objection of the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services if it seeks to increase its ownership of shares of Common Stock in excess of 9.9% of the outstanding shares of Common Stock.

Previous wording

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.

Current wording

As discussed above, pursuant to the Securities Purchase Agreement, on May 8, 2019, the Company issued a Warrant to Castle Creek to purchase 125,000 shares of non-voting common stock at an exercise price equal to $14.25 per share. At the same time, the Company entered into a Warrant Agreement with Castle Creek, to, among other things, authorize and establish the terms of the Warrant. The Warrant is exercisable at any time after May 8, 2019, and from time to time, in whole or in part, until May 8, 2026. However, the exercise of such Warrant remains subject to certain contractual provisions, and regulatory approval if Castle Creek’s ownership of Common Stock would exceed 9.9%. At December 31, 2024, Castle Creek owned approximately 9.9% of the Company’s common voting stock. The Warrant will receive dividends equal to the amount paid on the Company’s common stock. The dividend payment shall be calculated on (1) the unexercised portion of the 125,000 notional shares encompassed within the terms of the Warrant, less (2) any exercised portion of the 125,000 shares, times (3) the amount of the quarterly dividend paid to common shareholders. Dividend payments, if declared on the Company’s common stock, will be made on the Warrant until its expiration date.

Previous wording

-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.

Current wording

-33 - significant judgment on the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, and environmental factors, all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being individually evaluated which are on nonaccrual and have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. The Company also establishes a specific allowance, regardless of the size of the loan, for modified loans due to borrowers experiencing financial difficulties. In addition, an accruing substandard loan could be identified as being individually evaluated. The measurement of individually evaluated loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured based on the fair value of the collateral, less costs to sell. At December 31, 2024, the Bank’s position in individually evaluated loans consisted of 45 loans totaling $20.0 million. Of these loans, 15 loans, totaling $3.0 million, were valued using the present value of future cash flows method; and 30 loans, totaling $17.0 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the lifetime loss for each risk-rating category. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in this report.

Previous wording

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.

Current wording

The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements a probability of default and loss given default and loss exposure at default estimation. The probability of default and loss given default are applied to future cash flows that are adjusted to present value and these discounted expected losses become the Allowance for Credit Losses.

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 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.

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 December 31, 2024, the Bank held $535.0 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 58.2% of the Bank’s entire loan portfolio. The Bank allocated $10.4 million to the ACL for these loans, including $4.3 million derived from the use of qualitative factors in the calculation. Given the concentration of ACL allocation to the total commercial loan portfolio and the significant judgments made by management in deriving the qualitative loss factors, management considers the impact that changes in judgments could have on the ACL. The ACL could increase (or decrease) by approximately $1.1 million, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2024 in the final recorded estimation of the ACL on loans recognized on the Statement of Financial Condition.

Previous wording

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.

Current wording

If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual credit losses and an increase to the ACL may be necessary in future periods to allow for different assumptions or adverse developments. In addition, future problems with one or more individually evaluated loans or one or more individually evaluated borrower relationships could require a significant increase to the ACL.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

On December 23, 2024, the Company announced that its Board of Directors had declared a cash dividend of $0.10 per share on the Company’s voting common and non-voting common stock, and a cash dividend of $0.10 per notional share for the issued Warrant relating to the fiscal quarter ended December 31, 2024. The dividend was paid on February 7, 2025 to shareholders of record on January 17, 2025.

Previous wording

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.

Current wording

The Company reported net income of $3.4 million for 2024, a decrease of $5.9 million as compared to net income of $9.3 million in 2023. Net income decreased during 2024, as compared to the previous year, primarily due to an $8.1 million increase in provision for credit losses that reflected a comprehensive loan portfolio review that the Bank elected to undertake as part of its ongoing commitment to continuously improve its credit risk management approach, as well as a $5.0 million increase in noninterest expense that reflected transaction-related costs associated with the Company’s July 2024 East Syracuse branch acquisition and October 2024 insurance agency asset sale. The 2024 decrease in net income was partially offset by a $4.3 million increase in noninterest income, a $2.1 million increase in net interest income before provision for credit losses, a $2.0 million decrease in provision for income taxes, and a $1.3 million increase in net income attributable to the noncontrolling interest. Basic and diluted earnings per share in 2024 were both $0.54 per share, as compared to $1.51 per share in 2023.

