PATHFINDER BANCORP, INC.

(PBHC)
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Delayed Nasdaq  -  04:00 2022-06-24 pm EDT
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05/16PATHFINDER BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) (form 10-Q)
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05/16PATHFINDER BANCORP, INC. : Submission of Matters to a Vote of Security Holders (form 8-K)
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PATHFINDER BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) (form 10-Q)

05/16/2022 | 04:03pm EDT

General


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, 2022, the Company and subsidiaries had total
consolidated assets of $1.33 billion, total consolidated liabilities of $1.22
billion and shareholders' equity of $109.1 million, plus noncontrolling interest
of $390,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at March 31,
2022 and the results of operations for the three month period ended March 31,
2022 and 2021. Operating results for the three months ended March 31, 2022 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2022 or any other period.

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 2021 Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 25, 2022 ("the
consolidated annual financial statements") as of December 31, 2021 and 2020 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.

Statement Regarding Forward-Looking Statements


Certain statements contained herein are "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. This report contains forward-looking statements
that are based on assumptions and may describe future plans, strategies and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to:

• Credit quality and the effect of credit quality on the adequacy of our

allowance for loan losses;

• Deterioration in financial markets that may result in impairment charges

      relating to our securities portfolio;


  • Competition in our primary market areas;

• Changes in interest rates, inflation and national or regional economic

conditions;

• Changes in monetary and fiscal policies of the U.S. Government, including

policies of the U.S. Treasury and the Federal Reserve Board;

                                     - 47 -
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• Significant government regulations, legislation and potential changes

thereto;

• A reduction in our ability to generate or originate revenue-producing assets

      as a result of compliance with heightened capital standards;


   •  Increased cost of operations due to greater regulatory oversight,

supervision and examination of banks and bank holding companies, and higher

deposit insurance premiums;

• Cyberattacks, computer viruses and other technological threats that may

breach the security of our websites or other systems;

• Technological changes that may be more difficult or expensive than expected;

• Government action in response to the COVID-19 pandemic and its effects on

      our business and operations, including vaccination mandates and their
      effects on our workforce, human capital resources and infrastructure;

• Limitations on our ability to expand consumer product and service offerings

due to anticipated stricter consumer protection laws and regulations; and

• Other risks described herein and in the other reports and statements we file

      with the SEC.



Any one or a combination of the factors identified above could negatively impact
our business, financial condition and results of operations and prospects. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, the Company does not undertake, and
specifically disclaims any obligation, to release publicly the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.

COVID-19 Response


The World Health Organization (the "WHO") declared COVID-19 a global pandemic on
March 11, 2020.  In the United States, by the end of March 2020, the rapid
spread of the COVID-19 virus invoked various Federal and New York State
authorities to make emergency declarations and issue executive orders to limit
the spread of the disease.  Measures included severe restrictions on
international and domestic travel, limitations on public gatherings,
implementation of social distancing and sanitization protocols, school closings,
orders to shelter in place and mandates to close all non-essential businesses to
the public. To varying degrees, these very substantial mandated curtailments of
social and economic activity had been progressively relaxed in the United States
during 2021, and were partially reinstated in some cases due to new variant
breakouts in various areas of the country. This relaxation of the social and
economic restrictions followed the increasingly wide-spread availability of
vaccines that were first made available to the most vulnerable population
segments in late 2020. These vaccines are generally considered to be effective
in reducing the severity of the infection, if contracted, and in slowing the
rate of spread of the coronavirus. However, the percentage of unvaccinated
people in the United States, and the potential for future mutations of the
coronavirus, remain significant long-term public health and economic concerns.

As a result of the initial and continuing outbreak, and governmental responses
thereto, the spread of the coronavirus caused us to modify our business
practices, in some cases substantially. These modifications included
restrictions on employee travel, employee work locations, and the cancellation
of physical participation in meetings, events and conferences.  During the most
restrictive periods during the pandemic, the Company had many of its employees
working remotely and significantly reduced physical customer contact with
employees and other customers until the second quarter of 2021, when New York
State relaxed the majority of its safety mandates. At March 31, 2022, the Bank's
offices and branches were fully accessible to the public.  In the best interests
of our employees, customers, and business partners, we will take further action,
focused on safety, as may be required in the future by government authorities.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed
into law on March 27, 2020, provided financial assistance in various forms to
both businesses and consumers, including the establishment and funding of the
Paycheck Protection Program ("PPP"). In addition, the CARES Act also created
many directives affecting the operations of financial service providers, such as
the Company, including a forbearance program for federally-backed mortgage loans
and protections for borrowers from negative credit reporting due to
loan accommodations related to the national emergency. The banking regulatory
agencies issued guidance encouraging financial institutions to work prudently
with borrowers who were, or may be, unable to meet their contractual payment
obligations because of the

                                     - 48 -
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effects of COVID-19. The Company has worked to assist its business and consumer
customers affected by COVID-19.  While the CARES Act is widely-considered to
have been beneficial to the economic recovery and supportive of the Company's
business activities, the long-term effect of this legislation on the operations
of the Company cannot be determined with certainty at this time.

As of the date of this filing, variants of the coronavirus, referred to as the
"Omicron" variant, along with sub-variants of Omicron, have emerged in the
United States and remain a concern in some regions and potentially, throughout
the country. These variants are believed to be more contagious than earlier
variants of the coronavirus. Certain previously-relaxed social distancing and
safety protocols may have to be reinstated locally or in other regions of the
country and it is possible that such protocols will be reinstated broadly in the
future. The economic effects of these varying protocol reinstatement actions on
the Company's operations cannot be determined with certainty at this time.



Paycheck Protection Program


The Bank participated in all rounds of the PPP funded by the U.S. Treasury
Department and administered by the U.S. SBA pursuant to the CARES Act and
subsequent legislation. PPP loans have an interest rate of 1.0% and a two-year
or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans
made to eligible borrowers. The entire principal amount of the borrower's PPP
loan, including any accrued interest, is eligible to be reduced by the loan
forgiveness amount under the PPP so long as employee and compensation levels of
the business are maintained and the loan proceeds are used for qualifying
expenses. The PPP ended in May 2021. Information related to the Company's PPP
loans are included in the following tables:

Unaudited                                               For the three months ended
(In thousands, except number of loans)            March 31, 2022           March 31, 2021
Number of PPP loans originated in the period                     -                      421
Funded balance of PPP loans originated in the
period                                          $                -       $  

34,487

Number of PPP loans forgiven in the period                      93                      206
Balance of PPP loans forgiven in the period     $            6,096       $  

18,581

Deferred PPP fee income recognized in the
period                                          $              278       $              412



                                                              For the three months ended
(In thousands, except number of loans)                 March 31, 2022              March 31, 2021
Unearned PPP deferred fee income at end of period   $                440         $            1,468



(In thousands, except number of loans) Number Balance Total PPP loans originated since inception 1,177 $ 111,721 Total PPP loans forgiven since inception 1,025 $ 98,429 Total PPP loans remaining at March 31, 2022 152 $ 13,292

Application of Critical Accounting Estimates


The Company's consolidated quarterly financial statements are prepared in
accordance with accounting principles generally accepted in the United States
and follow practices within the banking industry. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the consolidated quarterly financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain accounting policies
inherently have a greater reliance on the use of estimates, assumptions, and
judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported. Estimates, assumptions,
and judgments are necessary when assets and liabilities are required to be
recorded at fair value or when an asset or liability needs to be recorded
contingent upon a future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair values and
information used to record valuation adjustments for certain assets and
liabilities are based on quoted market prices or are provided by unaffiliated
third-party sources, when available. When third party information is not
available, valuation adjustments are estimated in good faith by management.

