0001609065 pbhc:ATMFeesDepositAccountMember 2021-01-01 2021-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2021~~March 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

(Exact Name of Company as Specified in its Charter)

Maryland

(State of Other Jurisdiction of Incorporation)

001-36695

(Commission File No.)

38-3941859

(I.R.S. Employer Identification No.)

214 West First Street, Oswego, NY 13126

(Address of Principal Executive Office) (Zip Code)

(315) 343-0057

(~~Issuer's~~Issuer’s Telephone Number including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	PBHC	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of ~~August~~May 13, ~~2021,~~2022, there were ~~4,562,301~~4,603,184 shares outstanding of the registrant’s Voting common stock and 1,380,283 shares outstanding of the registrant’s Series A Non-Voting common stock.

Table of Contents

PATHFINDER BANCORP, INC.

INDEX

PART I - FINANCIAL INFORMATION		PAGE NO.

Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Statements of Condition	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive (Loss) Income	5
	Consolidated Statements of Changes in Shareholders' Equity	6
	Consolidated Statements of Cash Flows	87
	Notes to Consolidated Financial Statements	109

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)	5647

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8465

Item 4.	Controls and Procedures	8465

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	8666
Item 1A.	Risk Factors	8666
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8666
Item 3.	Defaults upon Senior Securities	8666
Item 4.	Mine Safety Disclosures	8666
Item 5.	Other information	8666
Item 6.	Exhibits	8666

SIGNATURES		8767

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

(Unaudited)

	June 30,			December 31,			March 31,			December 31,
(In thousands, except share and per share data)	2021			2020			2022			2021
ASSETS:
Cash and due from banks (including restricted balances of $1,600 and $1,600, respectively)	$	13,006		$	14,906		$	13,734		$	13,856
Interest-earning deposits (including restricted balances of $0 and $0, respectively)		28,148			28,558
Interest-earning deposits								23,450			23,293
Total cash and cash equivalents		41,154			43,464			37,184			37,149
Available-for-sale securities, at fair value		157,559			128,261			198,130			190,598
Held-to-maturity securities, at amortized cost (fair value of $165,997 and $174,935, respectively)		162,432			171,224
Held-to-maturity securities, at amortized cost (fair value of $164,791 and $162,805, respectively)								167,997			160,923
Marketable equity securities, at fair value		2,133			1,850			1,230			677
Federal Home Loan Bank stock, at cost		4,487			4,390			3,533			4,189
Loans		834,239			823,969			854,922			831,946
Loans held-for-sale		713			1,526			679			513
Less: Allowance for loan losses		14,603			12,777			13,017			12,935
Loans receivable, net		820,349			812,718			842,584			819,524
Premises and equipment, net		22,195			22,264			21,910			21,659
Operating lease right-of-use assets		2,172			2,240			2,102			2,136
Accrued interest receivable		4,539			4,549			4,740			4,520
Intangible assets, net		125			133			112			117
Goodwill		4,536			4,536			4,536			4,536
Bank owned life insurance		23,117			17,864			23,585			23,423
Other assets		14,893			13,950			20,773			15,726
Total assets	$	1,259,691		$	1,227,443		$	1,328,416		$	1,285,177

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing	$	848,010		$	833,850		$	909,345		$	863,488
Noninterest-bearing		183,660			162,057			204,732			191,858
Total deposits		1,031,670			995,907			1,114,077			1,055,346
Short-term borrowings		2,000			4,020			2,500			12,500
Long-term borrowings		81,734			78,030			60,021			64,598
Subordinated loans		29,482			39,400			29,604			29,563
Accrued interest payable		145			193			122			106
Operating lease liabilities		2,467			2,525			2,409			2,440
Other liabilities		8,661			9,646			10,237			9,991
Total liabilities		1,156,159			1,129,721			1,218,970			1,174,544
Shareholders' equity:
Preferred stock, par value $0.01 per share; 0 liquidation preference; 10,000,000 shares authorized; 0 and 1,380,283 shares issued and outstanding, respectively		-			14
Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,562,301 and 4,531,383 shares issued and outstanding, respectively		45			45
Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 and 0 shares issued and outstanding, respectively		14			-
Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,603,184 and 4,603,184 shares issued and outstanding, respectively								46			46
Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 and 1,380,283 shares issued and outstanding, respectively								14			14
Additional paid in capital		50,451			50,024			51,151			51,044
Retained earnings		54,545			50,284			63,352			60,946
Accumulated other comprehensive loss		(1,235	)		(2,236	)		(5,058	)		(1,268	)
Unearned ESOP		(585	)		(675	)		(450	)		(495	)
Total Pathfinder Bancorp, Inc. shareholders' equity		103,235			97,456			109,055			110,287
Noncontrolling interest		297			266			391			346
Total equity		103,532			97,722			109,446			110,633
Total liabilities and shareholders' equity	$	1,259,691		$	1,227,443		$	1,328,416		$	1,285,177

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

- 3 -

Pathfinder Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	For the three months ended					For the six months ended					For the three months ended
(In thousands, except per share data)	June 30, 2021		June 30, 2020			June 30, 2021		June 30, 2020			March 31, 2022			March 31, 2021
Interest and dividend income:
Loans, including fees	$	9,784	$	8,832		$	18,631	$	18,074		$	8,692		$	8,847
Debt securities:
Taxable		2,152		1,549			4,128		3,241			2,120			1,976
Tax-exempt		42		52			71		59			118			29
Dividends		87		64			174		134			48			87
Federal funds sold and interest earning deposits		1		17			4		49			4			3
Total interest and dividend income		12,066		10,514			23,008		21,557			10,982			10,942
Interest expense:
Interest on deposits		1,144		2,204			2,671		4,760			965			1,527
Interest on short-term borrowings		3		39			6		96			5			3
Interest on long-term borrowings		296		439			591		884			133			295
Interest on subordinated loans		408		192			965		398			412			557
Total interest expense		1,851		2,874			4,233		6,138			1,515			2,382
Net interest income		10,215		7,640			18,775		15,419			9,467			8,560
Provision for loan losses		929		1,146			1,957		2,213			102			1,028
Net interest income after provision for loan losses		9,286		6,494			16,818		13,206			9,365			7,532
Noninterest income:
Service charges on deposit accounts		357		303			689		659			259			331
Earnings and gain on bank owned life insurance		129		106			254		222			162			125
Loan servicing fees		11		79			101		128			117			90
Net gains on sales and redemptions of investment securities		51		1,023			51		1,049
Gains (losses) on marketable equity securities		49		(722	)		283		(916	)
Net losses on sales and redemptions of investment securities												(6	)		-
Gains on marketable equity securities												68			234
Net gains on sales of loans and foreclosed real estate		39		97			159		769			63			120
Net gains on sale of premises and equipment		-		-			201		-			-			201
Debit card interchange fees		241		205			462		368			228			221
Insurance agency revenue		234		185			514		522			299			280
Other charges, commissions & fees		323		255			565		478			413			243
Total noninterest income		1,434		1,531			3,279		3,279			1,603			1,845
Noninterest expense:
Salaries and employee benefits		3,501		2,972			6,842		6,219			4,049			3,341
Building and occupancy		870		707			1,663		1,461			826			793
Data processing		654		552			1,330		1,152			550			676
Professional and other services		451		301			868		617			393			417
Advertising		259		261			505		437			187			246
FDIC assessments		232		150			430		339			222			198
Audits and exams		177		125			379		250			141			202
Insurance agency expense		194		212			400		404			204			206
Community service activities		34		12			122		119			62			88
Foreclosed real estate expenses		16		5			22		35			13			6
Other expenses		457		461			920		970			605			463
Total noninterest expense		6,845		5,758			13,481		12,003			7,252			6,636
Income before income taxes		3,875		2,267			6,616		4,482			3,716			2,741
Provision for income taxes		851		439			1,400		894			721			549
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc.		3,024		1,828			5,216		3,588			2,995			2,192
Net income (loss) attributable to noncontrolling interest		15		(13	)		53		57
Net income attributable to noncontrolling interest												45			38
Net income attributable to Pathfinder Bancorp Inc.	$	3,009	$	1,841		$	5,163	$	3,531			2,950			2,154

Voting Earnings per common share - basic	$	0.50	$	0.31		$	0.87	$	0.60		$	0.49		$	0.36
Voting Earnings per common share - diluted	$	0.50	$	0.31		$	0.87	$	0.60		$	0.49		$	0.36
Series A Non-Voting Earnings per common share- basic	$	0.51	$	-		$	0.87	$	-		$	0.49		$	-
Series A Non-Voting Earnings per common share - diluted	$	0.51	$	-		$	0.87	$	-		$	0.49		$	-
Dividends per common share (Voting and Series A Non-Voting)	$	0.07	$	0.06		$	0.14	$	0.12		$	0.09		$	0.07

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

- 4 -

Pathfinder Bancorp, Inc.

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

For the three months ended

For the six months ended

(In thousands)

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Net Income

$
3,024

$
1,828

$
5,216

$
3,588

Other Comprehensive Income (Loss)

Retirement Plans:

Retirement plan net losses recognized in plan expenses

26

59

53

117

Unrealized holding gains (losses) on available-for-sale securities:

Unrealized holding gains (losses) arising during the period

597

4,393

963

760

Reclassification adjustment for net gains included in net
   income

-

(873
)

-

(899
)
Net unrealized gains (losses) on available-for-sale securities

597

3,520

963

(139
)

Derivatives and hedging activities:

Unrealized holding gains (losses) arising during the period

93

(184
)

327

(1,528
)
Net unrealized gains (losses) on derivatives and hedging activities

93

(184
)

327

(1,528
)

Accretion of net unrealized loss on securities transferred to held-to-
   maturity⁽¹⁾

6

10

13

19

Other comprehensive income (loss), before tax

722

3,405

1,356

(1,531
)
Tax effect

(189
)

(715
)

(355
)

321

Other comprehensive income (loss) , net of tax

533

2,690

1,001

(1,210
)
Comprehensive income

$
3,557

$
4,518

$
6,217

$
2,378

Comprehensive income (loss), attributable to noncontrolling interest

$
15

$
(13
)

$
53

$
57

Comprehensive income attributable to Pathfinder Bancorp, Inc.

$
3,542

$
4,531

$
6,164

$
2,321

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

Retirement plan net losses recognized in plan expenses

$
(7
)

$
(12
)

$
(15
)

$
(24
)
Unrealized holding gains (losses) on available-for-sale securities
   arising during the period

(156
)

(923
)

(251
)

(160
)
Reclassification adjustment for net gains included in net
   income

-

183

-

189

Unrealized gains (losses) on derivatives and hedging arising during
   the period

(24
)

39

(85
)

321

Accretion of net unrealized loss on securities transferred to held-to-
   maturity⁽¹⁾

(2
)

(2
)

(4
)

(5
)
Income tax effect related to other comprehensive income (loss)

$
(189
)

$
(715
)

$
(355
)

$
321

~~(1)~~

The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30, 2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

	For the three months ended
(In thousands)	March 31, 2022			March 31, 2021
Net Income	$	2,995		$	2,192

Other Comprehensive Income (Loss)
Retirement Plans:
Retirement plan net losses recognized in plan expenses		1			26

Unrealized holding (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains arising during the period		(5,782	)		366
Net unrealized (losses) gains on available-for-sale securities		(5,782	)		366

Derivatives and hedging activities:
Unrealized holding gains arising during the period		650			234
Net unrealized gains on derivatives and hedging activities		650			234

Accretion of net unrealized loss on securities transferred to held-to- maturity		-			7

Other comprehensive (loss) income, before tax		(5,131	)		633
Tax effect		1,341			(165	)
Other comprehensive (loss) income, net of tax		(3,790	)		468
Comprehensive (loss) income	$	(795	)	$	2,660
Comprehensive income, attributable to noncontrolling interest	$	45		$	38
Comprehensive (loss) income attributable to Pathfinder Bancorp, Inc.	$	(840	)	$	2,622

Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)
Retirement plan net losses recognized in plan expenses	$	-		$	(7	)
Unrealized holding gains (losses) on available-for-sale securities arising during the period		1,511			(95	)
Unrealized gains on derivatives and hedging arising during the period		(170	)		(61	)
Accretion of net unrealized loss on securities transferred to held-to- maturity		-			(2	)
Income tax effect related to other comprehensive income (loss)	$	1,341		$	(165	)

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

- 5 -

~~Pathfinder Bancorp, Inc.~~

~~Consolidated Statements of Changes in Shareholders’ Equity~~

~~Three months ended June 30, 2021 and June 30, 2020~~

~~(Unaudited)~~

(In thousands, except share and per share data)

Preferred Stock

Common Stock

Non-Voting Common Stock

Additional Paid in Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Unearned ESOP

Non-controlling Interest

Total

Balance, March 31, 2021

$
14

$
45

$
-

$
50,258

$
52,020

$
(1,768
)

$
(630
)

$
304

$
100,243

Net income

-

-

-

-

3,009

-

-

15

3,024

Conversion of Preferred stock to Non-Voting common stock

(14
)

-

14

-

-

-

-

-

-

Other comprehensive income, net of tax

-

-

-

-

-

533

-

-

533

ESOP shares earned (6,110 shares)

-

-

-

47

-

-

45

-

92

Restricted stock units (13,436 shares issued)

-

-

-

-

-

-

-

-

-

Stock based compensation

-

-

-

55

-

-

-

-

55

Stock options exercised

-

-

-

58

-

-

-

-

58

Common stock dividends declared ($0.07 per share)

-

-

-

-

(314
)

-

-

-

(314
)
Non-Voting common stock dividends declared ($0.07 per share)

-

-

-

-

(97
)

-

-

-

(97
)
Warrant dividends declared ($0.07 per share)

-

-

-

-

(8
)

-

-

-

(8
)
Capital transfer from affiliates

-

-

-

-

-

-

-

-

-

Cumulative effect of affiliate capital allocation

-

-

-

33

(65
)

-

-

32

-

Distributions from affiliates

-

-

-

-

-

-

-

(54
)

(54
)
Balance, June 30, 2021

$
-

$
45

$
14

$
50,451

$
54,545

$
(1,235
)

$
(585
)

$
297

$
103,532

Balance, March 31, 2020

$
12

$
47

$
-

$
49,659

$
46,174

$
(7,077
)

$
(809
)

$
305

$
88,311

Net income

-

-

-

-

1,841

-

-

(13
)

1,828

Other comprehensive income, net of tax

-

-

-

-

-

2,690

-

-

2,690

ESOP shares earned (6,110 shares)

-

-

-

15

-

-

44

-

59

Restricted stock units (13,437 shares issued)

-

-

-

-

-

-

-

-

-

Stock based compensation

-

-

-

73

-

-

-

-

73

Stock options exercised

-

1

-

-

-

-

-

-

1

Common stock dividends declared ($0.06 per share)

-

-

-

-

(279
)

-

-

-

(279
)
Preferred stock dividends declared ($0.06 per share)

-

-

-

-

(69
)

-

-

-

(69
)
Warrant dividends declared ($0.06 per share)

-

-

-

-

(7
)

-

-

-

(7
)
Distributions from affiliates

-

-

-

-

-

-

-

-

-

Balance, June 30, 2020

$
12

$
48

$
-

$
49,747

$
47,660

$
(4,387
)

$
(765
)

$
292

$
92,607

Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Three months ended March 31, 2022 and March 31, 2021
(Unaudited)




(In thousands, except share and per share data)	Preferred Stock		Common Stock		Non-Voting Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP			Non-controlling Interest		Total
Balance, January 1, 2022	$	-	$	46	$	14	$	51,044	$	60,946		$	(1,268	)	$	(495	)	$	346	$	110,633
Net income		-		-		-		-		2,950			-			-			45		2,995
Other comprehensive income, net of tax		-		-		-		-		-			(3,790	)		-			-		(3,790	)
ESOP shares earned (6,111 shares)		-		-		-		63		-			-			45			-		108
Stock based compensation		-		-		-		44		-			-			-			-		44
Common stock dividends declared ($0.09 per share)		-		-		-		-		(409	)		-			-			-		(409	)
Non-Voting common stock dividends declared ($0.09 per share)		-		-		-		-		(124	)		-			-			-		(124	)
Warrant dividends declared ($0.09 per share)		-		-		-		-		(11	)		-			-			-		(11	)
Balance, March 31, 2022	$	-	$	46	$	14	$	51,151	$	63,352		$	(5,058	)	$	(450	)	$	391	$	109,446

Balance, January 1, 2021	$	14	$	45	$	-	$	50,024	$	50,284		$	(2,236	)	$	(675	)	$	266	$	97,722
Net income		-		-				-		2,154			-			-			38		2,192
Other comprehensive income, net of tax		-		-		-		-		-			468			-			-		468
ESOP shares earned (6,111 shares)		-		-		-		37		-			-			45			-		82
Stock based compensation		-		-		-		93		-			-			-			-		93
Stock options exercised		-		-		-		104		-			-			-			-		104
Common stock dividends declared ($0.07 per share)		-		-		-		-		(312	)		-			-			-		(312	)
Preferred stock dividends declared ($0.07 per share)		-		-		-		-		(97	)		-			-			-		(97	)
Warrant dividends declared ($0.07 per share)		-		-		-		-		(9	)		-			-			-		(9	)
Balance, March 31, 2021	$	14	$	45	$	-	$	50,258	$	52,020		$	(1,768	)	$	(630	)	$	304	$	100,243

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

- 6 -

Pathfinder Bancorp, Inc.