Previous wording

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.

Current wording

Return on average assets decreased 44 basis points to 0.23% in 2024 from 0.67% in 2023. Return on average equity decreased 534 basis points to 2.75% in 2024 as compared to 8.09% in 2023. The decreases in return on average assets and return on average equity in 2024, as compared to the previous year, were both primarily due to the aforementioned decrease in net income. Average assets increased in 2024 by $60.7 million, or 4.4%, as the Company grew its total assets by $9.1 million from December 31, 2023 to $1.47 billion at December 31, 2024.

Previous wording

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.

Current wording

-35 - interest earning assets of $1.32 billion. Interest and dividend income increased $10.7 million in 2024 to $78.4 million, as compared to $67.7 million in 2023. The income effects of the $53.4 million aggregate increase in the average balance of interest-earning assets were enhanced by an increase of 58 basis points in the overall average yield earned on those assets. These increases in interest income were partially offset by increases in interest expense, as interest expense increased $8.6 million due to an increase in the average rate paid on interest-bearing liabilities of 68 basis points in 2024 as compared to 2023, enhanced by an increase in the average balance of interest-bearing liabilities of $35.1 million during the same time period.

Previous wording

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.

Current wording

The Company recorded a provision for credit losses of $11.0 million in 2024 as compared to $2.9 million in the prior year. The $8.1 million year-over-year increase in provision for credit losses primarily resulted from a comprehensive loan portfolio review during 2024 that the Bank elected to undertake as part of its commitment to continuously improve its credit risk management approach. Additionally, the provision for credit losses in 2024 reflected an increase in nonperforming loans of $4.9 million at December 31, 2024, as compared to December 31, 2023. The Company recorded $10.2 million in total loan charge-offs in 2024 as compared to $4.2 million in 2023. The increase in charge-off activity in 2024, as compared to the previous year, was primarily related to the aforementioned comprehensive loan portfolio review during the third quarter. The charge-offs in 2024 involved loans for which the charged-off amounts had been fully reserved for in prior periods.

Previous wording

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.

Current wording

Noninterest expenses totaled $34.4 million for 2024, which was an increase of $5.0 million, or 17.1%, from the $29.4 million reported for the previous year. This increase can be primarily attributed to expenses associated with the Company's growth activities, including the branch acquisition and operating costs related to the new East Syracuse location, and investments in technology to enhance digital banking services, which align with the Company’s long-term strategic plans.

Previous wording

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.

Current wording

Salaries and employee benefits, constituting the largest component of noninterest expenses, saw a year-over-year increase of $1.9 million, primarily attributed to increased headcount including staff associated with the East Syracuse branch acquired in July 2024, higher salaries and benefits costs associated with merit increases, and wage inflation. Professional and other services expense increased $1.7 million in 2024, as compared to 2023. This increase was primarily attributed to branch acquisition-related expenses, as well as an increase in technology project implementation services and other outsourced consulting services. An increase of $555,000 in occupancy and equipment expenses contributed to the annual increase in overall noninterest expenses, reflecting the Bank's investment in physical infrastructure and branch network expansion. Other increases in overall noninterest expense included a $453,000 increase in data processing primarily related to the opening of the new East Syracuse branch, and a $248,000 increase in insurance agency expense primarily associated with transaction-related expenses related to the Company's insurance agency assets sale in October 2024.

Previous wording

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.

Current wording

Net loan charge-offs to average loans were 1.09% for 2024, as compared to 0.43% for 2023. Nonperforming loans to total loans increased to 2.40% at December 31, 2024, compared to 1.92% at December 31, 2023. The allowance for credit losses to non-performing loans at December 31, 2024 was 78.08%, compared with 92.73% at December 31, 2023. Total nonperforming assets increased $4.7 million, or 27.1%, between December 31, 2023 and December 31, 2024, largely driven by an increase of $5.9 million in nonperforming commercial and commercial real estate loans, in addition to an increase of $1.4 million in nonperforming residential real estate loans, offset by a decrease in nonperforming consumer loans of $2.4 million.