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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
loan losses, deferred income taxes, pension obligations, the evaluation of
investment securities for other than temporary impairment, 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.

The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment on the use of estimates related to the amount and timing of
expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change.

Our Allowance for Loan and Lease Losses policy establishes criteria for selecting loans to be measured for impairment based on the following:

Residential and Consumer Loans:

• All loans rated substandard or worse, on nonaccrual status, and above our

      total related credit ("TRC") threshold balance of $300,000.


  • All Troubled Debt Restructured Loans.


Commercial Lines and Loans, Commercial Real Estate, and Tax-exempt loans:

• All loans rated substandard or worse, on nonaccrual status, and above our

      TRC threshold balance of $100,000.


  • All Troubled Debt Restructured Loans.



Impairment 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 probable
incurred loss for each risk-rating category.

Deferred income tax assets and liabilities are determined using the liability
method. Under this method, the net deferred tax asset or liability is recognized
for the future tax consequences. This is attributable to the differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases as well as net operating and capital loss
carry-forwards. Deferred tax assets and liabilities are measured using enacted
tax rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date. If current available
evidence about the future raises doubt about the likelihood of a deferred tax
asset being realized, a valuation allowance is established. The judgment about
the level of future taxable income, including that which is considered capital,
is inherently subjective and is reviewed on a continual basis as regulatory and
business factors change.

On April 7, 2021, the New York State Legislature approved comprehensive tax
legislation as part of the State's 2022 Fiscal Year budget. The legislation
includes increased taxes on businesses and high-income individuals among other
tax law revisions. Other provisions include amendments to the real estate
transfer tax. The legislation increases the corporate franchise tax rate to
7.25% from 6.5% for tax years beginning on or after January 1, 2021 and before
January 1, 2024 for taxpayers with a business income base greater than $5.0
million. In addition, the previously scheduled phase-out of the capital base tax
has been delayed. The rate of the capital base was set to be reduced to 0%
starting in 2021. The legislation imposes the tax at the rate of 0.1875% for tax
years beginning on or after January 1, 2021 and before January 1, 2024, with the
0% rate to take effect in 2024. Management continues to evaluate the projected
impact of this newly

                                     - 50 -
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issued New York State tax legislation on the Company's financial condition and
results of operations and believes that these provisions require an increase in
the Company's income tax expense for the three months ended March 31, 2022,
thereby requiring an increase in the Company's effective tax rate to 21% for the
three months ended March 31, 2022 as compared to the effective tax rate of
20.6%, for the same three month period in 2021.

The Company's effective tax rate typically differs from the 21% federal
statutory tax rate due primarily to New York State income taxes, partially
offset 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. Other variances from the federal statutory
federal tax rate are due to the effects of transitional adjustments related to
state income taxes. In addition, the tax effects of certain incentive stock
option activity may reduce the Company's effective tax rate on a sporadic basis.

We maintain a noncontributory defined benefit pension plan covering most
employees. The plan provides defined benefits based on years of service and
final average salary. On May 14, 2012, we informed our employees of our decision
to freeze participation and benefit accruals under the plan, primarily to reduce
some of the volatility in earnings that can accompany the maintenance of a
defined benefit plan.  Pension and post-retirement benefit plan liabilities and
expenses are based upon actuarial assumptions of future events; including fair
value of plan assets, interest rates, and the length of time the Company will
have to provide those benefits. The assumptions used by management are discussed
in Note 14 to the consolidated annual financial statements.

The Company carries all of its available-for-sale 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' impairment
losses and other-than-temporary impairment ("OTTI") of equity 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 (both available-for-sale and held-to-maturity)
portfolio for other-than-temporary impairment 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. When the fair value of a held-to-maturity or
available-for-sale security is less than its amortized cost basis, an assessment
is made as to whether OTTI is present. The Company considers numerous factors
when determining whether a potential OTTI exists and the period over which the
debt security is expected to recover. The principal factors considered are (1)
the length of time and the extent to which the fair value has been less than the
amortized cost basis, (2) the financial condition of the issue and (guarantor,
if any) and adverse conditions specifically related to the security, industry or
geographic area, (3) failure of the issuer of the security to make scheduled
interest or principal payments, (4) any changes to the rating of the security by
a nationally recognized statistical rating organization ("NRSRO"), and (5) the
presence of credit enhancements, if any, including the guarantee of the federal
government or any of its agencies.

The estimation of fair value is significant to several of our assets; including
available-for-sale and marketable equity investment securities, intangible
assets, foreclosed real estate, and the value of loan collateral when valuing
loans. These are all recorded at either fair value, or the lower of cost or fair
value. Fair values are determined based on third party sources, when
available. Furthermore, accounting principles generally accepted in the United
States require disclosure of the fair value of financial instruments as a part
of the notes to the annual audited consolidated financial statements. Fair
values on our available-for-sale securities may be influenced by a number of
factors including market interest rates, prepayment speeds, discount rates, and
the shape of yield curves.

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

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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, 2021
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 current pandemic, 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.

Recent Events


On March 25, 2022, the Company announced that its Board of Directors 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 March 31, 2022. The dividend was
payable to all shareholders of record on April 22, 2022 and was paid on May 6,
2022.

Overview and Results of Operations

The following represents the significant highlights of the Company's operating results between the first quarter of 2022 and the first quarter of 2021.

• Net income increased $796,000, or 37.0%, to $3.0 million.

• Basic and diluted earnings per share were both $0.49 per share and increased

$0.13 per share from $0.36 per share.

• Return on average assets increased 22 basis points to 0.90% as the increase

in income outpaced the increase in average assets.

• Net interest income, after provision for loan losses, increased $1.8

million, or 24.3%, to $9.4 million. Excluding the provision, net interest

income increased $907,000, or 10.6%, to $9.5 million. The increase in net

interest income, after provision for loan losses, was primarily due to the

increase in the average balance of interest-earning assets, coupled with a

decrease in the average rate paid on average interest-bearing

liabilities. These increases were offset by a 10 basis point decrease in the

average yield earned on the average balance of interest-earning assets.

Additionally, a reduction in the provision for loan losses of $926,000 was

      reflective of improving asset quality metrics. The credit sensitive
      portfolios continue to be carefully monitored.