Consolidated Statements of ~~Changes in Shareholders’ Equity~~

~~Six months ended June 30, 2021 and June 30, 2020~~Cash Flows

(Unaudited)

(In thousands, except share and per share data)

Preferred Stock

Common Stock

Non-Voting Common Stock

Additional Paid in Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Unearned ESOP

Non-controlling Interest

Total

Balance, January 1, 2021

$
14

$
45

$
-

$
50,024

$
50,284

$
(2,236
)

$
(675
)

$
266

$
97,722

Net income

-

-

-

-

5,163

-

-

53

5,216

Conversion of Preferred stock to Non-Voting common stock

(14
)

-

14

-

-

-

-

-

-

Other comprehensive income, net of tax

-

-

-

-

-

1,001

-

-

1,001

ESOP shares earned (12,221 shares)

-

-

-

84

-

-

90

-

174

Restricted stock units vested (13,436 shares issued)

-

-

-

-

-

-

-

-

-

Stock based compensation

-

-

-

148

-

-

-

-

148

Stock options exercised

-

-

-

162

-

-

-

-

162

Common stock dividends declared ($0.14 per share)

-

-

-

-

(626
)

-

-

-

(626
)
Non-Voting common stock dividends declared ($0.07 per share)

-

-

-

-

(97
)

-

-

-

(97
)
Preferred stock dividends declared ($0.07 per share)

-

-

-

-

(97
)

-

-

-

(97
)
Warrant dividends declared ($0.14 per share)

-

-

-

-

(17
)

-

-

-

(17
)
Cumulative effect of affiliate capital allocation

-

-

-

33

(65
)

-

-

32

-

Distributions from affiliates

-

-

-

-

-

-

-

(54
)

(54
)
Balance, June 30, 2021

$
-

$
45

$
14

$
50,451

$
54,545

$
(1,235
)

$
(585
)

$
297

$
103,532

Balance, January 1, 2020

$
12

$
47

$
-

$
49,362

$
44,839

$
(2,971
)

$
(855
)

$
235

$
90,669

Net income

-

-

-

3,531

-

-

57

3,588

Reevaluation of deferred tax asset valuation allowance⁽¹⁾

-

-

-

-

-

(206
)

-

-

(206
)
Other comprehensive loss, net of tax

-

-

-

-

-

(1,210
)

-

-

(1,210
)
ESOP shares earned (12,221 shares)

-

-

-

52

-

-

90

-

142

Restricted stock units (13,437 shares issued)

-

-

-

-

-

-

-

-

-

Stock based compensation

-

-

-

139

-

-

-

-

139

Stock options exercised

-

1

-

194

-

-

-

-

195

Common stock dividends declared ($0.12 per share)

-

-

-

-

(557
)

-

-

-

(557
)
Preferred stock dividends declared ($0.12 per share)

-

-

-

-

(138
)

-

-

-

(138
)
Warrant dividends declared ($0.12 per share)

-

-

-

-

(15
)

-

-

(15
)
Distributions from affiliates

-

-

-

-

-

-

-

-

-

Balance, June 30, 2020

$
12

$
48

$
-

$
49,747

$
47,660

$
(4,387
)

$
(765
)

$
292

$
92,607

~~(1)~~

In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.

	For the three months ended March 31,
(In thousands)	2022			2021
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.	$	2,950		$	2,154
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for loan losses		102			1,028
Amortization of operating leases		3			4
Proceeds from sales of loans		2,782			2,840
Originations of loans held-for-sale		(2,885	)		(1,631	)
Realized losses (gains) on sales, redemptions and calls of:
Loans		(63	)		(120	)
Available-for-sale investment securities		6			0
Marketable equity securities		(68	)		(234	)
Depreciation		384			453
Amortization of mortgage servicing rights		(5	)		(7	)
Amortization of deferred loan costs		188			328
Amortization of deferred financing from subordinated debt		41			43
Earnings on bank owned life insurance		(162	)		(125	)
Net amortization of premiums and discounts on investment securities		702			430
Amortization of intangible assets		5			4
Stock based compensation and ESOP expense		152			175
Net change in accrued interest receivable		(220	)		(169	)
Net change in other assets and liabilities		189			(1,699	)
Net cash flows from operating activities		4,101			3,474
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale		(21,026	)		(52,064	)
Purchase of investment securities held-to-maturity		(13,957	)		(9,131	)
Purchase of Federal Home Loan Bank stock		(29	)		(903	)
Proceeds from redemption of Federal Home Loan Bank stock		685			702
Purchase of marketable securities		(504	)		0
Proceeds from maturities and principal reductions of investment securities available-for-sale		4,174			19,671
Proceeds from maturities and principal reductions of investment securities held-to-maturity		6,736			13,605
Proceeds from sales, redemptions and calls of:
Available-for-sale investment securities		0			500
Held-to-maturity investment securities		50			1,051
Marketable equity securities		19			0
Purchase of bank owned life insurance		0			(5,000	)
Net change in loans		(23,350	)		(40,252	)
Purchase of premises and equipment		(635	)		(411	)
Proceeds from sale of premises and equipment		0			231
Net cash outflows from investing activities		(47,837	)		(72,001	)
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money management deposit accounts, MMDA accounts and escrow deposits		54,191			73,422
Net change in time deposits		4,616			5,414
Net change in brokered deposits		(76	)		(5,835	)
Net change in short-term borrowings		(10,000	)		0
Payments on long-term borrowings		(5,227	)		0
Proceeds from long-term borrowings		650			4,450
Proceeds from exercise of stock options		0			104

- 7 -

Cash dividends paid to common voting shareholders		(322	)		(271	)
Cash dividends paid to common non-voting shareholders		(97	)		0
Cash dividends paid to preferred shareholders		0			(83	)
Cash dividends paid on warrants		(9	)		(8	)
Change in noncontrolling interest, net		45			38
Net cash flows from financing activities		43,771			77,232
Change in cash and cash equivalents		35			8,705
Cash and cash equivalents at beginning of period		37,149			43,464
Cash and cash equivalents at end of period	$	37,184		$	52,169
CASH PAID DURING THE PERIOD FOR:
Interest	$	1,499		$	2,383
Income taxes		0			5
RESTRICTED CASH
Collateral deposits for hedge position included in cash and due from banks		1,600			1,600

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

- 7 -

~~Pathfinder Bancorp, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

For the six months ended June 30,

(In thousands)

2021

2020

OPERATING ACTIVITIES

Net income attributable to Pathfinder Bancorp, Inc.

$
5,163

$
3,531

Adjustments to reconcile net income to net cash flows from operating activities:

Provision for loan losses

1,957

2,213

Amortization of operating leases

10

11

Proceeds from sales of loans

4,634

40,498

Originations of loans held-for-sale

(3,662
)

(3,790
)
Realized losses (gains) on sales, redemptions and calls of:

Real estate acquired through foreclosure

0

4

Loans

(159
)

(773
)
Available-for-sale investment securities

0

(1,014
)
Held-to-maturity investment securities

(51
)

(35
)
Premises and equipment

(201
)

0

Marketable equity securities

(283
)

916

Depreciation

909

824

Amortization of mortgage servicing rights

(5
)

(298
)
Amortization of deferred loan costs

983

137

Amortization of deferred financing from subordinated debt

82

17

Earnings on bank owned life insurance

(254
)

(222
)
Net amortization of premiums and discounts on investment securities

1,310

637

Amortization of intangible assets

8

8

Stock based compensation and ESOP expense

322

281

Net change in accrued interest receivable

10

(1,261
)
Payment of executive deferred compensation and SERP contracts, expensed in prior periods

(571
)

0

Net change in other assets and liabilities

(1,617
)

(1,363
)
Net cash flows from operating activities

8,585

40,321

INVESTING ACTIVITIES

Purchase of investment securities available-for-sale

(72,642
)

(79,052
)
Purchase of investment securities held-to-maturity

(23,248
)

(39,552
)
Purchase of Federal Home Loan Bank stock

(3,562
)

(1,176
)
Proceeds from redemption of Federal Home Loan Bank stock

3,465

1,919

Proceeds from maturities and principal reductions of investment securities
available-for-sale

42,083

47,457

Proceeds from maturities and principal reductions of investment securities
held-to-maturity

30,753

19,523

Proceeds from sales, redemptions and calls of:

Available-for-sale investment securities

500

24,768

Held-to-maturity investment securities

1,112

1,589

Real estate acquired through foreclosure

0

116

Purchase of bank owned life insurance

(5,000
)

0

Net change in loans

(10,571
)

(61,017
)
Purchase of premises and equipment

(870
)

(436
)
Proceeds from sale of premises and equipment

231

0

Net cash flows from investing activities

(37,749
)

(85,861
)

- 8 -

FINANCING ACTIVITIES

Net change in demand deposits, NOW accounts, savings accounts, money management
deposit accounts, MMDA accounts and escrow deposits

65,864

100,069

Net change in time deposits

(3,188
)

(39,454
)
Net change in brokered deposits

(26,913
)

28,085

Net change in short-term borrowings

(2,020
)

(14,980
)
Payments on long-term borrowings

(3,391
)

(18,060
)
Proceeds from long-term borrowings

7,095

15,312

Payments on sub-debt borrowings

(10,000
)

-

Proceeds from exercise of stock options

162

195

Cash dividends paid to common shareholders

(589
)

(567
)
Cash dividends paid to preferred shareholders

(180
)

(139
)
Cash dividends paid on warrants

(17
)

(15
)
Change in noncontrolling interest, net

31

57

Net cash flows from financing activities

26,854

70,503

Change in cash and cash equivalents

(2,310
)

24,963

Cash and cash equivalents at beginning of period

43,464

20,160

Cash and cash equivalents at end of period

$
41,154

$
45,123

CASH PAID DURING THE PERIOD FOR:

Interest

$
4,282

$
6,259

Income taxes

755

550

NON-CASH INVESTING ACTIVITY

Real estate acquired in exchange for loans

-

58

RESTRICTED CASH

Collateral deposits for hedge position included in cash and due from banks

1,600

1,600

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

- 9 -

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc., (the “Company”), Pathfinder Bank (the “Bank”) and its other wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. Certain amounts in the ~~2020~~2021 consolidated financial statements may have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income or comprehensive income as previously reported. Operating results for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2021~~2022 or any other interim period.

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the ~~consolidated~~ financial statements; accordingly, as this information changes, the ~~consolidated~~ 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.

Although the Company owns, through its subsidiary Pathfinder Risk Management Company, Inc., 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of the Agency within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.

Note 2: New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies promulgate generally accepted accounting principles (“GAAP”) to regulate the standards of accounting in the United States. From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements. The following table provides a description of the accounting standards that are not currently effective, but could have an impact on the Company's consolidated financial statements upon adoption.

- 109 -

Standards Adopted as of ~~June 30, 2021~~
~~Standard~~	~~Description~~	~~Required Date~~ ~~of Implementation~~	~~Effect on Consolidated Financial Statements~~
~~Compensation~~ ~~(ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General [Subtopic 715 – 20]: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans)~~	The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ~~The following disclosure requirements are removed from Subtopic 715-20:~~ ~~1. The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.~~ ~~2. The amount and timing of plan assets expected to be returned to the employer.~~ ~~3. Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.~~ 4. The effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. ~~The following disclosure requirements are added to Subtopic 715-20:~~ ~~1. The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.~~ ~~2. An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.~~ ~~The amendments in this ASU also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:~~ ~~1. The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.~~ ~~2. The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.~~	The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.	~~The adoption of this ASU had no material impact to the Company's consolidated statements of condition or income.~~
~~Standard~~	~~Description~~	~~Required Date~~ ~~of Implementation~~	~~Effect on Consolidated Financial Statements~~
~~Investments~~ (ASU 2020-01- Equity Securities [Topic 321], Investments—Equity Method and Joint Ventures [Topic 323], and Derivatives and Hedging [Topic 815]—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)	The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.	The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.	~~The adoption of this ASU had no material impact to the Company's consolidated statements of condition or income.~~

- 11 -

~~Standard~~	~~Description~~	~~Required Date~~ ~~of Implementation~~	~~Effect on Consolidated Financial Statements~~
~~Income Taxes~~ ~~(ASU 2019-12- Simplifying the Accounting for Income Taxes)~~	~~The FASB Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative).~~ ~~The amendments in this Update simplify the accounting for income taxes by removing the following exceptions, among others not considered to be applicable to the Company:~~ 1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) ~~2. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.~~ ~~The amendments in this Update also simplify the accounting for income taxes by doing the following:~~ 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. ~~4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.~~ ~~5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.~~	The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period.	~~The adoption of this ASU had no material impact to the Company's consolidated statements of condition or income.~~
~~Standard~~	~~Description~~	~~Required Date~~ ~~of Implementation~~	~~Effect on Consolidated Financial Statements~~
~~Reference Rate Reform~~ ~~(ASU 2020-04- Facilitation of the Effects of Reference Rate Reform on Financial Reporting)~~	The amendments provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.	~~The amendments in this Update are effective for all entities as of~~ March ~~12, 2020 through December~~ 31, ~~2022.~~	~~The adoption of this ASU had no material impact to the Company's consolidated statements of condition or income.~~

- 12 -

~~Standards Not Yet Adopted as of June 30, 2021~~

~~Standard~~

~~Description~~

~~Required Date~~

~~of Implementation~~

~~Effect on Consolidated Financial Statements~~

~~Measurement of Credit Losses on Financial Instruments~~ ~~(ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments)~~

The amended guidance replaces the current incurred loss model for determining the allowance for credit losses. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-for-sale securities will be similar to how it is determined under existing guidance.

~~January 1, 2023 (early adoption was permitted as of January 1, 2019)~~

The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the current expected credit loss (CECL) methodology (as required upon implementation of this Update) will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13. The cumulative impact of the economic effects of the COVID-19 pandemic on the changes to the allowance for loan losses, that will be required upon the implementation of the CECL methodology, cannot be estimated at this time.

- 13 -

~~Standard~~

~~Description~~

~~Required Date~~

~~of Implementation~~

~~Effect on Consolidated Financial Statements~~

~~Transition Relief for the Implementation of ASU-2016-13~~ ~~(ASU 2019-5: Financial Instruments—Credit Losses [Topic 326]: Targeted Transition Relief)~~

~~The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20,~~ ~~Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10,~~ ~~Financial Instruments—Overall~~, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, ~~Fair Value Measurement—Overall~~, and 825-10. General guidance for the use of the fair value option is contained in Subtopic 825-10. The irrevocable election of the fair value option must be applied on an instrument-by-instrument basis for eligible instruments, whose characteristics are within the scope of Subtopic 326-20. Upon adoption of Topic 326, for items measured at fair value in accordance with paragraph 326-10-65-1(i), the difference between the carrying amount and the fair value shall be recorded by means of a cumulative-effect adjustment to the opening retained earnings balance as of the beginning of the first reporting period that an entity has adopted ASU 2016-13. Those differences may include, but are not limited to: (1) unamortized deferred costs, fees, premiums, and discounts (2) valuation allowances (for example, allowance for loan losses), or (3) accrued interest.