Previous wording

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.

Current wording

Management monitors its loan portfolio closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2024. Overall, the ratio of the allowance for credit losses to year end loans increased to 1.88% at December 31, 2024 from 1.78% at December 31, 2023.

Previous wording

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.

Current wording

Total past due loans measured as a percent of total loans, increased from 3.79% at December 31, 2023 to 3.81% at December 31, 2024, primarily due to increases of $2.0 million in past due commercial loans and $728,000 in past due residential loans, offset by a $1.7 million decrease in past due consumer loans. The level of nonperforming loans increased in aggregate by $4.9 million led by an increase of $5.9 million in nonperforming commercial and commercial real estate loans, in addition to an increase of $1.4 million in nonperforming residential real estate loans, and a decrease in nonperforming consumer loans of $2.4 million. Commensurate with the increase in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets increased to 1.50% at December 31, 2024 from 1.19% at December 31, 2023.

Previous wording

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.

Current wording

The Company’s shareholders’ equity increased $2.0 million, or 1.7%, to $121.5 million at December 31, 2024 from $119.5 million at December 31, 2023. This increase was primarily due to a $1.8 million increase in retained earnings, a $461,000 decrease in accumulated other comprehensive loss, a $364,000 decrease in additional paid in capital, and a $135,000 increase in ESOP shares earned. The increase in retained earnings resulted from $3.4 million in net income recorded in 2024, and $863,000 from the deconsolidation of a subsidiary related to the insurance agency assets sale. Partially offsetting these increases in retained earnings were $1.9 million for cash dividends declared on our voting common stock, $552,000 for cash dividends declared on our non-voting common stock and $50,000 for cash

Previous wording

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.

Current wording

Net interest income, before provision for credit losses, increased $2.1 million, or 5.3%, to $41.0 million in 2024 as compared to $38.9 million in the previous year. Our net interest margin for the year ended December 31, 2024 increased to 2.98% from 2.95% for the comparable prior year. The increase in net interest income was primarily due to an increase in interest and dividend income of $10.7 million, or 15.8%, offset by a lesser increase in interest expense of $8.6 million, or 30.0%. The $1.2 million increase in interest and dividend income was primarily driven by the $21.8 million increase in loan balances, combined with a 57 basis points increase in average yield. The increase in interest expense was the result of an increase in average balances of deposit accounts, as well as an increase in average cost of deposits resulting from the high interest rate environment and increased competition.

Previous wording

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.

Current wording

Interest and dividend income increased $10.7 million, or 15.8%, to $78.4 million in 2024 as compared to $67.7 million in 2023 due principally to the $53.4 million, or 4.0%, increase in average interest-earning assets and a 58 basis points increase in the average yield on average interest-earning assets. The average yield earned on loans increased 57 basis points in 2024, when compared to 2023, as a result of higher interest rates associated with variable rate loans. The average balance of loans increased $4.3 million, or 0.5%, in 2024, as compared to the previous year mostly due to the increase in average commercial real estate loans and home equity and junior liens. The average yield earned on taxable investment securities increased 66 basis points to 5.42% in 2024 as compared to 4.76% in 2023, primarily as a result of the higher interest rate environment in 2024. In addition, the average balance of taxable investment securities increased $43.9 million, or 11.6%, when compared to the prior year primarily due to increased purchases of securities in 2024 intended to take advantage of certain dynamics in the interest rate environment. In combination, these factors resulted in a $4.9 million increase in interest income associated with taxable investment securities in 2024, as compared to 2023.

Previous wording

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.

Current wording

Interest expense increased $8.6 million, or 30.0%, to $37.4 million in 2024, as compared to $28.7 million in the previous year. The year-over-year increase in interest expense was primarily driven by the higher interest rate environment in 2024 and continued competition for deposits. The average rate paid on interest-bearing deposits increased by 90 basis points to 4.16% in 2024 as compared to 3.26% in the previous year. The average cost of all interest-bearing liabilities increased from 2.65% in 2023 to 3.33% in 2024. In addition, the year-over-year increase in interest expense resulted from increases in the average balances of deposits and borrowings. The average balance of total interest-bearing liabilities increased $35.1 million, or 3.2%, in 2024, as compared to 2023, and the average balance of all deposits increased by $37.5 million, or 3.3% in 2024, as compared to the previous year, primarily due to the East Syracuse branch acquisition.