• The net interest margin for the first quarter of 2022 was 3.06%, a 21 basis

point increase compared to 2.85% for the first quarter of 2021. This

improvement reflects a 36 basis point decline in the average cost paid on

interest-bearing liabilities, with a 10 basis point decrease in the average

yield earned on interest-earning assets.

• The effective income tax rate increased .40% to 21.0% for the three months

ended March 31, 2022 as compared to 20.6% for the same three month period in

2021. The increase in the tax rate in the first quarter of 2022, as compared

to the same quarter in 2021, was primarily related to an increase in pretax

income and an increase in New York State permanent differences, which

created higher state taxable income subject to the tax rate of 7.25%.



The following reflects the significant changes in financial condition between
December 31, 2021 and March 31, 2022. In addition, the following reflects
significant changes in asset quality metrics between December 31, 2021, March
31, 2022 and March 31, 2021.

• Total assets increased $43.2 million, or 3.4% to $1.33 billion at March 31,

      2022, as compared to December 31, 2021, primarily driven by higher
      investment securities' balances and loan balances.

• Asset quality metrics, as measured by net loan charge-offs, remained stable,

in comparison to recent reporting periods. The annualized net loan

charge-offs to average loans ratio was 0.02% for the first quarter of 2022,

compared to 0.05% for the first quarter of 2021, and 0.10% for the fourth

quarter of 2021. Nonperforming loans to total loans decreased 154 basis

points to 0.93% at March 31, 2022, compared to 2.5% at March 31, 2021.

Nonperforming loans to total loans decreased 7 basis points to 0.93% at

March 31, 2022 compared to 1.0% at December 31, 2021. Correspondingly, the

ratio of the allowance for loan losses to nonperforming loans was 163.8% at

      March 31, 2022, as compared to 64.2% at March 31, 2021, and 156.0% at
      December 31, 2021.




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The Company had net income of $3.0 million for the three months ended March 31,
2022 compared to net income of $2.2 million for the three months ended March 31,
2021. The $796,000 increase in net income was due primarily to a $40,000
increase in interest and dividend income, an $867,000 decrease in interest
expense, and a $926,000 decrease in the provision for loan losses. Partially
offsetting the increases to net income was a $242,000 decrease in noninterest
income, a $616,000 increase in noninterest expense and a $172,000 increase in
income tax expense.

Net interest income before the provision for loan losses increased $907,000, or
10.6%, to $9.5 million for the three months ended March 31, 2022 as compared to
$8.6 million for the same three month period in 2021. The increase was primarily
a result of a 36 basis points decrease in the average cost of interest-bearing
liabilities between the year-over-year first quarter periods. Further, the
increase was a result of increases in average interest-earning asset balances,
primarily in the investment categories, offset by a decrease in the average
yield of interest-earning assets of 10 basis points to 3.54% for the three
months ended March 31, 2022 from 3.6% for the same three month period of the
previous year. The increase in interest income was partially reduced in the
three months ended March 31, 2022 by reductions in the level of deferred PPP fee
income recognized in the period due to the decreased levels of forgiveness in
the three months ended March 31, 2022 as compared to the same three month period
in the previous year.

In comparing the year-over-year first quarter periods, the return on average
assets increased 22 basis points to 0.90% due to the combined effects of the
increase in net income (the numerator in the ratio) and the increase in average
assets (the denominator in the ratio). Average assets increased due to increases
in average taxable securities of $21.0 million and average tax-exempt securities
of $20.5 million in the first quarter of 2022, as compared to the same quarter
of 2021. Average interest-bearing deposits increased $45.0 million in the first
quarter of 2022, as compared with the same quarter in 2021. Noninterest-bearing
deposits totaled $199.2 million at March 31, 2022, an increase of $18.7 million,
or 10.4%, compared to March 31, 2021. The increases in noninterest-bearing
deposits were primarily the result of the Bank's participation in the PPP, as
well as ongoing growth in business banking relationships.  In addition, the Bank
has seen a general increase in the average account balance for consumer deposits
consistent with similar increases generally reported throughout the industry.
These increases are expected to be transitory and relate primarily to
significant levels of economic stimulus combined with reduced levels of consumer
spending related to the pandemic. At this time, it cannot be determined with
certainty how long it will be before these deposits return to historically
normal levels.

For the first three months of 2022, we recorded $102,000 in provision for loan
losses as compared to $1.0 million in the same prior year three month
period. The provision is reflective of (1) the qualitative factors used in
determining the adequacy of the allowance for loan losses, (2) the size of the
loan portfolio, and (3) delinquent and nonaccrual loans. The decline in the
provision for loan losses in the first quarter of 2022, as compared to the same
period in the first quarter of 2021, was primarily related to the improvement in
the qualitative factors used by the Company to determine the provision in 2022,
as compared to the same period in the previous year. The improvement in these
qualitative factors was due to observed improvements in economic conditions
during the second half of 2021 and the first quarter of 2022 that followed the
easing of the most restrictive phases of the COVID-19 pandemic that had existed
in 2020 and the first half of 2021. The credit sensitive portfolios continue to
be carefully monitored. Please refer to the asset quality section below for a
further discussion of asset quality as it relates to the allowance for loan
losses.

Net Interest Income


Net interest income is the Company's primary source of operating income for
payment of operating expenses and providing for loan losses. It is the amount by
which interest earned on loans, interest-earning deposits, and investment
securities, exceeds the interest paid on deposits and other interest-bearing
liabilities. Changes in net interest income and net interest margin result from
the interaction between the volume and composition of interest-earning assets,
interest-bearing liabilities, related yields, and associated funding costs.

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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 has not been adjusted for tax equivalency. Averages are computed on
the daily average balance for each month in the period divided by the number of
days in the period. Yields and amounts earned include loan fees. Nonaccrual
loans have been included in interest-earning assets for purposes of these
calculations.