~~See comments above related to ASU 2016-13.~~

- 14 -

~~Standard~~

~~Description~~

~~Required Date~~

~~of Implementation~~

~~Effect on Consolidated Financial Statements~~

~~Financial Instruments—Credit Losses~~ ~~(ASU 2019-11- Codification Improvements to Topic 326)~~

~~On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326)~~: Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those assets. Through the amendments in that Update, the Board added Topic 326, ~~Financial Instruments—Credit Losses~~, and made several consequential amendments to the Codification. The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2016-13 to increase stakeholder awareness of those amendments and to expedite the improvement process. The amendments include items brought to the Board's attention by stakeholders. The amendments in this Update clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13 as described below:

1. Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCDs): The amendments clarify that the allowance for credit losses for PCD assets should include in the allowance for credit losses expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition.

2. Transition Relief for Troubled Debt Restructurings (TDRs): The amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring.

3. Disclosures Related to Accrued Interest Receivables: The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. 4. Financial Assets Secured by Collateral Maintenance Provisions: The amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. 5. Conforming Amendment to Subtopic 805-20: The amendment to Subtopic 805-20, ~~Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, clarifies the guidance by removing the cross-reference to Subtopic 310-30 in paragraph 805-20-50-1 and replacing it with a cross-reference to the guidance on PCD assets in Subtopic 326-20.~~

January 1, 2023 (early adoption was permitted as of January 1, 2019). The effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in Update 2016-13.

The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.

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~~Standard~~	~~Description~~	~~Required Date~~ ~~of Implementation~~	~~Effect on Consolidated Financial Statements~~
~~Earnings Per Share, Debt Modifications and Extinguishments, Stock Compensation, and Derivatives and Hedging- Contacts in Entity's own Equity~~ ~~(ASU 2011-04)~~	The amendments in this Update affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share. The amendments in this Update do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. That is, accounting for those instruments continues to be subject to the requirements in other Topics. The amendments in this Update do not affect a holder‘s accounting for freestanding call options.	The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.	The adoption of this ASU is expected to have no material impact to the Company's consolidated statements of condition or income as the Company does not have any freestanding equities with a written call option.2022
Standard	Description	Required Date of Implementation	Effect on Consolidated Financial Statements
Leases- Topic 842 (ASU 2021-05)	The amendments in this Update affect lessors with lease contracts that (1) have variable lease payments that do not depend on a reference index or a rate and (2) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. The amendment requires that a lessor determine whether a lease should be classified as a sales-type lease or a direct financing lease at lease commencement on the basis of specified classification criteria (see paragraphs 842-10-25-2 through 25-3). Under ASC 842, a lessor is not permitted to estimate most variable payments and must exclude variable payments that are not estimated and do not depend on a reference index or a rate from the lease receivable. Subsequently, those excluded variable payments are recognized entirely as lease income when the changes in facts and circumstances on which those variable payments are based occur. Consequently, the net investment in the lease for a sales-type lease or a direct financing lease with variable payments of a certain magnitude that do not depend on a reference index or a rate may be less than the carrying amount of the underlying asset derecognized at lease commencement. As a result, the lessor recognizes a selling loss at lease commencement (hereinafter referred to as a day-one loss) even if the lessor expects the arrangement to be profitable overall. The amendments in this Update address stakeholders' concerns by amending the lease classification requirements for lessors to align them with practice under ASC 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3 and (2) The lessor would have otherwise recognized a day-one loss. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The leased asset continues to be subject to the measurement and impairment requirements under other applicable GAAP before and after the lease transaction.	The amendments in this Update amend Topic 842, which has different effective dates for public business entities and most entities other than public business entities. The amendments are effective for fiscal years beginning after December 15, 2021, for all entities, and interim periods within those fiscal years for public business entities and interim periods within fiscal years beginning after December 15, 2022, for all other entities.	The adoption of this ASU is currently not expected to have a material impact to the Company's consolidated statements of condition or income.

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Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Earnings Per Share, Debt Modifications and Extinguishments, Stock Compensation, and Derivatives and Hedging- Contacts in Entity's own Equity (ASU 2021-04)

The amendments in this Update affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share. The amendments in this Update do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. That is, accounting for those instruments continues to be subject to the requirements in other Topics. The amendments in this Update do not affect a holder‘s accounting for freestanding call options.

The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.

The adoption of this ASU had no impact to the Company's consolidated statements of condition or income as the Company does not have any freestanding equities with a written call option.

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Standards Not Yet Adopted as of March 31, 2022

Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Measurement of Credit Losses on Financial Instruments (ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments)

January 1, 2023 (early adoption permitted as of January 1, 2019)

The Company is assessing new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is evaluating preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the current expected credit loss (CECL) methodology (as required upon implementation of this Update) will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date of adoption. The cumulative impact of the economic effects of the COVID-19 pandemic on the changes to the allowance for loan losses, that will be required upon the implementation of the CECL methodology, cannot be estimated at this time.

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Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Transition Relief for the Implementation of ASU-2016-13 (ASU 2019-5: Financial Instruments—Credit Losses [Topic 326]: Targeted Transition Relief)

The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10. General guidance for the use of the fair value option is contained in Subtopic 825-10. The irrevocable election of the fair value option must be applied on an instrument-by-instrument basis for eligible instruments, whose characteristics are within the scope of Subtopic 326-20. Upon adoption of Topic 326, for items measured at fair value in accordance with paragraph 326-10-65-1(i), the difference between the carrying amount and the fair value shall be recorded by means of a cumulative-effect adjustment to the opening retained earnings balance as of the beginning of the first reporting period that an entity has adopted ASU 2016-13. Those differences may include, but are not limited to: (1) unamortized deferred costs, fees, premiums, and discounts (2) valuation allowances (for example, allowance for loan losses), or (3) accrued interest.

January 1, 2023 (early adoption permitted as of January 1, 2019)

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Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Financial Instruments—Credit Losses (ASU 2019-11- Codification Improvements to Topic 326)

On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those assets. Through the amendments in that Update, the Board added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2016-13 to increase stakeholder awareness of those amendments and to expedite the improvement process. The amendments include items brought to the Board's attention by stakeholders.

The amendments in this Update clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13 as described below:

4. Financial Assets Secured by Collateral Maintenance Provisions: The amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero.

5. Conforming Amendment to Subtopic 805-20: The amendment to Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, clarifies the guidance by removing the cross-reference to Subtopic 310-30 in paragraph 805-20-50-1 and replacing it with a cross-reference to the guidance on PCD assets in Subtopic 326-20.

January 1, 2023 (early adoption permitted as of January 1, 2019). The effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in Update 2016-13.

The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.

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Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Debt (ASU 2020-06- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity's Own Equity (Subtopic 815-40)

The amendments reduce the number of accounting models for convertible debt instruments and convertible preferred stock. The amendments also reduce form-over-substance-based guidance for the derivatives scope exception for contacts in an entity’s own equity. For convertible instruments, embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate on the instrument. The amendments also require certain changes to EPS calculations for convertible instruments as well as additional disclosures relating to conditions that cause conversion features to be met.

For contracts in an entity’s own equity, the amendments revise the derivatives scope exception guidance as follows:

1. Remove the settlement in unregistered shares, collateral, and shareholder rights conditions from the settlement guidance.

2. Clarify that payment penalties for failure to timely file do not preclude equity classification.

3. Require instruments that are required to be classified as an asset or liability to be measured subsequently at fair value, with changes reported in earnings and disclosed in the financial statements. 4. Clarify that the scope of the disclosure requirements in the Contracts in an Entity’s Own Equity section of the Derivatives guidance applies only to freestanding instruments.

5. Clarify that the scope of the reassessment guidance in the Contracts in an Entity’s Own Equity section of the Derivatives guidance applies to both freestanding instruments and embedded features.

The amendments in this update are effective for public business entities, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year.

The amendments can be applied either on a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, the guidance should be applied to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. Transactions that were settled (or expired) during prior reporting periods are unaffected. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at the date of adoption. If applying the fully retrospective method of transition, the cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. The fair value option is allowed to be irrevocably elected for any financial instrument that is a convertible security upon adoption of the amendments. The Company has not yet determined which transition method will be applied to the extent that such transition adjustments are applicable. The Company does not expect that the guidance will have a material effect on its consolidated statements of financial condition or income.

- 15 -

Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method (ASU 2022-01)

Under current guidance, the last-of-layer method enables an entity to apply fair value hedging to a stated amount of a closed portfolio of prepayable financial assets (or one or more beneficial interests secured by a portfolio of prepayable financial instruments) without having to consider prepayment risk or credit risk when measuring those assets. ASU 2022-01 expands the scope of this guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both prepayable and nonprepayable financial assets. This scope expansion is consistent with the FASB’s efforts to simplify hedge accounting and allows entities to apply the same method to similar hedging strategies. ASU 2022-01 expands and clarifies the current guidance on accounting for fair value hedge basis adjustments under the portfolio layer method for both single-layer and multiple-layer hedges. An entity should adjust the basis of the hedged item for the change in fair value that is attributable to changes in the hedged risk (i.e., interest rate risk) as of each reporting date. However, the hedged item (i.e., the hedged layer) in a portfolio layer method hedge is related to multiple assets within a closed portfolio, but it is not necessarily related to all of the assets within that portfolio. Accordingly, ASU 2022-01 clarifies that an entity would adjust the basis at the portfolio level and should not allocate it to individual assets within the portfolio. The ASU does not change an entity’s current requirement to allocate the portfolio-level basis adjustment to the individual assets within a closed portfolio upon a dedesignation of a hedging relationship. The entity must, however, 1. recognize the reversal of all basis adjustments associated with a breach in interest income and, 2. disclose the specific amount and cause of the breach. Companies are allowed to reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the rules but only if they intend to apply portfolio layer method hedging to a closed portfolio that includes those debt securities. The decision of which securities to reclassify must be made within 30 days after the date of adoption, and the securities must be included in a closed portfolio that is designated in a portfolio layer method hedge within that 30-day period.

For public business entities, fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. For all other entities, fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted if an entity has adopted ASU 2017-12 for the corresponding period.

The Company has not yet determined which transition method will be applied to the extent that such transition adjustments are applicable. The Company does not expect that the guidance will have a material effect on its consolidated statements of financial condition or income.

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Standard

Description

Required Date

of Implementation

Effect on Consolidated Financial Statements

Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ASU 2022-02

ASU 2022-02 supersedes the accounting guidance for TDRs for creditors in ASC 310-40 in its entirety and requires entities to evaluate all receivable modifications under ASC 310-20-35-9 through 35-11 to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. The ASU also amends other subtopics to remove references to TDRs for creditors. In addition to the elimination of TDR guidance, an entity that has adopted ASU 2022-02 no longer considers renewals, modifications, and extensions that result from reasonably expected TDRs in their calculation of the allowance for credit losses in accordance with ASC 326-20. Due to the removal of the TDR accounting model, all loan modifications will be accounted for under the general loan modification guidance in Subtopic 310-20. On a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Public entities within the scope of Topic 326 vintage disclosure requirements also will be required to prospectively disclose current-period gross write-off information by vintage, or year of origination. In lieu of the TDR accounting model, creditors now will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met:

1. The terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks.

2. Modifications to the terms of the original loan are more than minor.

If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate.

Whether a modification is a new loan or the continuation of the original loan will determine whether net deferred fees or costs from the original loan are recognized in earnings (new loan) or continue to be accreted or amortized (continuation of original loan).

For entities that have adopted the amendments in ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted the amendments in ASU 2016-13, the effective dates for the amendments in ASU 2022-02 are the same as the effective dates in ASU 2016-13. The amendments in ASU 2022-02 should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption of the amendments in ASU 2022-02 is permitted if an entity has adopted the amendments in ASU 2016-13, including adoption in an interim period. If an entity elects to early adopt the amendments in ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period.

The Company is assessing the new guidance to determine what modifications to existing TDRs may be required. The new guidance is being evaluated as part of the CECL methodology and will be considered in conjunction with the preliminary output from CECL models that have been developed during this evaluative phase. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance.

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Note 3: Earnings per Common Share

Following shareholder approval received on June 4, 2021, the Company converted 1,380,283 shares of its Series B Convertible Perpetual Preferred Stock to an equal number of shares of its newly-created Series A Non-Voting Common Stock. The conversion, which was effective on June 28, 2021, represented 100% of the Company's Convertible Perpetual Preferred Stock outstanding at the time of the conversion and retired the Convertible Perpetual Preferred Stock in perpetuity.

The Company has voting common stock, non-voting common stock and a warrant that are all eligible to participate in dividends equal to the voting common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s non-voting common stock and warrant, are considered “participating ~~securities.”~~securities”. The Company calculates net income available to voting common shareholders using the two-class method required for capital structures that include participating securities.

In applying the two-class method, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted average number of shares of voting common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.

Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented. Anti-dilutive stock options, not included in the computation below, were -0- for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~were 256,145 and $128,073 for the three and six months ended June 30, 2020, respectively.~~

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March 31, 2021.

The following table sets forth the calculation of basic and diluted earnings per ~~share~~. share.

	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(In thousands, except per share data)	2021		2020		2021		2020
(In thousands, except share and per share data)									2022		2021
Net income attributable to Pathfinder Bancorp, Inc.	$	3,009	$	1,841	$	5,163	$	3,531	$	2,950	$	2,154
Convertible preferred stock dividends		83		69		180		138		-		97
Series A Non-Voting Common Stock dividends		14		-		14		-		124		-
Warrant dividends		9		7		17		15		11		9
Undistributed earnings allocated to participating securities		653		322		1,093		612		600		439
Net income available to common shareholders- Voting	$	2,250	$	1,443	$	3,859	$	2,766	$	2,215	$	1,666

Net income attributable to Pathfinder Bancorp, Inc.	$	3,009	$	-	$	5,163	$	-	$	2,950	$	-
Convertible preferred stock dividends		83		-		180		-
Voting Common Stock dividends		314		-		626		-		409		-
Warrant dividends		8		-		17		-		11		-
Undistributed earnings allocated to participating securities		2,504		-		4,254		-		1,857		-
Net income available to common shareholders- Series A Non-Voting	$	100	$	-	$	86	$	-	$	673	$	-


Basic weighted average common shares outstanding- Voting		4,464		4,639		4,453		4,623		4,535,967		4,442,231
Basic weighted average common shares outstanding- Series A Non-Voting		197		-		99		-		1,380,283		-
Diluted weighted average common shares outstanding- Voting		4,464		4,639		4,453		4,623		4,535,967		4,442,231
Diluted weighted average common shares outstanding- Series A Non-Voting		197		-		99		-		1,380,283		-

Basic earnings per common share- Voting	$	0.50	$	0.31	$	0.87	$	0.60	$	0.49	$	0.36
Basic earnings per common share- Series A Non-Voting	$	0.51	$	-	$	0.87	$	-	$	0.49	$	-
Diluted earnings per common share- Voting	$	0.50	$	0.31	$	0.87	$	0.60	$	0.49	$	0.36
Diluted earnings per common share- Series A Non-Voting	$	0.51	$	-	$	0.87	$	-	$	0.49	$	-

Supplemental information:	June 30, 2021		December 31, 2020		June 30, 2020
Voting Common Stock shares outstanding at period end		4,562		4,531		4,754
Series A Non-Voting Common Stock shares outstanding at period end		1,380		-		-
Series B Convertible Preferred Stock shares outstanding at period end		-		1,380		1,155
Total shares of all classes of stock outstanding at period end		5,942		5,911		5,909

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Note 4: Investment Securities

The amortized cost and estimated fair value of investment securities are summarized as follows:

	June 30, 2021									March 31, 2022
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	18,261	$	18	$	(25	)	$	18,254	$	31,624	$	15	$	(1,617	)	$	30,022
State and political subdivisions		22,548		1,203		0			23,751		43,117		887		(1,133	)		42,871
Corporate		12,830		486		(41	)		13,275		14,591		579		(144	)		15,026
Asset backed securities		14,279		30		(15	)		14,294		15,837		0		(300	)		15,537
Residential mortgage-backed - US agency		22,765		406		0			23,171		23,087		36		(1,083	)		22,040
Collateralized mortgage obligations - US agency		27,311		105		(427	)		26,989		11,881		0		(766	)		11,115
Collateralized mortgage obligations - Private label		37,263		401		(45	)		37,619		62,991		20		(1,698	)		61,313
Total		155,257		2,649		(553	)		157,353		203,128		1,537		(6,741	)		197,924
Equity investment securities:
Common stock - financial services industry		206		0		0			206		206		0		0			206
Total		206		0		0			206		206		0		0			206
Total available-for-sale	$	155,463	$	2,649	$	(553	)	$	157,559	$	203,334	$	1,537	$	(6,741	)	$	198,130