Previous wording

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.

Current wording

The Company recorded a provision for credit losses of $11.0 million in 2024 as compared to $2.9 million in the prior year. The $8.1 million year-over-year increase in provision for credit losses was primarily due to a comprehensive loan portfolio review during 2024 that the Bank elected to undertake as part of its commitment to continuously improve its credit risk management approach. The Company recorded $9.8 million in net charge-offs in 2024 as compared to $4.2 million in net charge-offs in 2023. The ratio of net charge-offs to average loans therefore increased to 1.09% in 2024 from 0.47% in 2023. Further information on earnings per share can be found in Note 1 to the consolidated financial statements of this Form 10-K.

Previous wording

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.

Current wording

Nonperforming loans to total loans increased to 2.40% at December 31, 2024 as compared to 1.92% at December 31, 2023. The allowance for credit losses to non-performing loans at December 31, 2024 was 78.1%, compared with 92.7% at December 31, 2023.

Previous wording

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.

Current wording

The Company reported income tax expense of $332,000 in 2024 and $2.4 million in 2023, a decrease of $2.1 million when compared to the previous year. This decrease was primarily the result of a decrease in income before income taxes.

Previous wording

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.

Current wording

Basic and diluted earnings per share for the year ended December 31, 2024 were both $0.54, as compared to basic and diluted earnings per share of $1.51 for the year ended December 31, 2023. The decrease in earnings per share between these two years was due to the decrease in net income available to common shareholders between these two time periods. Further information on earnings per share can be found in Note 3 to the consolidated financial statements of this Form 10-K.

Previous wording

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.

Current wording

The Company's total assets were $1.47 billion at December 31, 2024, an increase of $9.1 million, or 0.6% from December 31, 2023. The increase was primarily the result of a $20.5 million increase in loans receivable, net, a $12.6 million increase in finance lease right-of-use assets, and a $10.6 million increase in available-for-sale securities, partially offset by a $20.6 million decrease in held-to-maturity securities, and a $18.8 million decrease in interest-earning deposits. All other asset categories had a net decrease of $4.8 million.

Previous wording

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.

Current wording

The average balance of the investment portfolio represented 33.1% of the Company’s average interest-earning assets in 2024 and is designed to generate a favorable rate of return in consideration of all risk factors associated with debt securities while assisting the Company in meeting its liquidity needs and interest rate risk strategies. All of the Company’s investments, with the exception of marketable equity securities, are classified as either available-for-sale or held-to-maturity. The Company does not hold any trading securities. The Company invests in securities issued by United States Government agencies and sponsored enterprises (“GSE”), mortgage-backed securities, collateralized mortgage obligations, state and municipal obligations, mutual funds, equity securities, investment grade corporate debt instruments, and common stock issued by the FHLBNY. By investing in these types of assets, the Company reduces the credit risk of its asset base through geographical and collateral-type diversification but must accept lower yields than would typically be available on loan products. Our mortgage-backed securities and collateralized mortgage obligation portfolios include privately-issued but substantially collateralized pass-through securities as well as pass-through securities guaranteed by GSEs.

Previous wording

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.

Current wording

At December 31, 2024, available-for-sale investment securities increased 4.1% to $269.3 million and held-to-maturity investment securities decreased 11.5% to $158.7 million as compared to December 31, 2023. There were no securities that exceeded 10% of consolidated shareholders’ equity.

Previous wording

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.

Current wording

Average loans receivable represented 65.8% of the Company’s average interest earning assets in 2024 and accounted for the greatest portion of total interest income.

Previous wording

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.

Current wording

Total loans receivable, including net deferred costs, increased $21.8 million to $919.0 million at December 31, 2024 when compared to $897.2 million at December 31, 2023, due to increases in commercial real estate and home equity and junior liens of $19.1 million and $16.1 million, respectively. These increases in outstanding loan balances were partially offset by decreases in consumer loans, commercial and tax exempt loans, and residential real estate of $7.1 million, $3.4 million, and $2.9 million, respectively.