                                                                (Unaudited)
                                                    For the three months ended March 31,
                                              2022                                        2021
                                                             Average                                    Average
Unaudited                        Average                     Yield /         Average                    Yield /
(Dollars in thousands)           Balance       Interest         Cost         Balance      Interest         Cost
Interest-earning assets:
Loans                        $   845,461     $    8,692         4.11 %   $   849,676     $   8,847         4.16 %
Taxable investment
securities                       329,291          2,168         2.63 %       308,259         2,063         2.68 %
Tax-exempt investment
securities                        32,721            118         1.44 %        12,234            29         0.95 %
Fed funds sold and
interest-earning deposits         31,830              4         0.05 %        32,414             3         0.04 %
Total interest-earning
assets                         1,239,303         10,982         3.54 %     1,202,583        10,942         3.64 %
Noninterest-earning
assets:
Other assets                      91,622                                      82,353
Allowance for loan losses        (13,031 )                                   (13,057 )
Net unrealized
(losses)/gains
  on available-for-sale
securities                        (1,334 )                                     1,314
Total assets                 $ 1,316,560                                 $ 1,273,193
Interest-bearing
liabilities:
NOW accounts                 $   106,894     $       71         0.27 %   $    94,951     $      57         0.24 %
Money management accounts         16,072              4         0.10 %        15,597             4         0.10 %
MMDA accounts                    261,898            246         0.38 %       235,289           255         0.43 %
Savings and club accounts        138,585             48         0.14 %       111,317            33         0.12 %
Time deposits                    377,907            596         0.63 %       399,176         1,178         1.18 %
Subordinated loans                29,578            412         5.57 %        39,412           557         5.65 %
Borrowings                        63,528            138         0.87 %        85,070           298         1.40 %
Total interest-bearing
liabilities                      994,462          1,515         0.61 %       980,812         2,382         0.97 %
Noninterest-bearing
liabilities:
Demand deposits                  199,164                                     180,442
Other liabilities                 11,904                                      11,944
Total liabilities              1,205,530                                   1,173,198
Shareholders' equity             111,030                                      99,995
Total liabilities &
shareholders' equity         $ 1,316,560                                 $ 1,273,193
Net interest income                          $    9,467                                  $   8,560
Net interest rate spread                                        2.93 %                                     2.67 %
Net interest margin                                             3.06 %                                     2.85 %
Ratio of average
interest-earning assets
  to average
interest-bearing
liabilities                                                   124.62 %                                   122.61 %



 As indicated in the above table, net interest income, before provision for loan
losses, increased $907,000, or 10.6%, to $9.5 million for the three months ended
March 31, 2022 as compared to $8.6 million for the same prior year period. This
increase was due principally to the $36.7 million, or 3.1%, increase in the
average balance of interest-earning assets, offset by a decrease of 10 basis
points on the average yield earned on those assets. These positive factors on
net interest income were partially offset by an increase in the average balance
of interest-bearing liabilities of $13.7 million, or 1.4%. The negative effect
of this increase in the average balance of interest-bearing liabilities on net
interest income however, was partially offset by a decrease of 36 basis points
on the average interest rate paid on those liabilities. In total, net interest
margin increased 21 basis points to 3.06%. The following analysis should also be
viewed in conjunction with the table below which reports the changes in net
interest income attributable to rate and volume.

                                     - 54 -
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Interest and dividend income increased $40,000, or 0.1%, to $11.0 million for
the three months ended March 31, 2022 compared to $10.9 million for the same
three month period in 2021. This increase was due to an increase in the average
balance of interest earning assets, which increased between the year-over-year
first quarter periods by 3.1%, primarily as a result of an increase in the
average balance of investment securities. The average balance of investment
securities increased by $41.2 million primarily due to increased purchases of
investment securities throughout the twelve months ended March 31, 2022. These
increased investment security purchases were primarily funded by increased
levels of customer deposits placed with the Bank during 2021. The decrease in
the average yield earned on loans was primarily due to the recognition of
deferred PPP fee income in the period due to the increased levels of forgiveness
in the three month period ended March 31, 2022. PPP deferred fee recognition
(recorded as an increase to loan interest income) was $278,000 in the three
months ended March 31, 2022 as compared to $459,000 for the same three month
period in 2021. Please refer to the PPP tables above for the full impact of PPP
loans on average loan yields.

Interest expense for the three months ended March 31, 2022 decreased $867,000,
or 36.4%, to $1.5 million when compared to the same prior year period. This
decrease was primarily due to a 36 basis points decline in the cost of
interest-bearing liabilities. Deposit interest expense decreased $562,000, or
36.8%, to $965,000 due to a 28 basis points decrease in the annualized average
rate paid on deposits to 0.43% for the three months ended March 31, 2022, as
compared to 0.71% for the three months ended March 31, 2021. This was partially
offset by a $45.0 million increase in the average balance of interest-bearing
deposits during the same time periods due to increases in average consumer,
business and municipal deposit balances. These increases in average deposit
balances were substantially derived from the effects of the various economic
stimulus programs instituted in response to the Covid-19 pandemic, principally
the PPP program and significant stimulus grant payments made to various
municipalities and municipal agencies within the Bank's customer base. This
decrease in the average cost of deposits was primarily due to a 55 basis points
decrease in the average rates paid on time deposits during the three months
ended March 31, 2022, as compared to the same three month period in 2021, due to
the general decline in market interest rates during 2021 after the first quarter
of that year.

Net interest income for the three months ended March 31, 2022 was $9.5 million,
compared to $9.7 million for the three months ended December 31, 2021. The
average balance of interest-earning assets increased $54.2 million for the
quarter ended March 31, 2022 to $1,239 million from $1,185 million for the
quarter ended December 31, 2021. The net interest margin percentage decreased
from 3.28% for the three months ended December 31, 2021 to 3.06% for the three
months ended March 31, 2022. The primary driver of the decrease in net interest
income and margin was a $205,000, or 1.8%, decrease in interest dividend income
to $11.0 million for the three months ended March 31, 2022 compared to $11.2
million for the three months ended December 31, 2021. This decrease was
primarily due to a $238,000 quarter-over-quarter decline in loan income in the
quarter ended March 31, 2022, as compared to the immediately preceding quarter,
This decline in loan income was primarily due to $102,000 in non-recurring
settlement adjustments made in January of 2022, causing a quarter over quarter
variance of $204,000 in loan income. The nonrecurring settlement adjustments
related to two purchased loan pools, with an aggregate amortized cost of $43.5
million, acquired in the fourth quarter of 2021. In addition, loan income in the
three months ended March 31, 2022 was lower than in the previous quarter as PPP
deferred fee recognition (recorded as an increase to loan interest income)
declined to $278,000 in the three months ended March 31, 2022 as compared to
$408,000 for the three months ended December 31, 2021.

For the full year ended December 31, 2022, management projects a net interest
margin of 3.13-3.18%. This is a forward looking projection relying on internal
analyses performed by the Company's management. These analyses are based on the
interest-earning assets and liabilities held on the Company's balance sheet at
March 31, 2022. This projection considers both forecasted asset and liability
repricing expectations as well as anticipated reinvestment rates for expected
future asset and liability cash flows. The analyses were prepared in
consideration of forward and spot Treasury and swap markets observations at
March 31, 2022. These markets are subject to frequent and potentially
significant changes and, therefore, no absolute assurance can be made as to the
accuracy of the resultant forward projections.

Rate/Volume Analysis


Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changes in the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to: (i) changes
attributable to changes in volume (change in volume

                                     - 55 -
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multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) total increase or
decrease. Changes attributable to both rate and volume have been allocated
ratably. Tax-exempt securities have not been adjusted for tax equivalency.
Please refer to the PPP table in the previous section for information on PPP
loans and the impact on loan income for the three months ended March 31, 2022
and 2021.