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	0	$	0	$	0		$	0	$	0	$	0	$	0		$	0
State and political subdivisions		16,912		489		(149	)		17,252		14,735		25		(928	)		13,832
Corporate		44,673		1,406		(50	)		46,029		47,304		291		(524	)		47,071
Asset backed securities		13,959		186		(92	)		14,053		13,759		0		(359	)		13,400
Residential mortgage-backed - US agency		10,714		408		0			11,122		9,514		77		(227	)		9,364
Collateralized mortgage obligations - US agency		13,312		580		(4	)		13,888		14,093		57		(255	)		13,895
Collateralized mortgage obligations - Private label		62,862		902		(111	)		63,653		68,592		0		(1,363	)		67,229
Total held-to-maturity	$	162,432	$	3,971	$	(406	)	$	165,997	$	167,997	$	450	$	(3,656	)	$	164,791

- 19 -

	December 31, 2020									December 31, 2021
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	6,428	$	12	$	(24	)	$	6,416	$	32,669	$	17	$	(413	)	$	32,273
State and political subdivisions		23,235		538		(20	)		23,753		37,860		1,383		(44	)		39,199
Corporate		12,393		275		0			12,668		13,603		562		(38	)		14,127
Asset backed securities		8,572		39		(4	)		8,607		13,693		9		(89	)		13,613
Residential mortgage-backed - US agency		24,856		355		0			25,211		22,482		148		(466	)		22,164
Collateralized mortgage obligations - US agency		26,776		149		(461	)		26,464		12,658		30		(403	)		12,285
Collateralized mortgage obligations - Private label		24,662		384		(110	)		24,936		56,848		285		(402	)		56,731
Total		126,922		1,752		(619	)		128,055		189,813		2,434		(1,855	)		190,392
Equity investment securities:
Common stock - financial services industry		206		0		0			206		206		0		0			206
Total		206		0		0			206		206		0		0			206
Total available-for-sale	$	127,128	$	1,752	$	(619	)	$	128,261	$	190,019	$	2,434	$	(1,855	)	$	190,598

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	1,000	$	2	$	0		$	1,002	$	0	$	0	$	0		$	0
State and political subdivisions		16,482		527		(58	)		16,951		14,790		416		(140	)		15,066
Corporate		36,441		1,101		(7	)		37,535		46,290		1,252		(102	)		47,440
Asset backed securities		18,414		217		(176	)		18,455		14,636		67		(188	)		14,515
Residential mortgage-backed - US agency		11,807		475		0			12,282		9,740		277		(18	)		9,999
Collateralized mortgage obligations - US agency		24,482		850		(1	)		25,331		11,362		367		(9	)		11,720
Collateralized mortgage obligations - Private label		62,598		902		(121	)		63,379		64,105		222		(262	)		64,065
Total held-to-maturity	$	171,224	$	4,074	$	(363	)	$	174,935	$	160,923	$	2,601	$	(719	)	$	162,805

The amortized cost and estimated fair value of debt investments at ~~June 30, 2021~~March 31, 2022 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
(In thousands)	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	14,841	$	15,147	$	0	$	0	$	5,883	$	6,437	$	2,821	$	2,839
Due after one year through five years		4,669		4,787		14,553		15,231		6,153		6,117		9,843		9,932
Due after five years through ten years		14,946		14,969		39,601		40,605		33,839		32,156		43,247		42,736
Due after ten years		33,462		34,671		21,390		21,498		59,294		58,746		19,887		18,796
Sub-total		67,918		69,574		75,544		77,334		105,169		103,456		75,798		74,303
Residential mortgage-backed - US agency		22,765		23,171		10,714		11,122		23,087		22,040		9,514		9,364
Collateralized mortgage obligations - US agency		27,311		26,989		13,312		13,888		11,881		11,115		14,093		13,895
Collateralized mortgage obligations - Private label		37,263		37,619		62,862		63,653		62,991		61,313		68,592		67,229
Totals	$	155,257	$	157,353	$	162,432	$	165,997	$	203,128	$	197,924	$	167,997	$	164,791

- 20 -

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	June 30, 2021																					March 31, 2022
	Less than Twelve Months							Twelve Months or More							Total							Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of							Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
(Dollars in thousands)	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
Available-for-Sale Portfolio
US Treasury, agencies and GSEs		1	$	(3	)	$	1,975		1	$	(22	)	$	4,957		2	$	(25	)	$	6,932
US Treasury, agencies and GSE's																							3	$	(1,617	)	$	29,017		0	$	0		$	0		3	$	(1,617	)	$	29,017
State and political subdivisions		0		0			0		0		0			0		0		0			0		15		(983	)		18,445		1		(150	)		2,155		16		(1,133	)		20,600
Corporate		1		(41	)		713		0		0			0		1		(41	)		713		4		(49	)		3,212		1		(95	)		660		5		(144	)		3,872
Asset backed securities		1		(4	)		3,000		2		(11	)		2,062		3		(15	)		5,062		9		(300	)		15,380		0		0			0		9		(300	)		15,380
Residential mortgage-backed - US agency		0		0			0		0		0			0		0		0			0		12		(1,083	)		19,407		0		0			0		12		(1,083	)		19,407
Collateralized mortgage obligations - US agency		3		(151	)		8,713		3		(276	)		6,957		6		(427	)		15,670		11		(255	)		6,323		3		(511	)		4,455		14		(766	)		10,778
Collateralized mortgage obligations - Private label		3		(40	)		4,676		1		(5	)		953		4		(45	)		5,629		26		(1,682	)		51,149		2		(16	)		1,533		28		(1,698	)		52,682
Totals		9	$	(239	)	$	19,077		7	$	(314	)	$	14,929		16	$	(553	)	$	34,006		80	$	(5,969	)	$	142,933		7	$	(772	)	$	8,803		87	$	(6,741	)	$	151,736
Held-to-Maturity Portfolio
State and political subdivisions		4	$	(149	)	$	5,315		0	$	0		$	0		4	$	(149	)	$	5,315		9	$	(421	)	$	7,898		2	$	(507	)	$	3,590		11	$	(928	)	$	11,488
Corporate		8		(50	)		7,311		0		0			0		8		(50	)		7,311		20		(481	)		18,325		1		(43	)		707		21		(524	)		19,032
Asset backed securities		0		0			0		2		(92	)		2,104		2		(92	)		2,104		6		(347	)		7,201		1		(12	)		1,403		7		(359	)		8,604
Residential mortgage-backed - US agency		0		0			0		0		0			0		0		0			0		6		(227	)		5,744		0		0			0		6		(227	)		5,744
Collateralized mortgage obligations - US agency		1		(4	)		1,293		0		0			0		1		(4	)		1,293		5		(244	)		8,393		1		(11	)		1,029		6		(255	)		9,422
Collateralized mortgage obligations - Private label		2		(110	)		4,000		1		(1	)		532		3		(111	)		4,532		26		(1,110	)		41,634		2		(253	)		3,494		28		(1,363	)		45,128
Totals		15	$	(313	)	$	17,919		3	$	(93	)	$	2,636		18	$	(406	)	$	20,555		72	$	(2,830	)	$	89,195		7	$	(826	)	$	10,223		79	$	(3,656	)	$	99,418

	December 31, 2020																					December 31, 2021
	Less than Twelve Months							Twelve Months or More							Total							Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of							Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
(Dollars in thousands)	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
Available-for-Sale Portfolio
US Treasury, agencies and GSE's		0	$	0		$	0		1	$	(24	)	$	4,954		1	$	(24	)	$	4,954		3	$	(413	)	$	31,195		0	$	0		$	0		3	$	(413	)	$	31,195
State and political subdivisions		1		(20	)		2,521		0		0			0		1		(20	)		2,521		3		(44	)		4,847		0		0			0		3		(44	)		4,847
Corporate		0		0			0		0		0			0		0		0			0		2		(5	)		1,162		1		(33	)		722		3		(38	)		1,884
Asset backed securities		2		(2	)		2,487		1		(2	)		80		3		(4	)		2,567		5		(89	)		11,206		0		0			0		5		(89	)		11,206
Residential mortgage-backed - US agency		0		0			0		0		0			0		0		0			0		3		(466	)		13,090		0		0			0		3		(466	)		13,090
Collateralized mortgage obligations - US agency		2		(45	)		6,974		2		(416	)		5,683		4		(461	)		12,657		3		(126	)		6,504		2		(277	)		2,204		5		(403	)		8,708
Collateralized mortgage obligations - Private label		3		(78	)		8,071		4		(32	)		2,574		7		(110	)		10,645		18		(388	)		38,816		2		(14	)		1,539		20		(402	)		40,355
Totals		8	$	(145	)	$	20,053		8	$	(474	)	$	13,291		16	$	(619	)	$	33,344		37	$	(1,531	)	$	106,820		5	$	(324	)	$	4,465		42	$	(1,855	)	$	111,285
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's		0	$	0		$	0		0	$	0		$	0		0	$	0		$	0
State and political subdivisions		3		(58	)		7,063		0		0			0		3		(58	)		7,063		4	$	(28	)	$	2,013		2	$	(112	)	$	3,988		6	$	(140	)	$	6,001
Corporate		4		(7	)		3,775		0		0			0		4		(7	)		3,775		9		(102	)		7,636		0		0			0		9		(102	)		7,636
Asset backed securities		4		(36	)		4,209		3		(140	)		4,683		7		(176	)		8,892		2		(130	)		2,974		2		(58	)		1,610		4		(188	)		4,584
Residential mortgage-backed - US agency		0		0			0		0		0			0		0		0			0		1		(18	)		1,941		0		0			0		1		(18	)		1,941
Collateralized mortgage obligations - US agency		1		(1	)		1,496		0		0			0		1		(1	)		1,496		0		0			0		1		(9	)		1,109		1		(9	)		1,109
Collateralized mortgage obligations - Private label		4		(115	)		6,442		1		(6	)		780		5		(121	)		7,222		6		(163	)		13,070		3		(99	)		3,820		9		(262	)		16,890
Totals		16	$	(217	)	$	22,985		4	$	(146	)	$	5,463		20	$	(363	)	$	28,448		22	$	(441	)	$	27,634		8	$	(278	)	$	10,527		30	$	(719	)	$	38,161

- 21 -

Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to other-than-temporary impairment (“OTTI”), as described below, the fair market value of a debt security as of a particular measurement date is highly dependent upon prevailing market and economic environmental factors at the measurement date relative to the prevailing market and economic environmental factors present at the time the debt security was acquired. The most significant market and environmental factors include, but are not limited to (1) the general level of interest rates, (2) the relationship between shorter-term interest rates and longer-term interest rates (referred to as the “slope” of the interest rate yield curve), (3) general bond market liquidity, (4) the recent and expected near-term volume of new issuances of similar debt securities, and (5) changes in the market values of individual loan collateral underlying mortgage-backed debt securities. Changes in interest rates affect the fair market values of debt securities by influencing the discount rate applied to the securities’ future expected cash flows. The higher the discount rate, the lower the resultant security price. Conversely, the lower the discount rate, the higher the resultant security price. In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may be also affected by changes in interest rates. For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the

- 21 -

duration of the security, (2) imbedded optionality contractually granted to the issuer of the security with respect to principal prepayments, and (3) changes in the level of market premiums demanded by investors for securities with imbedded credit risk (where applicable).

The Company conducts a formal review of investment securities on a quarterly basis for the presence of OTTI. The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

Management does not believe any individual unrealized loss in investment securities within the portfolio as of ~~June 30, 2021~~March 31, 2022 represents OTTI. ~~At June 30, 2021, the Bank had the following~~There were a total of 7 securities classified as available-for-sale (aggregate amortized historical cost of $9.6 million, unrealized aggregate loss of $772,000, or -8.1%) and 7 securities classified as held-to-maturity (aggregate amortized historical cost of $11.0 million, unrealized aggregate loss of $826,000, or -7.5%) that were in aan unrealized loss position for 12 months or longer at March 31, 2022.

Each security which has been in an unrealized loss position for 12 months or more ~~relative~~has been analyzed and is not considered to ~~their amortized historical cost, which were deemed to~~be impaired. These securities have ~~no credit impairment, thus, the disclosed~~ unrealized losses ~~relate directly~~primarily due to fluctuations in general interest rates or changes in ~~interest rates subsequent to~~expected prepayments. In substantially all cases, price improvement in future months is expected as the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

issuances approach maturity. Of the total of 1014 securities in an unrealized loss position for 12 months or more at ~~June 30, 2021,~~March 31, 2022, 4 securities, with aggregate amortized cost balances of $6.0 million and representing ~~67.9%~~29.1% of the unamortized cost of the total securities in an unrealized loss position for 12 months or more, are issued by United States agencies ~~or Government Sponsored Enterprises (GSEs)~~ and consist of ~~mortgage-backed securities,~~a collateralized mortgage ~~obligations and direct agency financings.~~obligation. These positions in ~~U.S.~~US government agency ~~and GSEs~~ are deemed to have no credit impairment, thus, the disclosed unrealized losses relate primarily to ~~changes~~increases in ~~prepayment assumptions related to significantly lower~~ general interest ~~rates resulting from the economic effects of the pandemic.~~rates.

In addition to these four securities, the Company held the following ~~six non-government or GSE-issued/~~ten non-government-issued/backed securities that were in an unrealized loss position for 12 or more months at ~~June 30, 2021:~~March 31, 2022:

•

NaN ~~privately-issued asset-backed security,~~corporate bond, categorized as ~~available-for-sale, and collateralized by rail car leases,~~available for sale, with an ~~aggregate~~ amortized historical cost of ~~$2.0 million~~$755,000 (unrealized loss of ~~$11,000,~~$95,000, or ~~0.6%~~-12.51%). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment ~~grade.~~ grade and therefore, no credit-related OTTI is deemed to be present.

•NaN corporate bond, categorized as held-to-maturity, with an amortized historical cost of $750,000 (unrealized loss of $43,000, or -5.68%). This security retains a credit rating by one or more NRSRO that is above investment grade and is considered to be stable in terms of future outlook. Therefore, no credit-related OTTI is deemed to be present.

- 22 -

•

NaN privately-issued ~~asset-backed security,~~mortgage-backed securities, categorized as available-for-sale, and collateralized by ~~consumer installment loans~~various forms of commercial mortgages, with an aggregate amortized historical cost of ~~$78,000~~$1.5 million (unrealized aggregate loss of ~~less than $1,000)~~$16,000, or -0.967%). ~~This security was~~These securities were not rated at the time of ~~its issuance~~their issuances by any NRSRO but each remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.

- 22 -

•

NaN ~~privately-issued collateralized mortgage obligation~~securities, categorized as issued by unrelated state and/or political subdivisions (generally referred to as “municipal’ securities), categorized as held-to-maturity, with an aggregate amortized historical cost of $4.1 million (unrealized loss of $507,000, or -12.37%). These securities each maintain a credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related OTTI is deemed to be present.

•NaN security, ~~collateralized~~categorized as issued by ~~commercial mortgage loans and~~unrelated state and/or political subdivisions (generally referred to as “municipal’ securities), categorized as available-for-sale, with an aggregate amortized historical cost of $958,000 and an aggregate market value of $953,000 (unrealized aggregate loss of $5,000 or -0.5%). This security was not rated at the time of its issuance by any NRSRO but remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.

•

~~NaN~~ privately-issued asset-backed security, collateralized by small business installment loans, and categorized as held-to-maturity, with an aggregate amortized historical cost of $486,000 and a market value of $479,000$2.3 million (unrealized loss of ~~$7,000~~$150,000 or ~~-1.4%~~-6.53%). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment ~~grade. Therefore,~~grade and therefore, no credit-related OTTI is deemed to be present.