Previous wording

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.

Current wording

Management monitors its loan portfolios closely and has incorporated our current estimate of the ultimate collectability of all loans into the reported allowance for credit losses at December 31, 2024. The ratio of the allowance for credit losses to year end loans was 1.88% and 1.78% at December 31, 2024 and December 31, 2023, respectively.

Previous wording

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.

Current wording

Total nonperforming assets increased $4.7 million, or 27.1%, between December 31, 2023 and December 31, 2024, driven by an increase of $5.9 million in nonperforming commercial and commercial real estate loans, and an increase of $1.4 million in nonperforming residential real estate loans. These increases were partially offset by decreases in nonperforming consumer loans and foreclosed real estate of $2.4 million and $151,000, respectively. The increase in nonperforming commercial and commercial real estate loans in 2024 was primarily due to two loan relationships in the amount of $5.4 million that were placed on non-accrual status. The increase in nonperforming residential real estate loans in 2024 was primarily due to one loan relationship in the amount of $1.5 million that was placed on non-accrual status.

Previous wording

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.

Current wording

Management believes that the value of the collateral properties underlying the loans is sufficient to preclude any significant losses related to these loans. Management continues to monitor and react to national and local economic trends as well as general portfolio conditions which may impact the quality of the portfolio, and considers these environmental factors in support of the allowance for credit loss reserve. Management believes that the current level of the allowance for credit losses, at $17.2 million at December 31, 2024, adequately addresses the current level of risk within the loan portfolio, particularly considering the types and levels of collateralization supporting the substantial majority of the portfolio. The Company maintains strict loan underwriting standards and carefully monitors the performance of the loan portfolio. See Note 1: Summary of Significant Accounting Policies contained in the financial statements herein.

Previous wording

Foreclosed Real Estate (“FRE”) balances decreased to $151,000 at December 31, 2023, compared to $221,000 from the prior year end.

Current wording

FRE balances decreased to zero at December 31, 2024, compared to $151,000 at the prior year end.

Previous wording

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.

Current wording

The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest as set forth in the table above. The Company considers a loan as individually evaluated when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $2.4 million and $989,000 would have been recorded for the years ended December 31, 2024 and December 31, 2023, respectively.

Previous wording

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.

Current wording

The measurement of individually evaluated loans is based upon the fair value of the collateral or the present value of future cash flows discounted at the historical effective interest rate for individually evaluated loans when the receipt of contractual principal and interest is probable. At December 31, 2024 and December 31, 2023, the Company had $20.0 million and $22.6 million in loans, which were deemed to be individually evaluated, having specific reserves of $2.5 million and $3.7 million, respectively. The $1.2 million year-over-year decrease in individually evaluated loans was principally due to increases of $76,000, and $33,000 in individually evaluated consumer and home equity lines, respectively, offset by decreases of $690,000, $400,000, $116,000 and $96,000 in commercial lines of credit, commercial and industrial loans, commercial mortgage, and residential mortgages, respectively.

Previous wording

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.

Current wording

The threshold for individually evaluated commercial real estate or commercial loans remains at $100,000 and for residential mortgage loans remains at $300,000 at December 31, 2024. The thresholds described above do not apply to loans that have been classified as modified due to borrowers experiencing financial difficulties, which are individually evaluated at the time that the restructuring is affected.

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 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.

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 increased $13.3 million to $56.4 million at December 31, 2024, compared to $43.1 million at December 31, 2023. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered individually evaluated. The increase in potential problem loans was primarily due to a $8.2 million increase in potential problem commercial real estate loans, a $5.4 million increase in potential problem commercial lines of credit, and a $2.3 million increase in potential problem commercial and industrial loans. These increases were partially offset by a decrease of $1.9 million in potential problem residential mortgage loans.

Previous wording

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.

Current wording

Total potential problem loans, including individually evaluated loans, were $58.0 million at December 31, 2024, and were comprised of special mention, substandard and doubtful loans of $32.8 million, $23.1 million and $2.1 million, respectively. Total potential problem loans, including individually evaluated loans, were $43.1 million at December 31, 2023, and were comprised of special mention, substandard and doubtful loans of $20.7 million, $20.3 million and $2.1 million, respectively.