                                           Three months ended March 31,
                                                  2022 vs. 2021
                                            Increase/(Decrease) Due to
                                                                         Total
Unaudited                                                             Increase
(In thousands)                         Volume            Rate       (Decrease)
Interest Income:
Loans                               $     (47 )     $    (108 )    $      (155 )
Taxable investment securities             312            (207 )            105
Tax-exempt investment securities           68              21               89
Interest-earning deposits                   -               1                1
Total interest income                     333            (293 )             40
Interest Expense:
NOW accounts                                8               6               14
Money management accounts                   -               -                -
MMDA accounts                             116            (125 )             (9 )
Savings and club accounts                   9               6               15
Time deposits                             (60 )          (522 )           (582 )
Subordinated loans                       (137 )            (8 )           (145 )
Borrowings                                (64 )           (96 )           (160 )
Total interest expense                   (128 )          (739 )          

(867 ) Net change in net interest income $ 461 $ 446 $ 907




Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, at a
level management believes is appropriate to absorb probable incurred credit
losses in the loan portfolio. In evaluating the level of the allowance for loan
losses, management considers historical loss experience, the types of loans and
the amount of loans in the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and prevailing economic conditions. This evaluation is inherently subjective as
it requires estimates that are susceptible to significant revision as more
information becomes available or as future events change. The provision for loan
losses represents management's estimate of the amount necessary to maintain the
allowance for loan losses at an adequate level.

Management extensively reviews recent trends in historical losses, qualitative
factors and specific reserve needs on loans individually evaluated for
impairment in its determination of the adequacy of the allowance for loan
losses. We recorded $102,000 in provision for loan losses for the three month
period ended March 31, 2022, as compared to $1.0 million for the three month
period ended March 31, 2021. The provisioning in the first quarter of 2022 and
2021 reflects management's determination of prudent additions to reserves
considering loan mix changes, concentrations of loans in certain business
sectors, factors related to loan quality metrics, and continued COVID-19 related
economic uncertainty. The decrease in the provision for loan losses in the first
quarter of 2022, as compared to the same period in 2021, was primarily related
to the improvement in the qualitative factors used by the Company to determine
the provision in the first quarter of 2022, as compared to the previous year's
first quarter. The improvement in these qualitative factors was due to observed
improvements in economic conditions during 2022 that followed the easing of the
most restrictive phases of the COVID-19 pandemic that had existed in 2021. The
Company's credit-sensitive portfolios continue to be carefully monitored.

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
decreased to 2.12% at March 31, 2022 as compared to 2.14% at December 31,
2021. Delinquent loans (numerator) increased $283,000 while total loan balances
(denominator) increased $23.1 million at March 31, 2022, as compared to December
31, 2021. The increase in past due loans was primarily driven by an increase

                                     - 56 -
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of $1.4 million in loans delinquent 60-89 days, partially offset by a $761,000
decrease in loans delinquent 30-59 days past due, and a $318,000 decrease in
loans delinquent 90 days and over.

At March 31, 2022, there were $18.1 million in loans past due including $4.5
million in loans 30-59 days past due, $6.0 million in loans 60-89 days past due
and $7.7 million in loans 90 or more days past due. At December 31, 2021, there
were $17.9 million in loans past due including $5.2 million in loans 30-59 days
past due, $4.6 million in loans 60-89 days past due and $8.0 million in loans 90
or more days past due.

Noninterest Income

The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions, including insurance agency commissions, and net gains on sales of securities, loans, and foreclosed real estate.


The following table sets forth certain information on noninterest income for the
periods indicated:

Unaudited                                                  For the three months ended
(Dollars in thousands)                     March 31, 2022        March 31, 2021           Change
Service charges on deposit accounts       $            259     $            331     $   (72 )     -21.8 %
Earnings and gain on bank owned life
insurance                                              162                  125          37        29.6 %
Loan servicing fees                                    117                   90          27        30.0 %
Debit card interchange fees                            228                  221           7         3.2 %
Insurance agency revenue                               299                  280          19         6.8 %
Other charges, commissions and fees                    413                  243         170        70.0 %
Noninterest income before (losses)
gains                                                1,478                1,290         188        14.6 %
Net gains on sales of securities, fixed
assets, loans and foreclosed
  real estate                                           57                  321        (264 )     -82.2 %
Gains on marketable equity securities                   68                  234        (166 )     -70.9 %
Total noninterest income                  $          1,603     $          

1,845 $ (242 ) -13.1 %




First quarter 2022 noninterest income was $1.6 million, a decrease of $242,000,
or 13.1%, compared to $1.8 million for the same three-month period in 2021. The
decrease in noninterest income, as compared to the same quarter of the previous
year, was primarily due to a $201,000 non-recurring gain, recorded in the first
quarter of 2021, related to the Bank's sale of land previously held for
development. Noninterest income categorized as recurring noninterest income was
$1.5 million for the first quarter of 2022, reflecting a $188,000, or 14.6%,
improvement over the first quarter of the prior year. Recurring noninterest
income excludes unrealized gains on equity securities, gains on sales of loans,
foreclosed real estate, and premises and equipment, as well as losses on
investment securities.

Offsetting these increases in noninterest income before (losses) and gains for
the three month period, were decreases of $264,000 in gains on sales of
securities, fixed assets, loans and foreclosed real estate, and a $166,000
decrease in gains on marketable equity securities in the quarter ended March 31,
2022, as compared to the prior year in the same quarter.


                                     - 57 -
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Noninterest Expense

The following table sets forth certain information on noninterest expense for
the periods indicated:

Unaudited                                               For the three months ended
(Dollars in thousands)                      March 31, 2022       March 31, 2021            Change
Salaries and employee benefits            $          4,049      $          3,341     $   708        21.2 %
Building and occupancy                                 826                   793          33         4.2 %
Data processing                                        550                   676        (126 )     -18.6 %
Professional and other services                        393                   417         (24 )      -5.8 %
Advertising                                            187                   246         (59 )     -24.0 %
FDIC assessments                                       222                   198          24        12.1 %
Audits and exams                                       141                   202         (61 )     -30.2 %
Insurance agency expense                               204                   206          (2 )      -1.0 %
Community service activities                            62                    88         (26 )     -29.5 %
Foreclosed real estate expenses                         13                     6           7       116.7 %
Other expenses                                         605                   463         142        30.7 %
Total noninterest expenses                $          7,252      $          

6,636 $ 616 9.3 %




Total noninterest expense for the first quarter of 2022 was $7.3 million, an
increase of $616,000, or 9.3%, compared to $6.6 million for the same three-month
period in 2021. The increase was primarily driven by increases in salaries and
employee benefits expense of $708,000, or 21.2%.

The $708,000 year-over-year increase in salaries and employee benefits expense
was comprised of a $239,000 reduction in deferrals of personnel-related loan
origination costs, a $207,000, or 7.9%, increase in salaries, a $206,000
increase in incentives expense and a $56,000 net increase in all other salaries
and employee benefits expenses.

The $239,000 reduction in personnel-related costs deferred under generally
accepted accounting principles in the first quarter of 2022, as compared to the
same quarter in 2021, related to reduced levels of PPP loans loan originated in
2022 as compared to the previous year. The Company originated no PPP loans in
the first quarter of 2022, as compared to $34.5 million in the first quarter of
2021.