•

NaN privately-issued asset-backed security, collateralized by private-issue student loans and categorized as held-to-maturity, with an ~~aggregate~~ amortized historical cost of ~~$1.7~~$1.4 million and ~~an aggregate~~a market value of ~~$1.6~~$1.4 million (unrealized loss of ~~$85,000~~$12,000 or ~~-5.0%~~-0.83%). This security was unrated at issuance but remains sufficiently collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.

•

NaN privately-issued collateralized mortgage obligation ~~security,~~securities, collateralized by ~~residential~~commercial mortgage loans and categorized as held-to-maturity, with an aggregate amortized historical cost of ~~$532,000~~$3.7 million and aan aggregate market value of ~~$531,000~~$3.5 million (unrealized aggregate loss of ~~less than $1,000)~~$253,000, or -6.76%). ~~This security~~These securities each maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment ~~grade. Therefore,~~grade and therefore, no credit-related OTTI is deemed to be ~~present~~. present.

All other securities with market values less than their amortized historical costs for twelve or more months are issued by United States agencies or government sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in US government agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. The Company had no equity investment securities that were impaired at June 30, 2021 or December 31, 2020.

Gross realized gains (losses) on salesandredemptions of securities for the indicated periods are detailed below:

	For the three months					For the six months						For the three months
	ended June 30,					ended June 30,						ended March 31,
(In thousands)	2021		2020			2021			2020			2022			2021
Realized gains on investments	$	51	$	917		$	58		$	950		$	0		$	7
Realized losses on investments		0		(9	)		(7	)		(16	)		(6	)		(7	)
	$	51	$	908		$	51		$	934		$	(6	)	$	0

As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, securities with a fair value of ~~$109.5~~$154.0 million and ~~$96.4~~$103.2 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of ~~$11.9~~$8.9 million and ~~$13.2~~$9.4 million, respectively, were pledged against certain borrowing arrangements.

- 23 -

Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, only minimal exposure exists to sub-prime or other high-risk residential mortgages. With limited exceptions in the Company’s investment portfolio involving the most senior tranches of securitized bonds, the Company is not in the practice of investing in, or originating, these types of investments or loans.

- 2423 -

Note 5: Pension and Postretirement Benefits

The Company has 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, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there are no future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In addition, the Company provides certain health and life insurance benefits for a limited number of eligible retired employees. The healthcare plan is contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory. Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.

The composition of net periodic pension plan and postretirement plan costs for the indicated periods is as follows:

	Pension Benefits						Postretirement Benefits						Pension Benefits						Postretirement Benefits						Pension Benefits						Postretirement Benefits
	For the three months ended June 30,												For the six months ended June 30,												For the three months ended March 31,
(In thousands)	2021			2020			2021			2020			2021			2020			2021			2020			2022			2021			2022			2021
Service cost	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Interest cost		111			117			2			3			221			233			6			8			116			110			3			3
Expected return on plan assets		(287	)		(274	)		-			-			(573	)		(547	)		-			-			(267	)		(286	)		-			-
Amortization of prior service credits		-			-			(1	)		(1	)		-			-			(2	)		(2	)		-			-			(1	)		(1	)
Amortization of net losses		25			57			2			3			50			114			4			5			-			25			1			2
Net periodic benefit plan (benefit) cost	$	(151	)	$	(100	)	$	3		$	5		$	(302	)	$	(200	)	$	8		$	11		$	(151	)	$	(151	)	$	3		$	4

The Company will evaluate the need for further contributions to the defined benefit pension plan during ~~2021.~~2022. The prepaid pension asset is recorded in other assets on the ~~statement~~consolidated statements of condition as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

- 2524 -

Note 6: Loans

Major classifications of loans at the indicated dates are as follows:

	June 30,			December 31,			March 31,			December 31,
(In thousands)	2021			2020			2022			2021
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	226,896		$	227,185		$	232,809		$	240,434
Construction		8,133			6,681			21,594			6,329
Loans held-for-sale		713			1,526			679			513
Total residential mortgage loans		235,742			235,392			255,082			247,276

Commercial loans:
Real estate		291,678			286,271			303,250			288,450
Lines of credit		60,097			49,103			75,370			61,884
Other commercial and industrial		74,416			78,629			69,695			69,135
Paycheck Protection Program loans		53,611			60,643			13,292			19,338
Tax exempt loans		6,554			7,166			5,550			5,811
Total commercial loans		486,356			481,812			467,157			444,618

Consumer loans:
Home equity and junior liens		34,649			38,624			30,781			31,737
Other consumer		80,269			70,905			103,825			110,108
Total consumer loans		114,918			109,529			134,606			141,845

Total loans		837,016			826,733			856,845			833,739
Net deferred loan fees		(2,064	)		(1,238	)		(1,244	)		(1,280	)
Less allowance for loan losses		14,603			12,777			13,017			12,935
Loans receivable, net	$	820,349		$	812,718		$	842,584		$	819,524

Although the Bank may sometimes purchase or fund loan participation interests outside of its primary market areas, the Bank generally originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions.

The Bank acquires diversified pools of loans, originated by unrelated third parties, as part of the Company’s overall balance sheet management strategies. These acquisitions occurred in 10eleven separate transactions commencing in 2019 and ~~continuing through 2021, including 2 separate transactions~~four new pools were added during ~~the six months ended June 30,~~ 2021.

- 26 -

~~The following table sets forth certain information related to these loan transactions:~~

June 30,

December 31,

(In thousands, except number of loans)

2021

2020

Purchased residential real estate loans

Original Balance

$
4,300

$
4,300

Current Balance

$
4,200

$
4,300

Unamortized Premium (Discount)

$
265

$
273

Percent Owned

100
%

100
%
Number of Loans

51

51

Maturity range

17-24 years

17-25 years

Cumulative net charge-offs

$
-

$
-

Purchased other commercial and industrial loans

Original Balance

$
6,800

$
6,800

Current Balance

$
4,800

$
5,500

Unamortized Premium (Discount)

$
-

$
-

Percent Owned

100
%

100
%
Number of Loans

37

39

Maturity range

4-8 years

5-9 years

Cumulative net charge-offs

$
-

$
-

Purchased home equity lines of credit:

Original Balance

$
21,900

$
21,900

Current Balance

$
10,900

$
13,900

Unamortized Premium (Discount)

$
274

$
309

Percent Owned

100
%

100
%
Number of Loans

226

275

Maturity range

3-28 years

3-29 years

Cumulative net charge-offs

$
-

$
-

Purchased automobile loans:

Original Balance

$
50,400

$
50,400

Current Balance

$
12,500

$
17,000

Unamortized Premium (Discount)

$
457

$
602

Percent Owned

90
%

90
%
Number of Loans

1,041

1,257

Maturity range

0-5 years

0-6 years

Cumulative net charge-offs

$
231

$
230

Purchased unsecured consumer loan pool 1:

Original Balance

$
5,400

$
5,400

Current Balance

$
3,000

$
3,600

Unamortized Premium (Discount)

$
-

$
-

Percent Owned

100
%

100
%
Number of Loans

70

76

Maturity range

3-5 years

3-6 years

Cumulative net charge-offs

$
-

$
-

- 2725 -

June 30,

December 31,

(In thousands, except number of loans)

2021

2020

Purchased unsecured consumer loan pool 2:

Original Balance

$
26,600

$
26,600

Current Balance

$
10,400

$
15,400

Unamortized Premium (Discount)

$
45

$
63

Percent Owned

59
%

59
%
Number of Loans

1,878

2,246

Maturity range

1-3 years

2-4 years

Cumulative net charge-offs

$
-

$
-

Purchased unsecured consumer loan pool 3:

Original Balance

$
10,300

$
10,300

Current Balance

$
3,600

$
5,500

Unamortized Premium (Discount)

$
101

$
138

Percent Owned

100
%

100
%
Number of Loans

2,127

2,958

Maturity range

0-6 years

0-6 years

Cumulative net charge-offs

$
6

$
-

Purchased secured consumer loan pool 1:

Original Balance

$
14,500

$
14,500

Current Balance

$
13,800

$
14,500

Unamortized Premium (Discount)

$
(1,943
)

$
(2,124
)
Percent Owned

68
%

68
%
Number of Loans

599

619

Maturity range

25 years

25 years

Cumulative net charge-offs

$
-

$
-

Purchased secured consumer loan pool 2:

Original Balance

$
24,400

$
-

Current Balance

$
21,700

$
-

Unamortized Premium (Discount)

$
(633
)

$
-

Percent Owned

100
%

0
%
Number of Loans

797

-

Maturity range

10-24 years

-

Cumulative net charge-offs

$
-

$
-

Purchased commercial line of credit:

Original Balance

$
11,600

$
-

Current Balance

$
4,100

$
-

Unamortized Premium (Discount)

$
32

$
-

Percent Owned

12
%

0
%
Number of Loans

1

-

Maturity range

3 years

-

Cumulative net charge-offs

$
-

$
-

(In thousands, except number of loans)	March 31, 2022
	Original Balance		Current Balance		Unamortized Premium/ (Discount)			Number of Loans		Maturity Range	Cumulative net charge-offs
Residential real estate loans		4,300		4,100		253			50	19-24 years		-
Secured consumer installment loans		21,300		20,900		(3,492	)	880		19-26 years		-
Commercial and industrial loans		6,800		3,700					33	0-5 years		-
Commercial Line of Credit 1		11,600		12,300		23		1		0-1 year		-
Commercial Line of Credit 2		10,500		9,300		32			1	0-1 year		-
Home equity lines of credit		21,900		7,500		229			173	2-28 years		-
Automobile loans		50,400		7,300		242			758	0-5 years		239
Unsecured consumer loan pool 1		5,400		2,400					65	0-5 years		-
Unsecured consumer loan pool 2		26,600		4,500		24			1,239	0-3 years		1,551
Unsecured consumer installment loans pool 3		10,300		1,800		63			977	0-6 years		31
Secured consumer installment loans pool 4		14,500		12,300		(1,699	)	553		Over 15 years		-
Unsecured consumer loans pool 5		24,400		19,100		(554	)		733	Over 15 years		-
Unsecured consumer loans pool 6		22,200		21,600		(2,694	)	560		Over 15 years		-
Total		230,200		126,800		(7,573	)		6,023			1,821

(In thousands, except number of loans)	December 31, 2021
	Original Balance		Current Balance		Unamortized Premium/ (Discount)			Number of Loans		Maturity Range	Cumulative net charge-offs
Residential real estate loans		4,300		4,100		257			51	17-23 years		-
Secured consumer installment loans		21,300		21,400		(3,642	)	900		19-25 years		-
Commercial and industrial loans		6,800		3,900					33	4-8 years		-
Commercial Line of Credit 1		11,600		7,100		26		1		0-1 year		-
Commercial Line of Credit 2		10,500		9,300		35			1	0-1 year		-
Home equity lines of credit		21,900		8,400		243			187	2-28 years		-
Automobile loans		50,400		8,800		301			855	0-5 years		239
Unsecured consumer loan pool 1		5,400		2,600					66	3-5 years		-
Unsecured consumer loan pool 2		26,600		6,300		30			1,438	1-3 years		42
Unsecured consumer installment loans pool 3		10,300		2,200		74			1,356	0-6 years		296
Secured consumer installment loans pool 4		14,500		12,600		(1,776	)	563		Over 15 years		-
Unsecured consumer loans pool 5		24,400		19,700		(583	)		756	Over 15 years		-
Unsecured consumer loans pool 6		22,200		22,100		(2,785	)	564		Over 15 years		-
Total		230,200		128,500		(7,820	)		6,771			577

- 28 -

As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, residential mortgage loans with a carrying value of ~~$120.4~~$123.0 million and ~~$115.6~~$123.2 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.

Loan Origination / Risk Management

The Company’s lending policies and procedures are presented in Note 5 to the audited consolidated financial statements included in the ~~2020~~2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March ~~30, 2021~~25, 2022 and have not changed. As part of the execution of the Company’s overall balance sheet management strategies, the Bank will acquire participating interests in loans originated by unrelated third parties on an occasional basis. The purchase of participations in loans that are originated by third parties only occurs after the completion of thorough pre-acquisition due diligence. Loans in which the Company acquires a participating interest are determined to meet, in all material respects, the Company’s internal underwriting policies, including credit and collateral suitability thresholds, prior to acquisition. In addition, the financial condition of the originating financial institutions, which are generally retained as the ongoing loan servicing provider for participations acquired by the Bank, are analyzed prior to the acquisition of the participating interests and monitored on a regular basis thereafter for the life of those interests.

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into 3 portfolio segments, each with different risk characteristics but with similar methodologies for assessing risk. Each portfolio segment is broken down into loan classes where

- 26 -

appropriate. Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class.

The following table illustrates the portfolio segments and classes for the Company’s loan portfolio:

Portfolio Segment	Class

Residential Mortgage Loans	1-4 family first-lien residential mortgages
	Construction

Commercial Loans	Real estate
	Lines of credit
	Other commercial and industrial
	Tax exempt loans

Consumer Loans	Home equity and junior liens
	Other consumer

- 2927 -

The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:

	As of June 30, 2021										As of March 31, 2022
			Special										Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	222,785	$	661	$	2,724	$	726	$	226,896	$	231,039	$	510	$	599	$	661	$	232,809
Construction		8,133		0		0		0		8,133		21,594		0		0		0		21,594
Loans held-for-sale		713		0		0		0		713		679		0		0		0		679
Total residential mortgage loans		231,631		661		2,724		726		235,742		253,312		510		599		661		255,082
Commercial loans:
Real estate		267,369		13,523		10,198		588		291,678		282,336		9,768		10,569		577		303,250
Lines of credit		51,881		4,981		3,107		128		60,097		67,908		4,078		3,337		48		75,370
Other commercial and industrial		62,711		3,860		6,810		1,035		74,416		58,521		3,457		7,534		183		69,695
Paycheck Protection Program loans		53,611		0		0		0		53,611		13,292		0		0		0		13,292
Tax exempt loans		6,554		0		0		0		6,554		5,550		0		0		0		5,550
Total commercial loans		442,126		22,364		20,115		1,751		486,356		427,607		17,302		21,440		808		467,157
Consumer loans:
Home equity and junior liens		33,632		108		647		262		34,649		29,776		145		634		225		30,781
Other consumer		79,876		86		220		87		80,269		103,755		18		52		0		103,825
Total consumer loans		113,508		194		867		349		114,918		133,532		163		686		225		134,606
Total loans	$	787,265	$	23,219	$	23,706	$	2,826	$	837,016	$	814,451	$	17,975	$	22,724	$	1,694	$	856,845

	As of December 31, 2020										As of December 31, 2021
			Special										Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	222,386	$	1,151	$	3,196	$	452	$	227,185	$	238,823	$	269	$	811	$	531	$	240,434
Construction		6,681		0		0		0		6,681		6,329		0		0		0		6,329
Loans held-for-sale		1,526		0		0		0		1,526		513		0		0		0		513
Total residential mortgage loans		230,593		1,151		3,196		452		235,392		245,665		269		811		531		247,276
Commercial loans:
Real estate		267,736		9,541		8,615		379		286,271		267,388		9,879		10,604		579		288,450
Lines of credit		40,733		5,132		3,154		84		49,103		54,408		4,036		3,387		53		61,884
Other commercial and industrial		65,441		4,770		8,153		265		78,629		56,719		3,907		8,321		188		69,135
Paycheck Protection Program loans		60,643		0		0		0		60,643		19,338		0		0		0		19,338
Tax exempt loans		7,166		0		0		0		7,166		5,811		0		0		0		5,811
Total commercial loans		441,719		19,443		19,922		728		481,812		403,664		17,822		22,312		820		444,618
Consumer loans:
Home equity and junior liens		37,926		54		411		233		38,624		30,740		133		606		258		31,737
Other consumer		70,502		104		218		81		70,905		109,979		44		77		8		110,108
Total consumer loans		108,428		158		629		314		109,529		140,719		177		683		266		141,845
Total loans	$	780,740	$	20,752	$	23,747	$	1,494	$	826,733	$	790,048	$	18,268	$	23,806	$	1,617	$	833,739

Management has reviewed its loan portfolio and determined that, to the best of its knowledge, no material exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.

Nonaccrual and Past Due Loans

Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.

- 3028 -

An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, are detailed in the following tables:

	As of June 30, 2021												As of March 31, 2022

	30-59 Days		60-89 Days		90 Days		Total				Total Loans		30-59 Days		60-89 Days		90 Days		Total				Total Loans
(In thousands)	Past Due		Past Due		and Over		Past Due		Current		Receivable		Past Due		Past Due		and Over		Past Due		Current		Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	771	$	205	$	871	$	1,847	$	225,049	$	226,896	$	1,072	$	322	$	1,098	$	2,492	$	230,317	$	232,809
Construction		0		0		0		0		8,133		8,133		0		0		0		0		21,594		21,594
Loans held-for-sale		0		0		0		0		713		713		0		0		0		0		679		679
Total residential mortgage loans		771		205		871		1,847		233,895		235,742		1,072		322		1,098		2,492		252,590		255,082
Commercial loans:
Real estate		3,331		390		3,160		6,881		284,797		291,678		1,054		3,800		4,212		9,066		294,184		303,250
Lines of credit		572		1,654		172		2,398		57,699		60,097		274		365		94		733		74,637		75,370
Other commercial and industrial		2,749		3,008		1,257		7,014		67,402		74,416		1,572		1,016		1,001		3,589		66,106		69,695
Paycheck Protection Program loans		0		0		0		0		53,611		53,611		0		0		0		0		13,292		13,292
Tax exempt loans		0		0		0		0		6,554		6,554		0		0		0		0		5,550		5,550
Total commercial loans		6,652		5,052		4,589		16,293		470,063		486,356		2,900		5,181		5,307		13,388		453,769		467,157
Consumer loans:
Home equity and junior liens		156		0		291		447		34,202		34,649		117		64		388		569		30,212		30,781
Other consumer		535		235		419		1,189		79,080		80,269		389		412		895		1,696		102,129		103,825
Total consumer loans		691		235		710		1,636		113,282		114,918		506		476		1,283		2,265		132,341		134,606
Total loans	$	8,114	$	5,492	$	6,170	$	19,776	$	817,240	$	837,016	$	4,478	$	5,979	$	7,688	$	18,145	$	838,700	$	856,845

	As of December 31, 2020												As of December 31, 2021

	30-59 Days		60-89 Days		90 Days		Total				Total Loans		30-59 Days		60-89 Days		90 Days		Total				Total Loans
(In thousands)	Past Due		Past Due		and Over		Past Due		Current		Receivable		Past Due		Past Due		and Over		Past Due		Current		Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	1,250	$	570	$	1,098	$	2,918	$	224,267	$	227,185	$	960	$	416	$	891	$	2,268	$	238,166	$	240,434
Construction		0		0		0		0		6,681		6,681		0		0		0		0		6,329		6,329
Loans held-for-sale		0		0		0		0		1,526		1,526		0		0		0		0		513		513
Total residential mortgage loans		1,250		570		1,098		2,918		232,474		235,392		960		416		891		2,268		245,008		247,276
Commercial loans:
Real estate		480		913		2,511		3,904		282,367		286,271		1,735		1,029		4,379		7,143		281,307		288,450
Lines of credit		734		1,870		194		2,798		46,305		49,103		156		1,180		576		1,913		59,971		61,884
Other commercial and industrial		441		1,717		1,691		3,849		74,780		78,629		1,799		1,686		1,056		4,541		64,594		69,135
Paycheck Protection Program loans		170		0		0		170		60,473		60,643		0		0		0		0		19,338		19,338
Tax exempt loans		0		0		0		0		7,166		7,166		0		0		0		0		5,811		5,811
Total commercial loans		1,825		4,500		4,396		10,721		471,091		481,812		3,691		3,895		6,011		13,597		471,091		444,618
Consumer loans:
Home equity and junior liens		248		78		473		799		37,825		38,624		17		49		251		317		31,420		31,737
Other consumer		443		252		187		882		70,023		70,905		571		257		852		1,680		108,428		110,108
Total consumer loans		691		330		660		1,681		107,848		109,529		588		306		1,103		1,998		139,847		141,845
Total loans	$	3,766	$	5,400	$	6,154	$	15,320	$	811,413	$	826,733	$	5,239	$	4,617	$	8,006	$	17,862	$	815,877	$	833,739

- 3129 -

Nonaccrual loans, segregated by class of loan, were as follows:

	June 30,		December 31,		March 31,		December 31,
(In thousands)	2021		2020		2022		2021
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	2,881	$	2,608	$	1,098	$	891
		2,881		2,608		1,098		891
Commercial loans:
Real estate		4,829		11,286		4,235		4,407
Lines of credit		172		194		141		629
Other commercial and industrial		6,802		6,498		1,191		1,261
		11,803		17,978		5,567		6,297
Consumer loans:
Home equity and junior liens		839		473		388		252
Other consumer		471		274		895		852
Total consumer loans		1,310		747		1,283		1,104
Total nonaccrual loans	$	15,994	$	21,333	$	7,948	$	8,292

~~The following table summarizes nonaccrual loans by category and status at June 30, 2021:~~

Loan Type
Collateral Type
Number of Loans

Loan Balance

Average Loan Balance

Weighted LTV at Origination/ Modification

Status
Secured residential mortgage:

Real Estate

33

$
2,881

$
87

88
%

Under active resolution management by the Bank.

Secured commercial real estate:

Private Museum

1

1,385

1,385

79
%

The Bank is working on a modification with the borrower. The borrower has substantial deposits with the Bank.

Recreational

1

1,234

1,234

50
%

The loan is currently classified as a Troubled Debt Restructuring (TDR). Next payment is due August 1, 2021.

All Others

14

2,210

158

79
%

Under active resolution management by the Bank.

Commercial lines of credit

4

172

43

N/A

Under active resolution management by the Bank.

Commercial and industrial:

Real Estate

1

4,485

4,485

41
%

The Bank modified the loan and the next payment is due August 1, 2021. Repayment is expected from operations, pledges and collateral value.

All Others

11

2,317

211

N/A

Under active resolution management by the Bank.

Consumer loans

31

1,310

42

N/A

Under active resolution management by the Bank.

96

$
15,994

- 32 -

The Company is required to disclose certain activities related to Troubled Debt Restructurings (“TDR”) in accordance with accounting guidance. Certain loans have been modified inas a TDR where economic concessions have been granted to a borrower who is experiencing, or expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that it would not otherwise consider for a new loan with similar risk characteristics.

The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented. The pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR. The post-modification outstanding recorded investment is the principal balance less the provision for loan losses after the loan was modified as a TDR. Additional provision for loan losses is the change in the allowance for loan losses between the pre-modification outstanding recorded investment and post-modification outstanding recorded investment.

The Company ~~had 0 loans~~has 1 loan that ~~were~~was modified as ~~TDRs~~a TDR for the three months ended ~~June 30, 2021.~~

~~The table below details loans that had been modified as TDRs for the six months ended June 30, 2021.~~March 31, 2022.

For the three months ended June 30, 2021

(In thousands)
Number of loans

Pre-modification outstanding recorded investment

Post-modification outstanding recorded investment

Additional provision for loan losses

Commercial loans
2
$

961

$

967

$

6

Residential real estate loans
2
$

389

$

389

$

12

Home equity and junior liens
1
$

200

$

504

$

219

	For the three months ended March 31, 2022
(In thousands)	Number of loans		Pre-modification outstanding recorded investment			Post-modification outstanding recorded investment			Additional provision for loan losses
Commercial real estate loans	1	$		355	$		355	$		-

The ~~loans~~loan evaluated for impairment for the ~~six~~three months ended ~~June 30, 2021 have~~March 31, 2022 has been classified as ~~TDRs~~a TDR due to economic concessions granted, which consisted of a reduction in the stated interest rate, a significant delay in the timing of the payment or an extended maturity date that will result in a significant delay in payment from the original terms.

~~The Company had 0 loans that were modified as TDRs for the three months ended June 30, 2020.~~

~~The Company had 0 loans that were modified as TDRs for the six months ended June 30, 2020.~~

The Company is required to disclose loans that have been modified as TDRs within the previous 12 months in which there was payment default after the restructuring. The Company defines payment default as any loans 90 days past due on contractual payments.

The Company had 02 loans that were modified as TDRs during the twelve months prior to ~~June 30,~~March 31, 2022, which had subsequently defaulted during the three months ended March 31, 2022.

The Company had 1 loan that was modified as a TDR during the twelve months prior to March 31, 2021, which had subsequently defaulted during the ~~six~~three months ended ~~June 30,~~March 31, 2021.

~~The Company had 0 loans that were modified as TDRs during the twelve months prior to June 30, 2020, which had subsequently defaulted during the six months ended June 30, 2020.~~

When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate

- 30 -

of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for loan losses, by an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period.

- 33 -

Impaired Loans

The following table summarizes impaired loan information by portfolio class at the indicated ~~dates~~:dates:

	June 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
			Unpaid						Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
(In thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
1-4 family first-lien residential mortgages	$	1,006	$	1,006	$	-	$	665	$	665	$	-	$	662	$	662	$	-	$	666	$	666	$	-
Commercial real estate		4,841		4,929		-		11,053		11,136		-		4,206		4,301		-		4,708		4,801		-
Commercial lines of credit		100		100		-		0		0		-		100		100		-		100		104		-
Other commercial and industrial		4,881		4,881		-		5,114		5,132		-		299		335		-		357		396		-
Home equity and junior liens		72		72		-		75		75		-		91		91		-		93		93		-
Other consumer		79		79		-		81		81		-

With an allowance recorded:
1-4 family first-lien residential mortgages		493		493		80		1,182		1,182		205		528		528		97		539		539		90
Commercial real estate		2,105		2,105		222		1,729		1,729		231		2,908		2,908		352		2,450		2,450		300
Commercial lines of credit		904		904		904		925		925		925		48		53		48		53		53		53
Other commercial and industrial		2,385		2,385		1,852		1,864		1,864		1,278		1,887		1,893		1,353		1,852		1,852		1,318
Home equity and junior liens		506		506		223		142		142		142		539		539		114		539		539		114
Other consumer		0		0		0		0		0		0
Total:
1-4 family first-lien residential mortgages		1,499		1,499		80		1,847		1,847		205		1,191		1,190		97		1,205		1,205		90
Commercial real estate		6,946		7,034		222		12,782		12,865		231		7,114		7,209		352		7,158		7,251		300
Commercial lines of credit		1,004		1,004		904		925		925		925		148		153		48		153		157		53
Other commercial and industrial		7,266		7,266		1,852		6,978		6,996		1,278		2,185		2,228		1,353		2,209		2,248		1,318
Home equity and junior liens		578		578		223		217		217		142		630		630		114		632		632		114
Other consumer		79		79		0		81		81		0
Totals	$	17,372	$	17,460	$	3,281	$	22,830	$	22,931	$	2,781	$	11,268	$	11,410	$	1,964	$	11,357	$	11,493	$	1,875

The following table presents the average recorded investment in impaired loans for the periods indicated:

	For the three months ended				For the six months ended				For the three months ended
	June 30,				June 30,				March 31,
(In thousands)	2021		2020		2021		2020		2022		2021
1-4 family first-lien residential mortgages	$	1,503	$	1,601	$	1,618	$	1,604	$	1,197	$	1,677
Commercial real estate		10,234		4,544		11,083		4,511		7,135		13,152
Commercial lines of credit		982		180		963		181		151		943
Other commercial and industrial		6,990		972		6,986		959		2,198		6,846
Home equity and junior liens		578		219		458		219		631		398
Other consumer		86		88		84		89		0		87
Total	$	20,373	$	7,604	$	21,192	$	7,563	$	11,312	$	23,103

- 3431 -

The following table presents the cash basis interest income recognized on impaired loans for the periods indicated:

	For the three months ended				For the six months ended				For the three months ended
	June 30,				June 30,				March 31,
(In thousands)	2021		2020		2021		2020		2022		2021
1-4 family first-lien residential mortgages	$	16	$	15	$	32	$	27	$	16	$	16
Commercial real estate		44		38		109		69		63		65
Commercial lines of credit		15		3		25		5		2		10
Other commercial and industrial		49		6		74		22		20		25
Home equity and junior liens		5		1		6		4		6		1
Other consumer		1		2		3		3		-		5
Total	$	130	$	65	$	249	$	130	$	107	$	122

Note 7: Allowance for Loan Losses

Management extensively reviews recent trends in historical losses, qualitative factors, including concentrations of loans to related borrowers and concentrations of loans by collateral type, and specific reserve needs on loans individually evaluated for impairment in its determination of the adequacy of the allowance for loan losses. We recorded ~~$929,000~~$102,000 in provision for loan losses for the three month period ended ~~June 30, 2021,~~March 31, 2022, as compared to ~~$1.1~~$1.0 million for the three month period ended ~~June 30, 2020. For the first six months of 2021, we recorded $2.0 million in provision for loan losses as compared to $2.2 million in the same prior year six month period.~~March 31, 2021. The provisioning in ~~2021~~2022 and ~~2020~~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 credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its ~~proven~~ conservative loan classification and reserve building methodologies to the analysis of these portfolios.

- 35 -

Summarized in the tables below are changes in the allowance for loan losses for the indicated periods and information pertaining to the allocation of the allowance for loan losses, balances of the allowance for loan losses, loans receivable based in

- 32 -

on individual, and collective impairment evaluation by loan portfolio class. An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.

	For the three months ended June 30, 2021																	For the three months ended March 31, 2022
	1-4 family																	1-4 family
	first-lien			Residential									Other			Paycheck		first-lien			Residential									Other			Paycheck
	residential			construction			Commercial			Commercial			commercial			Protection		residential			construction			Commercial			Commercial			commercial			Protection
(In thousands)	mortgage			mortgage			real estate			lines of credit			and industrial			Program		mortgage			mortgage			real estate			lines of credit			and industrial			Program
Allowance for loan losses:
Beginning Balance	$	975		$	0		$	5,721		$	1,916		$	3,016		$	0	$	872		$	0		$	5,308		$	935		$	2,762		$	0
Charge-offs		(20	)		0			(6	)		0			0			0		0			0			0			(17	)		0			0
Recoveries		0			0			0			62			0			0		0			0			0			0			0			0
Provisions		(80	)		0			405			(168	)		432			0
Provisions (credits)																			(42	)		0			(10	)		143			(25	)		0
Ending balance	$	875		$	0		$	6,120		$	1,810		$	3,448		$	0	$	830		$	0		$	5,298		$	1,061		$	2,737		$	0
Ending balance: related to loans individually evaluated for impairment	$	80		$	0		$	222		$	904		$	1,852		$	0	$	97		$	0		$	352		$	48		$	1,353		$	0
Ending balance: related to loans collectively evaluated for impairment	$	795		$	0		$	5,898		$	906		$	1,596		$	0	$	733		$	0		$	4,946		$	1,013		$	1,384		$	0
Loans receivables:
Ending balance	$	226,896		$	8,133		$	291,678		$	60,097		$	74,416		$	53,611	$	232,809		$	21,594		$	303,250		$	75,370		$	69,695		$	13,292
Ending balance: individually evaluated for impairment	$	1,499		$	0		$	6,946		$	1,004		$	7,266		$	0	$	1,191		$	0		$	7,114		$	148		$	2,185		$	0
Ending balance: collectively evaluated for impairment	$	225,397		$	8,133		$	284,732		$	59,093		$	67,150		$	53,611	$	231,618		$	21,594		$	296,136		$	75,222		$	67,510		$	13,292

				Home equity			Other														Home equity			Other
	Tax exempt			and junior liens			Consumer			Unallocated			Total					Tax exempt			and junior liens			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1		$	827		$	1,237		$	0		$	13,693				$	3		$	774		$	1,297		$	984			12,935
Charge-offs		0			0			(76	)		0			(102	)				0			0			(29	)		0			(46	)
Recoveries		0			0			21			0			83					0			0			26			0			26
Provisions		0			(22	)		68			294			929					1			(98	)		128			5			102
Ending balance	$	1		$	805		$	1,250		$	294		$	14,603				$	4		$	676		$	1,422		$	989		$	13,017
Ending balance: related to loans individually evaluated for impairment	$	0		$	223		$	0		$	0		$	3,281				$	0		$	114		$	0		$	0		$	1,964
Ending balance: related to loans collectively evaluated for impairment	$	1		$	582		$	1,250		$	294		$	11,322				$	4		$	562		$	1,422		$	989		$	11,053
Loans receivables:
Ending balance	$	6,554		$	34,649		$	80,269		$	713		$	837,016				$	5,550		$	30,781		$	103,825		$	679		$	856,845
Ending balance: individually evaluated for impairment	$	0		$	578		$	79		$	0		$	17,372				$	0		$	630		$	0		$	0		$	11,268
Ending balance: collectively evaluated for impairment	$	6,554		$	34,071		$	80,190		$	713		$	819,644				$	5,550		$	30,151		$	103,825		$	679		$	845,577