The $207,000 increase in salaries expense was primarily due to increases in
individual salaries, effective in the first quarter of 2022, as well as modest
additions to staff headcount. The Company increased its salary structure for
employees, where deemed to be appropriate, in late 2021 and early 2022 in order
to effectively respond to inflationary and competitive pressures within our
marketplace relative to the recruitment and retention of talent.

The $206,000 increase in incentives expense in the first quarter of 2022, as
compared to the same quarter in 2021, was primarily due to reductions in the
amounts paid in the first quarter of 2021 for management and sales incentives in
response to reduced sales and business activity in 2020 as a result of the
pandemic and adjustments made to the Bank's performance incentive
plans. Management believes that the level of incentive expense in the first
quarter of 2022 is indicative of the quarterly level of such expenses expected
for the remainder of 2022.

Partially offsetting the increase in salaries and employee benefits expense was
a $126,000, or 18.6%, reduction in data processing expenses, primarily the
result of a reduction in ATM processing fees that was in turn primarily driven
by third-party vendor refunds obtained through contract renegotiation
activities.

At March 31, 2022, the Bank serviced 507 residential mortgage loans in the
aggregate amount of $52.0 million that have been sold on a non-recourse basis to
FNMA. FNMA is the only unrelated third-party that has acquired loans originated
by the Bank. On an infrequent basis, loans previously sold to FNMA that
subsequently default may be found to have underwriting defects that place the
loans out of compliance with the representations and warranties made by the
Bank. This can occur at any time while the loan is outstanding. In such cases,
the Bank is required to repurchase the defaulted loans from FNMA. Repurchase
losses sustained by the Bank include all costs incurred by FNMA as part of the
foreclosure process, including items such as delinquent property taxes and legal
fees. No such claims against the Bank were made by FNMA in the three month
periods ended in either March 31, 2022 or March 31, 2021. Management

                                     - 58 -
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continues to monitor the underwriting standards applied to all residential mortgage loan originations and subsequent sales through its quality control processes and considers these occurrences and their related expenses to be isolated instances.

Income Tax Expense


Income tax expense increased $172,000 to $721,000, with an effective tax rate of
21.0%, for the quarter ended March 31, 2022, as compared to $549,000, with an
effective tax rate of 20.6%, for the same three month period in 2021. The
increase in income tax expense in the current quarter, as compared to the same
quarter in 2021, was primarily attributable to the year-over-year quarterly
increase in pre-tax net income. The federal statutory rate applied to pretax
income was 21% for the three month periods ended March 31, 2022 and 2021.

On April 7, 2021, the New York State Legislature approved comprehensive tax
legislation as part of the State's 2022 Fiscal Year budget. The legislation
includes increased taxes on businesses and high-income individuals among other
tax law revisions. Other provisions include amendments to the real estate
transfer tax. The legislation increases the corporate franchise tax rate to
7.25% from 6.5% for tax years beginning on or after January 1, 2021 and before
January 1, 2024 for taxpayers with a business income base greater than $5.0
million. In addition, the previously scheduled phase-out of the capital base tax
has been delayed. The rate of the capital base was to have been reduced to 0%
starting in 2021. The legislation imposes the tax at the rate of 0.1875% for tax
years beginning on or after January 1, 2021 and before January 1, 2024, with the
0% rate to take effect in 2024. Management continues to evaluate the impact of
this amended New York State tax legislation on the Company's financial condition
and results of operations and has incorporated these analyses into the recorded
effective tax rate for the three months ended March 31, 2022.

The Company's effective tax rate of 21% is due primarily to increased pretax
income, New York State income taxes, partially offset 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.
Other variances from the federal statutory federal tax rate are due to the
effects of transitional adjustments related to state income taxes. In addition,
the tax effects of certain incentive stock option activity may reduce the
Company's effective tax rate on a sporadic basis.

Earnings per Share


Basic and diluted earnings per share were $0.49 per share for the first quarter
of 2022, as compared to $0.36 per basic and diluted share for the same quarter
of 2021. The increase in earnings per share between these two periods was due to
the increase in net income between these two time periods. Further information
on earnings per share can be found in Note 3 of this Form 10-Q.

Changes in Financial Condition

Assets


Total assets increased $43.2 million, or 3.4%, to $1.33 billion at March 31,
2022 as compared to $1.29 billion at December 31, 2021. This increase was due
primarily to increases in loans and investment securities.

Loans totaled $855.6 million, an increase of $23.1 million compared to $832.5
million at December 31, 2021. Primarily due to increases of $14.4 million in
commercial real estate loans and $14.0 million in commercial business loans.

Investment securities increased $14.5 million, or 4.1%, to $370.9 million at
March 31, 2022, as compared to $356.4 million at December 31, 2021, due
principally to purchases of securities during the first three months of 2022,
that were only partially offset by sales and redemptions of securities and
unrealized losses in the portion of the investment portfolio characterized as
available-for-sale.

Liabilities

Total liabilities increased $44.4 million, or 3.8%, to $1.22 billion at March
31, 2022, compared to $1.17 billion at December 31, 2021.  Deposits increased
$58.7 million, or 5.6%, to $1.11 billion at March 31, 2022, compared to $1.06

                                     - 59 -
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billion at December 31, 2021.  Interest-bearing deposits were the primary driver
of growth between the comparable periods and totaled $909.3 million at March 31,
2022, an increase of $45.9 million, or 5.3% from the 2021 year-end.

Borrowed funds balances from the FHLB-NY decreased $14.6 million, or 18.9%, to
$62.5 million at March 31, 2022 from $77.1 million at December 31, 2021 as the
Bank primarily used net incoming deposit cash flows to repay borrowings at their
scheduled maturity dates.

Shareholders' Equity

The Company's shareholders' equity, exclusive of the noncontrolling interest,
decreased $1.2 million, or 1.1%, to $109.1 million at March 31, 2022, from
$110.3 million at December 31, 2021. This decrease was principally due to a $3.8
million increase in accumulated other comprehensive loss. Partially offsetting
this increase in in accumulated other comprehensive loss was an increase in
retained earnings of $2.4 million, or 3.9%, to $63.4 million at March 31, 2022,
from $60.9 million at December 31, 2021. Comprehensive loss increased primarily
as the result of increases in the unrealized losses on the available-for sale
investment portfolio in the three months ended March 31, 2022 as a result of
increases in market interest rates.

Capital


Capital adequacy is evaluated primarily by the use of ratios which measure
capital against total assets, as well as against total assets that are weighted
based on defined risk characteristics. The Company's goal is to maintain a
strong capital position, consistent with the risk profile of its banking
operations. This strong capital position serves to support growth and expansion
activities while at the same time exceeding regulatory standards. At March 31,
2022, the Bank met the regulatory definition of a "well-capitalized"
institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total
risk-based capital ratio exceeding 10%.