- 3633 -

	For the six months ended June 30, 2021																For the three months ended March 31, 2021
	1-4 family																1-4 family
	first-lien			Residential								Other			Paycheck		first-lien		Residential								Other			Paycheck
	residential			construction		Commercial			Commercial			commercial			Protection		residential		construction		Commercial			Commercial			commercial			Protection
(In thousands)	mortgage			mortgage		real estate			lines of credit			and industrial			Program		mortgage		mortgage		real estate			lines of credit			and industrial			Program
Allowance for loan losses:
Beginning Balance	$	931		$	0	$	4,776		$	1,670		$	2,992		$	0	$	931	$	0	$	4,776		$	1,670		$	2,992		$	0
Charge-offs		(20	)		0		(6	)		0			(100	)		0		0		0		(100	)		0			0			0
Recoveries		0			0		0			63			0			0		0		0		0			1			0			0
Provisions		(36	)		0		1,350			77			556			0		44		0		1,045			245			24			0
Ending balance	$	875		$	0	$	6,120		$	1,810		$	3,448		$	0	$	975	$	0	$	5,721		$	1,916		$	3,016		$	0
Ending balance: related to loans individually evaluated for impairment																	$	161	$	0	$	252		$	960		$	1,285		$	0
Ending balance: related to loans collectively evaluated for impairment																	$	814	$	0	$	5,469		$	956		$	1,731		$	0
Loans receivables:
Ending balance																	$	226,058	$	7,789	$	289,182		$	63,158		$	77,915		$	71,885
Ending balance: individually evaluated for impairment																	$	1,507	$	0	$	13,521		$	960		$	6,714		$	0
Ending balance: collectively evaluated for impairment																	$	224,551	$	7,789	$	275,661		$	62,198		$	71,201		$	71,885

				Home equity		Other													Home equity		Other
	Tax exempt			and junior liens		consumer			Unallocated			Total					Tax exempt		and junior liens		Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1		$	739	$	1,123		$	545		$	12,777				$	1	$	739	$	1,123		$	545			12,777
Charge-offs		0			0		(119	)		0			(245	)				0		0		(43	)		0			(143	)
Recoveries		0			0		51			0			114					0		0		30			0			31
Provisions		0			66		195			(251	)		1,957					0		88		127			(545	)		1,028
Ending balance	$	1		$	805	$	1,250		$	294		$	14,603				$	1	$	827	$	1,237		$	0		$	13,693
Ending balance: related to loans individually evaluated for impairment																	$	0	$	221	$	0		$	0			2,879
Ending balance: related to loans collectively evaluated for impairment																	$	1	$	606	$	1,237		$	0			10,814
Loans receivables:
Ending balance																	$	6,959	$	36,181	$	87,976		$	437			867,540
Ending balance: individually evaluated for impairment																	$	0	$	578	$	92		$	0			23,372
Ending balance: collectively evaluated for impairment																	$	6,959	$	35,603	$	87,884		$	437		$	844,168

- 37 -

For the three months ended June 30, 2020

1-4 family

first-lien

Residential

Other

Paycheck

residential

construction

Commercial

Commercial

commercial

Protection

(In thousands)

mortgage

mortgage

real estate

lines of credit

and industrial

Program

Allowance for loan losses:

Beginning Balance

$
731

$
0

$
4,243

$
1,218

$
1,758

$
0

Charge-offs

(99
)

0

0

(48
)

(9
)

0

Recoveries

0

0

0

0

0

0

Provisions

124

0

15

38

317

0

Ending balance

$
756

$
0

$
4,258

$
1,208

$
2,066

$
0

Ending balance: related to loans
   individually evaluated for impairment

$
153

$
0

$
64

$
98

$
563

$
0

Ending balance: related to loans
   collectively evaluated for impairment

$
603

$
0

$
4,194

$
1,110

$
1,503

$
0

Loans receivables:

Ending balance

$
212,741

$
3,678

$
260,824

$
53,509

$
83,167

$
73,774

Ending balance: individually
   evaluated for impairment

$
1,598

$
0

$
4,661

$
178

$
1,062

$
0

Ending balance: collectively
   evaluated for impairment

$
211,143

$
3,678

$
256,163

$
53,331

$
82,105

$
73,774

Home equity

Other

Tax exempt

and junior liens

Consumer

Unallocated

Total

Allowance for loan losses:

Beginning Balance

$
1

$
611

$
846

$
198

9,606

Charge-offs

0

0

(52
)

0

(208
)

Recoveries

0

0

9

0

9

Provisions

0

33

252

367

1,146

Ending balance

$
1

$
644

$
1,055

$
565

$
10,553

Ending balance: related to loans
   individually evaluated for impairment

$
0

$
142

$
0

$
0

$
1,020

Ending balance: related to loans
   collectively evaluated for impairment

$
1

$
502

$
1,055

$
565

$
9,533

Loans receivables:

Ending balance

$
7,644

$
42,587

$
69,915

$
0

$
807,839

Ending balance: individually
   evaluated for impairment

$
0

$
219

$
85

$
0

$
7,803

Ending balance: collectively
   evaluated for impairment

$
7,644

$
42,368

$
69,830

$
0

$
800,036

- 38 -

For the six months ended June 30, 2020

1-4 family

first-lien

Residential

Other

Paycheck

residential

construction

Commercial

Commercial

commercial

Protection

(In thousands)

mortgage

mortgage

real estate

lines of credit

and industrial

Program

Allowance for loan losses:

Beginning Balance

$
580

$
0

$
4,010

$
1,195

$
1,645

$
0

Charge-offs

(125
)

0

0

(48
)

(9
)

0

Recoveries

1

0

0

2

0

0

Provisions (credits)

300

0

248

59

430

0

Ending balance

$
756

$
0

$
4,258

$
1,208

$
2,066

$
0

Home equity

Other

Tax exempt

and junior liens

consumer

Unallocated

Total

Allowance for loan losses:

Beginning Balance

$
1

$
553

$
413

$
272

$
8,669

Charge-offs

0

(28
)

(185
)

0

(395
)

Recoveries

0

29

34

0

66

Provisions (credits)

0

90

793

293

2,213

Ending balance

$
1

$
644

$
1,055

$
565

$
10,553

The Company’s methodology for determining its allowance for loan losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for loan losses needed for this general pool of loans. The qualitative factors include:

•

Changes in national and local economic trends;

•

The rate of growth in the portfolio;

•

Trends of delinquencies and nonaccrual balances;

•

Changes in loan policy; and

•

Changes in lending management experience and related staffing.

- 34 -

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan losses analysis and calculation.

- 39 -

The allocation of the allowance for loan losses summarized on the basis of the Company’s calculation methodology was as follows:

	June 30, 2021
	1-4 family
	first-lien		Residential						Other
	residential		construction		Commercial		Commercial		commercial		March 31, 2022
(In thousands)	mortgage		mortgage		real estate		lines of credit		and industrial		1-4 family first-lien residential mortgage		Residential construction mortgage		Commercial real estate		Commercial lines of credit		Other Commercial and industrial
Specifically reserved	$	80	$	0	$	222	$	904	$	1,852	$	97	$	0	$	352	$	48	$	1,353
Historical loss rate		85		0		1		33		38		85		0		2		26		96
Qualitative factors		710		0		5,897		873		1,558		648		0		4,944		987		1,288
Total	$	875	$	0	$	6,120	$	1,810	$	3,448	$	830	$	0	$	5,298	$	1,061	$	2,737

			Home equity		Other
	Tax exempt		and junior liens		consumer		Unallocated		Total		Tax exempt		Home equity and junior liens		Other consumer		Unallocated		Total
Specifically reserved	$	0	$	223	$	0	$	0	$	3,281	$	0	$	114	$	0	$	0	$	1,964
Historical loss rate		0		325		992		0		1,474		0		324		1,147		0		1,680
Qualitative factors		1		257		258		0		9,554		4		238		275		0		8,384
Other		0		0		0		294		294		0		0		0		989		989
Total	$	1	$	805	$	1,250	$	294	$	14,603	$	4	$	676	$	1,422	$	989	$	13,017

	June 30, 2020										March 31, 2021
	1-4 family										1-4 family
	first-lien		Residential						Other		first-lien		Residential						Other
	residential		construction		Commercial		Commercial		commercial		residential		construction		Commercial		Commercial		commercial
(In thousands)	mortgage		mortgage		real estate		lines of credit		and industrial		mortgage		mortgage		real estate		lines of credit		and industrial
Specifically reserved	$	153	$	0	$	64	$	98	$	563	$	161	$	0	$	252	$	960	$	1,285
Historical loss rate		71		0		99		152		61		84		0		1		89		61
Qualitative factors		532		0		4,095		958		1,442		730		0		5,468		867		1,670
Total	$	756	$	0	$	4,258	$	1,208	$	2,066	$	975	$	0	$	5,721	$	1,916	$	3,016

			Home equity		Other								Home equity		Other
	Tax exempt		and junior liens		consumer		Unallocated		Total		Tax exempt		and junior liens		consumer		Unallocated		Total
Specifically reserved	$	0	$	142	$	0	$	0	$	1,020	$	0	$	221	$	0	$	0	$	2,879
Historical loss rate		0		211		805		0		1,399		0		325		957		0		1,517
Qualitative factors		1		291		250		0		7,569		1		281		280		0		9,297
Other		-		-		-		565		565		-		-		-		-		-
Total	$	1	$	644	$	1,055	$	565	$	10,553	$	1	$	827	$	1,237	$	0	$	13,693

Note 8: Foreclosed Real Estate

The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the property at each reporting period. ~~The Company had 0 foreclosed residential real estate at June 30, 2021~~At March 31, 2022 and December 31, ~~2020. At June 30,~~ 2021, ~~and December 31, 2020,~~ the Company reported ~~$891,000~~$722,000 and ~~$182,000,~~$594,000, respectively,, in residential real estate loans in the process of ~~foreclosure~~.

foreclosure.

- 4035 -

Note 9: Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit ~~are~~is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had ~~$2.6~~$2.7 million of standby letters of credit as of ~~June 30, 2021.~~March 31, 2022. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.

Note 10: Fair Value Measurements

Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

The Company used the following methods and significant assumptions to estimate fair value:

Investment securities: The fair values of available-for-sale and marketable equity securities are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service.Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.

The Company holds ~~one~~two corporate investment ~~security, categorized based on its net asset value (NAV),~~securities with an amortized historical cost of ~~$2.6~~$4.1 million and aan aggregate fair market value of ~~$2.8~~$4.7 million as of ~~June 30, 2021. This security has~~March 31, 2022. These securities have a valuation that is determined using published net asset values (NAV) derived by ~~analyses~~an analysis of the ~~security’s~~securities’ underlying assets. ~~This security is~~These securities are comprised primarily of broadly-diversified real estate ~~properties whose fair values~~and adjustable-rate senior secured business loans and are ~~determined by appraisals and other discounted cash flow evaluation methods~~traded in secondary markets on an infrequent basis. While ~~this security is~~these securities are redeemable at least annually through tender offers made by ~~its~~their respective ~~issuer,~~issuers, the liquidation value of the ~~security~~securities may be below ~~its~~their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled redemption. The Company

- 36 -

anticipates that ~~this security~~these securities will be redeemed by ~~its~~their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of ~~this investment.~~ these investments.

The Company holds ~~two~~one equity security

- 41 -

~~investments,~~ investment, with an aggregate value of ~~$2.1~~$1.2 million at ~~June 30, 2021,~~March 31, 2022, valued utilizing readily available market pricing (Level 1) observed from active trading on major national stock exchanges.

Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are calculated based on a discounted cash flow model. All future floating rate cash flows are projected and both floating rate and fixed rate cash flows are discounted to the valuation date. The benchmark interest rate curve utilized for projecting cash flows and applying appropriate discount rates is built by obtaining publicly available third party market quotes for various swap maturity terms.

Impaired loans: Impaired loans are those loans in which the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

Foreclosed real estate: Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are 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. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.

- 42 -

The following tables summarize assets measured at fair value on a recurring basis as of the indicated dates, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:

	June 30, 2021										March 31, 2022
								Total Fair										Total Fair
(In thousands)	Level 1		Level 2			Level 3		Value			Level 1		Level 2			Level 3		Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	0	$	18,254		$	0	$	18,254		$	-	$	30,022		$	-	$	30,022
State and political subdivisions		0		23,751			0		23,751			-		42,871			-		42,871
Corporate		0		10,450			0		10,450			-		10,374			-		10,374
Asset backed securities		0		14,294			0		14,294			-		15,537			-		15,537
Residential mortgage-backed - US agency		0		23,171			0		23,171			-		22,040			-		22,040
Collateralized mortgage obligations - US agency		0		26,989			0		26,989			-		11,115			-		11,115
Collateralized mortgage obligations - Private label		0		37,619			0		37,619			-		61,313			-		61,313
Total				154,528					154,528					193,272					193,272
Corporate measured at NAV		-		-			-		2,825			-		-			-		4,652
Total available-for-sale securities	$	0	$	154,528		$	0	$	157,353		$	-	$	193,272		$	-	$	197,924

Marketable equity securities	$	2,133	$	0		$	0	$	2,133
Marketable equity securities measured at NAV											$	1,230	$	-		$	-	$	1,230

Interest rate swap derivative fair value hedges	$	0	$	878		$	0	$	878		$	-	$	(894	)	$	-	$	(894	)

Interest rate swap derivative cash flow hedges	$	0	$	(981	)	$	0	$	(981	)	$	-	$	262		$	-	$	262

- 37 -

	December 31, 2020										December 31, 2021
								Total Fair										Total Fair
(In thousands)	Level 1		Level 2			Level 3		Value			Level 1		Level 2			Level 3		Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	0	$	6,416		$	0	$	6,416		$	-	$	32,273		$	-	$	32,273
State and political subdivisions		0		23,753			0		23,753			-		39,199			-		39,199
Corporate		0		9,943			0		9,943			-		9,630			-		9,630
Asset backed securities		0		8,607			0		8,607			-		13,613			-		13,613
Residential mortgage-backed - US agency		0		25,211			0		25,211			-		22,164			-		22,164
Collateralized mortgage obligations - US agency		0		26,464			0		26,464			-		12,285			-		12,285
Collateralized mortgage obligations - Private label		0		24,936			0		24,936			-		56,731			-		56,731
Total		0		125,330			0		125,330			-		185,895			-		185,895
Corporate measured at NAV		-		-			-		2,725			-		-			-		4,497
Total available-for-sale securities	$	0	$	125,330		$	0	$	128,055		$	-	$	185,895		$	-	$	190,392

Marketable equity securities	$	1,850	$	0		$	0	$	1,850
Marketable equity securities measured at NAV											$	677	$	-		$	-	$	677

Interest rate swap derivative fair value hedge				136					136		$	-	$	(152	)	$	-	$	(152	)

Interest rate swap derivative fair value hedge	$	0	$	(1,308	)	$	0	$	(1,308	)
Interest rate swap derivative cash flow hedges											$	-	$	(387	)	$	-	$	(387	)

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

			June 30, 2021								March 31, 2022
							Total Fair								Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Impaired loans	$	0	$	0	$	2,560	$	2,560	$	-	$	-	$	793	$	793

- 43 -

			December 31, 2020								December 31, 2021
							Total Fair								Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Impaired loans	$	0	$	0	$	14,701	$	14,701	$	-	$	-	$	4,182	$	4,182

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at the indicated dates.