In addition to establishing the minimum regulatory capital requirements, the
regulations limit capital distributions and certain discretionary bonus payments
to management if the institution does not hold a "capital conservation buffer"
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above
the amount necessary to meet its minimum risk-based capital requirements. The
buffer is separate from the capital ratios required under the Prompt Corrective
Actions ("PCA") standards. In order to avoid these restrictions, the capital
conservation buffer effectively increases the minimum levels of the following
capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and
(3) Common Equity. At March 31, 2022, the Bank exceeded all regulatory required
minimum capital ratios, including the capital buffer requirements.

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection
Act, the federal banking agencies developed a "Community Bank Leverage Ratio"
(the ratio of a bank's tier 1 capital to average total consolidated assets) for
financial institutions with assets of less than $10 billion. A "qualifying
community bank" that exceeds this ratio will be deemed to be in compliance with
all other capital and leverage requirements, including the capital requirements
to be considered "well capitalized" under Prompt Corrective Action statutes. The
federal banking agencies may consider a financial institution's risk profile
when evaluating whether it qualifies as a community bank for purposes of the
capital ratio requirement. The federal banking agencies have set the Community
Bank Leverage Ratio at 9%. A financial institution can elect to be subject to
this new definition. The Bank did not elect to become subject to the Community
Bank Leverage Ratio.

Pathfinder Bank's capital amounts and ratios as of the indicated dates are presented in the following table:

                                     - 60 -
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                                                                                              Minimum To Be
                                                                   Minimum For              "Well-Capitalized"              Minimum For
                                                                Capital Adequacy               Under Prompt              Capital Adequacy
                                           Actual                   Purposes              Corrective Provisions             with Buffer
(Dollars in thousands)               Amount        Ratio        Amount       Ratio         Amount           Ratio       Amount        Ratio
As of March 31, 2022:
Total Core Capital (to
Risk-Weighted Assets)               $ 132,741       15.29 %   $   69,453       8.00 %   $     86,816         10.00 %   $  91,157       10.50 %
Tier 1 Capital (to Risk-Weighted
Assets)                             $ 121,862       14.04 %   $   52,089       6.00 %   $     69,453          8.00 %   $  73,793        8.50 %
Tier 1 Common Equity (to
Risk-Weighted Assets)               $ 121,862       14.04 %   $   39,067       4.50 %   $     56,430          6.50 %   $  60,771        7.00 %
Tier 1 Capital (to Assets)          $ 121,862        9.29 %   $   52,460       4.00 %   $     65,575          5.00 %   $  65,575        5.00 %
As of December 31, 2021
Total Core Capital (to
Risk-Weighted Assets)               $ 129,166       15.19 %   $   68,013       8.00 %   $     85,016         10.00 %   $  89,266       10.50 %
Tier 1 Capital (to Risk-Weighted
Assets)                             $ 118,511       13.94 %   $   51,009       6.00 %   $     68,013          8.00 %   $  72,263        8.50 %
Tier 1 Common Equity (to
Risk-Weighted Assets)               $ 118,511       13.94 %   $   38,257       4.50 %   $     55,260          6.50 %   $  59,511        7.00 %
Tier 1 Capital (to Assets)          $ 118,511        9.52 %   $   49,804       4.00 %   $     62,255          5.00 %   $  62,255        5.00 %



Non-GAAP Financial Measures

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.


                                     - 61 -
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                                                           March 31,       December 31,
(Dollars in thousands)                                          2022               2021
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Total equity (GAAP)                                      $   131,569     $      121,896
Goodwill                                                      (4,536 )           (4,536 )
Intangible assets                                               (113 )             (117 )
Addback: Accumulated other comprehensive income               (5,058 )      

1,268

    Total Tier 1 Capital                                 $   121,862     $ 

118,511

Allowance for loan and lease losses                           10,879             10,655
    Total Tier 2 Capital                                 $    10,879     $       10,655
    Total Tier 1 plus Tier 2 Capital (numerator)         $   132,741     $      129,166
Risk-weighted assets (denominator)                           868,158        

850,157

   Total core capital to risk-weighted assets                  15.29   %    

15.19 %


Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)                         $   121,862     $  

118,511

Risk-weighted assets (denominator)                           868,158        

850,157

   Total capital to risk-weighted assets                       14.04   %    

13.94 %


Tier 1 capital (to adjusted assets)
Total Tier 1 capital (numerator)                         $   121,862     $      118,511
Total average assets                                       1,316,158          1,249,752
Goodwill                                                      (4,536 )           (4,536 )
Intangible assets                                               (113 )             (117 )
Adjusted assets (denominator)                            $ 1,311,509     $    1,245,099
   Total capital to adjusted assets                             9.29   %    

9.52 %


Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 capital (numerator)                         $   121,862     $  

118,511

Risk-weighted assets (denominator)                           868,158            850,157
   Total Tier 1 Common Equity to risk-weighted assets          14.04   %          13.94   %


Loan and Asset Quality and Allowance for Loan Losses

The following table represents information concerning the aggregate amount of non-accrual loans at the indicated dates:

                                                  March 31,      December 31,       March 31,
(Dollars In thousands)                                 2022              2021            2021
Nonaccrual loans:
Commercial and commercial real estate loans     $     5,567     $       6,297     $    17,842
Consumer                                              1,283             1,104             602
Residential mortgage loans                            1,098               891           2,899
Total nonaccrual loans                                7,948             8,292          21,343
Total nonperforming loans                             7,948             8,292          21,343
Foreclosed real estate                                    -                 -               -
Total nonperforming assets                      $     7,948     $       8,292     $    21,343

Accruing troubled debt restructurings           $     3,926     $       

3,605 $ 5,378


Nonperforming loans to total loans                     0.93 %            1.00 %          2.47 %
Nonperforming assets to total assets                   0.60 %            

0.65 % 1.63 %




Nonperforming assets include nonaccrual loans, nonaccrual troubled debt
restructurings ("TDR"), and foreclosed real estate (''FRE"). 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.  Loans are considered modified in a TDR when, due to a
borrower's

                                     - 62 -
--------------------------------------------------------------------------------


financial difficulties, the Company makes a concession(s) to the borrower that
it would not otherwise consider. These modifications may include, among others,
an extension of the term of the loan, and granting a period when interest-only
payments can be made, with the principal payments made over the remaining term
of the loan or at maturity.  TDRs are included in the above table within the
categories of nonaccrual loans or accruing TDRs.  There was one TDR loan in
nonaccrual status at March 31, 2022.

Pursuant to the CARES Act, financial institutions had the option to temporarily
suspend certain requirements under U.S. generally accepted accounting principles
related to troubled debt restructurings for a limited period of time to account
for the effects of COVID-19. This provision allows a financial institution the
option to not apply the guidance on accounting for troubled debt restructurings
to loan modifications, such as extensions or deferrals, related to COVID-19 made
between March 1, 2020 and January 1, 2022. The relief can only be applied to
modifications for borrowers that were not more than 30 days past due as of
December 31, 2019. The Bank elected to adopt these provisions of the CARES Act.

As indicated in the table above, nonperforming assets at March 31, 2022 were
$7.9 million and were $344,000 lower than the $8.3 million reported at December
31, 2021 and $13.4 million lower than the reported $21.3 million at March 31,
2021. The decrease at March 31, 2021 was due primarily to a decrease in
commercial and commercial real estate loans of $12.3 million and a decrease of
$1.8 million in residential mortgage loans. This decrease was partially offset
by an increase of $681,000 in nonperforming consumer loans.

Fair values for commercial FRE are initially recorded based on market value
evaluations by third parties, less costs to sell ("initial cost basis"). On a
prospective basis, residential FRE assets will be initially recorded at the
lower of the net amount of loan receivable or the real estate's fair value less
costs to sell.  Any write-downs required when the related loan receivable is
exchanged for the underlying real estate collateral at the time of transfer to
FRE are charged to the allowance for loan losses. Values are derived from
appraisals, similar to impaired loans, of underlying collateral or discounted
cash flow analysis. Subsequent to foreclosure, valuations are updated
periodically and assets are marked to current fair value, not to exceed the
initial cost basis for the FRE property.

The allowance for loan losses represents management's estimate of the probable
losses inherent in the loan portfolio as of the date of the statement of
condition. The allowance for loan losses was $13.0 million and $12.9 million at
March 31, 2022 and December 31, 2021, respectively. The ratio of the allowance
for loan losses to total loans decreased 3 basis points to 1.52% at March 31,
2022 from 1.55% at December 31, 2021. Management performs a quarterly evaluation
of the allowance for loan losses based on quantitative and qualitative factors
and has determined that the current level of the allowance for loan losses is
adequate to absorb the losses in the loan portfolio as of March 31, 2022.

The Company considers a loan impaired 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.  The measurement of impaired loans is generally based upon the fair
value of the collateral, with a portion of the impaired loans measured based
upon the present value of future cash flows discounted at the historical
effective interest rate. A specific reserve is established for an impaired loan
if its carrying value exceeds its estimated fair value.  The estimated fair
values of the majority of the Company's impaired loans are measured based on the
estimated fair value of the loan's collateral.  For loans secured by real
estate, estimated fair values are determined primarily through third-party
appraisals or broker price opinions.  When a loan is determined to be impaired,
the Bank will reevaluate the collateral which secures the loan. For real estate,
the Company will obtain a new appraisal or broker's opinion whichever is
considered to provide the most accurate value in the event of sale. An
evaluation of equipment held as collateral will be obtained from a firm able to
provide such an evaluation. Collateral will be inspected not less than annually
for all impaired loans and will be reevaluated not less than every two years.
Appraised values and broker opinion values are discounted due to the market's
perception of a reduced price of Bank-owned property and the Bank's desire to
sell the property more quickly to arrive at the estimated selling price of the
collateral, which is considered to be the estimated fair value.  The discounts
also include estimated costs to sell the property.

At March 31, 2022 and December 31, 2021, the Company had $11.2 million and $11.4
million in loans, respectively, which were deemed to be impaired, having
established specific reserves of $2.0 million and $1.9 million, respectively, on
these loans.


                                     - 63 -
--------------------------------------------------------------------------------



Management has identified potential credit problems which may result in the
borrowers not being able to comply with the current loan repayment terms and
which may result in those loans being included in future impaired loan
reporting. Potential problem loans totaled $42.4 million as of March 31, 2022, a
decrease of $1.3 million, or 3.0%, as compared to $43.7 million at December 31,
2021. These loans have been internally classified as special mention,
substandard, or doubtful, yet are not currently considered impaired.

Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years.


In the normal course of business, the Bank sells residential mortgage loans and
has infrequently sold participation interests in commercial loans. As is typical
in the industry, the Bank makes certain representations and warranties to the
buyers of these loans or loan participations. The Bank maintains a quality
control program for closed loans and considers the risks and uncertainties
associated with potential repurchase requirements to be minimal.

The future performance of the Company's loan portfolios with respect to credit
losses will be highly dependent upon the course and duration, both nationally
and within the Company's market area, of the public health and economic factors
related to the pandemic, as well as the concentrations in the Company's loan
portfolio.  Concentrations of loans within a portfolio that are made to a single
borrower, to a related group of borrowers, or to a limited number of industries,
are generally considered to be additional risk factors in estimating future
credit losses.  Therefore, the Company monitors all of its credit relationships
to ensure that the total loan amounts extended to one borrower, or to a related
group of borrowers, does not exceed the maximum permissible levels defined by
applicable regulation or the Company's generally more restrictive internal
policy limits.

Liquidity


Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth, meet deposit
withdrawals, maintain reserve requirements, and otherwise operate the Company on
an ongoing basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of deposits to maintain a desired deposit
composition and balance. In addition, the Company invests excess funds in
short-term interest-earning and other assets, which provide liquidity to meet
lending requirements.

The Company's liquidity has been enhanced by its ability to borrow from the
Federal Home Loan Bank of New York ("FHLBNY"), whose competitive advance
programs and lines of credit provide the Company with a safe, reliable, and
convenient source of funds. A significant decrease in deposits in the future
could result in the Company having to seek other sources of funds for liquidity
purposes. Such sources could include, but are not limited to, additional
borrowings, brokered deposits, negotiated time deposits, the sale of
"available-for-sale" investment securities, the sale of securitized loans, or
the sale of whole loans. Such actions could result in higher interest expense
and/or losses on the sale of securities or loans.

Through the first three months of 2022, as indicated in the consolidated
statement of cash flows, the Company reported net cash flow from operating
activities of $4.1 million and net cash outflow of $47.8 million related to
investing activities. The net cash outflow from investing activities primarily
was due to a $23.8 million increase in net investment activity, a $23.4 million
increase in net loan activity and a $635,000 net increase in all other investing
activities in aggregate. The Company reported net cash flows from financing
activities of $43.8 million generated principally by increased customer deposit
balances of $58.8 million, partially offset by a $14.6 million decrease in net
borrowings, and an aggregate decrease in net cash of $384,000 from all other
financing sources, including dividends paid to common voting and non-voting
shareholders and warrants of $428,000.

The Company has a number of existing credit facilities available to it. At March
31, 2022, total credit available to the Company under the existing lines of
credit was approximately $146.9 million at FHLBNY, the Federal Reserve Bank, and
two other correspondent banks. As of March 31, 2022, the Company had $62.5
million of the available lines of credit utilized on its existing lines of
credit with $84.4 million available.

                                     - 64 -
--------------------------------------------------------------------------------

The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of March 31, 2022, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.

Off-Balance Sheet Arrangements


The Company is also a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit.  At March 31, 2022, the Company had $237.2 million in
outstanding commitments to extend credit and standby letters of credit.

© Edgar Online, source Glimpses

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