		Quantitative Information about Level 3 Fair Value Measurements
	Valuation	Unobservable	Range
	Techniques	Input	(Weighted Avg.)
At ~~June 30, 2021~~March 31, 2022
Impaired loans	Appraisal of collateral	Appraisal Adjustments	5% - ~~25% (16%~~30% (17%)
	(Sales Approach)	Costs to Sell	7% - 14% ~~(5%~~(12%)
	Discounted Cash Flow

		Quantitative Information about Level 3 Fair Value Measurements
	Valuation	Unobservable	Range
	Techniques	Input	(Weighted Avg.)
At December 31, ~~2020~~2021
Impaired loans	Appraisal of collateral	Appraisal Adjustments	5% - ~~25% (18%~~30% (15%)
	(Sales Approach)	Costs to Sell	7% - ~~13% (12%~~14% (10%)
	Discounted Cash Flow

There have been no transfers of assets into or out of any fair value measurement level during the three ~~or six~~ months ended ~~June 30, 2021.~~March 31, 2022.

- 38 -

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

Under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation

- 44 -

techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.

Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.

Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Loan value estimates include judgments based on expected prepayment rates. The measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.

Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.

- 39 -

Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.

Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.

Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.

- 45 -

The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:

		June 30, 2021				December 31, 2020					March 31, 2022						December 31, 2021
	Fair Value	Carrying		Estimated		Carrying		Estimated		Fair Value	Carrying			Estimated			Carrying		Estimated
(In thousands)	Hierarchy	Amounts		Fair Values		Amounts		Fair Values		Hierarchy	Amounts			Fair Values			Amounts		Fair Values
Financial assets:
Cash and cash equivalents	1	$	41,154	$	41,154	$	43,464	$	43,464	1	$	37,184		$	37,184		$	37,149	$	37,149
Investment securities - available-for-sale	2		154,528		154,528		125,330		125,330	2		193,272			193,272			185,895		185,895
Investment securities - available-for-sale	NAV		2,825		2,825		2,725		2,725	NAV		4,652			4,652			4,497		4,497
Investment securities - marketable equity	1		2,133		2,133		1,850		1,850	1		1,230			1,230			677		677
Investment securities - held-to-maturity	2		162,432		165,997		171,224		174,935	2		167,997			164,791			160,923		162,805
Federal Home Loan Bank stock	2		4,487		4,487		4,390		4,390	2		3,533			3,533			4,189		4,189
Net loans	3		820,349		824,686		812,718		816,626	3		842,584			835,644			819,524		819,721
Accrued interest receivable	1		4,539		4,539		4,549		4,549	1		4,740			4,740			4,520		4,520
Interest rate swap derivative fair value hedges	2		878		878		191		191	2		4,229			4,229			1,308		1,308

Financial liabilities:
Demand Deposits, Savings, NOW and MMDA	1	$	668,156	$	668,156	$	598,683	$	598,683	1	$	748,162		$	748,162		$	694,089	$	694,089
Time Deposits	2		363,514		364,192		397,224		398,863	2		365,915			361,757			361,257		360,680
Borrowings	2		83,734		84,710		82,050		84,065	2		62,521			59,951			77,098		76,957
Subordinated loans	2		29,482		31,184		39,400		39,416	2		29,604			29,896			29,563		30,627
Accrued interest payable	1		145		145		193		193	1		122			122			106		106
Interest rate swap derivative fair value hedges	2		0		0		55		55	2		894			894			152		152
Interest rate swap derivative cash flow hedges	2		981		981		1,308		1,308	2		(262	)		(262	)		387		387

- 40 -

Note 11: Interest Rate Derivatives

The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at ~~June 30, 2021.~~March 31, 2022. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no material derivative contracts not designated as hedging agreements at ~~June 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by ~~fluctuations~~changes in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. In a fair value hedge, the fair value of the derivative (the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to the interest income or interest expense of the respective hedged item.

Cash flows related to floating rate assets and liabilities will fluctuate with changes in ~~the~~ underlying rate ~~index.~~indices. When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on cash flow hedges is accounted for similar to that associated with fair value hedges.

- 46 -

Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap (or floor) contracts. The Company uses interest rate swaps, cap or floor contracts as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount. An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest rate exceeds the contractually agreed upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in interest rates above the strike price. Similarly, an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit from any rise in interest rates above the strike price.

The Company records various hedges in the ~~Consolidated Statement~~consolidated statements of ~~Condition~~condition at fair value. The Company’s accounting treatment for these derivative instruments is based on the instruments hedge designation determined at the inception of each derivative instrument's contractual term. The following tables show the Company’s outstanding fair value hedges at ~~June 30, 2021~~March 31, 2022 and December 31, 2021:

- 41 -

(In thousands)

Carrying Amount of the Hedged Assets at
June 30, 2021

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets at June 30, 2021

Carrying Amount of the Hedged Assets at
December 31, 2020

Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at December 31, 2020

Line item on the balance sheet in which the hedged item is included:

Loans receivable ⁽¹⁾

$
-

$
-

$
12,944

$
53

Available-for-sale securities ⁽²⁾

$
16,369

$
(831
)

$
17,055

$
(191
)
Loans receivable ⁽³⁾

$
21,690

$
(47
)

$
-

$
-

(In thousands)	Carrying Amount of the Hedged Assets at March 31, 2022		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets at March 31, 2022			Carrying Amount of the Hedged Assets at December 31, 2021		Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at December 31, 2021
Line item on the balance sheet in which the hedged item is included:
Available-for-sale securities ⁽¹⁾	$	65,636	$	(4,229	)	$	61,808	$	(1,308	)
Loans receivable⁽²⁾	$	39,887	$	(894	)	$	41,651	$	(152	)

⁽¹⁾

These amounts include the amortized historical cost basis of a specific loan pool designated as the underlying asset for the hedging relationship in which the hedged item is the underlying asset's amortized cost (last layer) projected to be remaining at the end of the contractual term of the hedging instrument. The hedging instrument matured in April of 2021 and is no longer a component of the Company's Consolidated Statement of Condition at June 30, 2021. The amount of the designated hedged item was $9.2 million and the fair value of the hedging instrument resulted in a net liability position of $55,000, recorded by the Company in other liabilities at December 31, 2020. The Company’s participation in the fair value hedge had an immaterial effect on recorded interest income for the three and six months ended June 30, 2021 and 2020.

⁽²⁾

~~These amounts~~ represent the amortized cost basis of specifically identified municipal securities designated as the underlying assets for the hedging relationship. The notional amount of the designated hedged item was ~~$16.3~~$65.6 million and $61.8 million at ~~both June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021, respectively. At ~~June 30, 2021,~~March 31, 2022, the fair value of the derivative resulted in a net asset position of ~~$831,000,~~$4.2 million and $1.3 million recorded by the Company in other ~~assets. At~~assets at March 31, 2022 and December 31, ~~2020, the fair value of the derivative resulted in a net asset position of $191,000 recorded by the Company in other assets.~~2021. The ~~Company's~~Company’s participation in the fair value hedge had an immaterial effect on recorded interest income ~~for the three~~at March 31, 2022 and ~~six months ended June 30, 2021 and 2020~~.December 31, 2021.

⁽³⁾⁽²⁾

These amounts include the amortized cost of a specific loan pool designated as the underlying asset for the hedging relationship in which the hedged item is the underlying asset's amortized cost (last layer) projected to be remaining at the end of the contractual term of the hedging instrument. The amount of the designated hedged item was ~~$12.2~~$39.9 million ~~at June 30, 2021. The Company did not have this derivative agreement in place at~~and $41.7 million as of March 31, 2022 and December 31, ~~2020.~~2021, respectively. At ~~June 30, 2021,~~March 31, 2022, the fair value of the derivative resulted in a net asset position of ~~$47,000,~~$894,000, recorded by the Company in other assets. The Company’s participation in the fair value hedge had an immaterial effect on recorded interest income ~~for the three~~at March 31, 2022 and ~~six months ended June 30, 2021 and 2020~~December 31, 2021..

- 47 -

The following table shows the pre-tax gains and losses of the Company’s derivatives designated as cash flow hedges in ~~other comprehensive income~~OCI at ~~June 30, 2021~~March 31, 2022 and December 31, 2021:

(In thousands)		June 30, 2021			December 31, 2020				March 31, 2022		December 31, 2021
Cash flow hedges:	Cash flow hedges:							Cash flow hedges:
Total unamortized premium		$	178		$	204
Fair market value adjustment interest rate cap			(166	)		(197	)
Total unamortized cap			12			7
Fair market value adjustment interest rate swap	Fair market value adjustment interest rate swap		(815	)		(1,111	)	Fair market value adjustment interest rate swap		262		(387	)
Total loss in comprehensive income	Total loss in comprehensive income	$	(981	)	$	(1,308	)	Total loss in comprehensive income	$	262	$	(387	)

The amounts of hedge ineffectiveness, recognized ~~during the three~~at March 31, 2022 and ~~six months ended June 30,~~December 31, 2021 ~~and 2020~~ for cash flow hedges were not material to the Company’s consolidated results of operations. A portion of, or the entire amount included in accumulated other comprehensive loss would be reclassified into current earnings should a portion of, or the entire hedge, no longer be considered effective. Management believes that the hedges will remain fully effective during the remaining term of the respective hedging contracts. The changes in the fair values of the interest rate hedging agreements primarily result from the effects of changing index interest ~~rates.~~rates and the reduction of the time each quarter between the measurements date and the contractual maturity date of the hedging instrument.

The Company manages its potential credit exposure on interest rate swap transactions by entering into bilateral credit support agreements with each contractual counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold amounts. At ~~June 30, 2021,~~March 31, 2022 the Company posted cash, held in an interest-bearing refundable escrow arrangement, in the amount of $1.6 million in order to satisfy collateral requirements associated with its hedging contracts.

- 42 -

Note 12: Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the tables below.

For the three months ended June 30, 2021

(In thousands)

Retirement
Plans

Unrealized Gains
and Losses on
Available-for-
Sale Securities

Unrealized
Losses on
Derivatives
and Hedging
Activities

Unrealized Loss
on Securities
Transferred to
Held-to-Maturity

Total

Beginning balance

$
(2,074
)

$
1,108

$
(793
)

$
(9
)

$
(1,768
)
Other comprehensive income before reclassifications

0

441

69

4

514

Amounts reclassified from AOCI

19

0

0

0

19

Ending balance

$
(2,055
)

$
1,549

$
(724
)

$
(5
)

$
(1,235
)

- 48 -

	For the three months ended June 30, 2020															For the three months ended March 31, 2022
(In thousands)	Retirement Plans			Unrealized Gains and Losses on Available-for- Sale Securities			Unrealized Losses on Derivatives and Hedging Activities			Unrealized Loss on Securities Transferred to Held-to-Maturity			Total			Retirement Plans			Unrealized Loss on Available-for- Sale Securities			Unrealized Gain on Derivatives and Hedging Activities			Unrealized Gain on Securities Transferred to Held-to-Maturity		Total
Beginning balance	$	(2,859	)	$	(3,121	)	$	(1,062	)	$	(35	)	$	(7,077	)	$	(1,412	)	$	428		$	(286	)	$	2	$	(1,268	)
Reevaluation of deferred tax asset valuation allowance ⁽¹⁾		0			0			0			0			0
Other comprehensive income before reclassifications		0			3,470			(145	)		8			3,333			0			(4,271	)		480			0		(3,791	)
Amounts reclassified from AOCI		47			(690	)		0			0			(643	)		1			0			0			0		1
Ending balance	$	(2,812	)	$	(341	)	$	(1,207	)	$	(27	)	$	(4,387	)	$	(1,411	)	$	(3,843	)	$	194		$	2	$	(5,058	)

	For the six months ended June 30, 2021														For the three months ended March 31, 2021
(In thousands)	Retirement Plans			Unrealized Gains and Losses on Available-for- Sale Securities		Unrealized Losses on Derivatives and Hedging Activities			Unrealized Loss on Securities Transferred to Held-to-Maturity			Total			Retirement Plans			Unrealized Gain on Available-for- Sale Securities		Unrealized Loss on Derivatives and Hedging Activities			Unrealized Loss on Securities Transferred to Held-to-Maturity			Total
Beginning balance	$	(2,093	)	$	837	$	(966	)	$	(14	)	$	(2,236	)	$	(2,093	)	$	837	$	(966	)	$	(14	)	$	(2,236	)
Other comprehensive income before reclassifications		0			712		242			9			963			0			271		173			5			449
Amounts reclassified from AOCI		38			0		0			0			38			19			0		0			0			19
Ending balance	$	(2,055	)	$	1,549	$	(724	)	$	(5	)	$	(1,235	)	$	(2,074	)	$	1,108	$	(793	)	$	(9	)	$	(1,768	)

For the six months ended June 30, 2020

(In thousands)

Retirement
Plans

Unrealized Gains
and Losses on
Available-for-
Sale Securities

Unrealized
Losses on
Derivatives
and Hedging
Activities

Unrealized Loss
on Securities
Transferred to
Held-to-Maturity

Total

Beginning balance

$
(2,717
)

$
(216
)

$
0

$
(38
)

$
(2,971
)
Reevaluation of deferred tax asset valuation allowance ⁽¹⁾

(188
)

(15
)

0

(3
)

(206
)
Other comprehensive income before reclassifications

0

600

(1,207
)

14

(593
)
Amounts reclassified from AOCI

93

(710
)

0

0

(617
)
Ending balance

$
(2,812
)

$
(341
)

$
(1,207
)

$
(27
)

$
(4,387
)

(1) In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore, management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.

- 49 -

The following table presents the amounts reclassified out of each component of AOCI for the indicated period:

		Amount Reclassified						Amount Reclassified							Amount Reclassified
		from AOCI ⁽¹⁾						from AOCI ⁽¹⁾							from AOCI ⁽¹⁾
		(Unaudited)						(Unaudited)							(Unaudited)
(In thousands)		For the three months ended						For the six months ended							For the three months ended
Details about AOCI ⁽¹⁾ components	Affected Line Item in the Statement of Income	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			Affected Line Item in the Statement of Income	March 31, 2022			March 31, 2021
Retirement plan items
Retirement plan net losses recognized in plan expenses ⁽²⁾	Salaries and employee benefits	$	(26	)	$	(59	)	$	(53	)	$	(117	)	Salaries and employee benefits	$	(1	)	$	(26	)
Tax effect	Provision for income taxes		7			12			15			24		Provision for income taxes		0			7
	Net Income	$	(19	)	$	(47	)	$	(38	)	$	(93	)	Net Income	$	(1	)	$	(19	)

Available-for-sale securities
Realized gain on sale of securities	Net gains on sales and redemptions of investment securities	$	0		$	873		$	0		$	899
Tax effect	Provision for income taxes		0			(183	)		0			(189	)
	Net Income	$	0		$	690		$	0		$	710

(1)	Amounts in parentheses indicates debits in net income.

(2)	These items are included in net periodic pension cost.

See Note 5 for additional information.

- 5043 -

Note 13: Noninterest Income

The Company has included the following table regarding the Company’s noninterest income for the periods presented.

	For the three months					For the six months					For the three months
	ended June 30,					ended June 30,					ended March 31,
(In thousands)	2021		2020			2021		2020			2022			2021
Service fees
Insufficient funds fees	$	208	$	148		$	398	$	423		$	118		$	190
Deposit related fees		96		117			194		172			102			97
ATM fees		53		38			97		64			39			44
Total service fees		357		303			689		659			259			331
Fee Income
Insurance commissions		232		184			511		519			299			279
Investment services revenue		163		81			246		149			97			83
ATM fees surcharge		59		56			110		109			48			51
Banking house rents collected		62		71			125		142			55			63
Total fee income		516		392			992		919			499			476
Card income
Debit card interchange fees		241		205			462		368			228			221
Merchant card fees		15		15			31		31			16			15
Total card income		256		220			493		399			244			236
Mortgage fee income and realized gain on sale of loans and foreclosed real estate
Loan servicing fees		11		79			101		128			117			90
Net gains on sales of loans and foreclosed real estate		39		97			159		769			63			120
Total mortgage fee income and realized gain on sale of loans and foreclosed real estate		50		176			260		897			180			210
Total		1,179		1,091			2,434		2,874			1,182			1,253
Earnings and gain on bank owned life insurance		129		106			254		222			162			125
Net gains on sales and redemptions of investment securities		51		1,023			51		1,049
Gains/(losses) on marketable equity securities		49		(722	)		283		(916	)
Net loss on sale and redemption of investment securities												(6	)		-
Gains on marketable equity securities												68			234
Net gains on sale of premises and equipment		-		-			201		-			-			201
Other miscellaneous income		26		33			56		50			197			32
Total noninterest income	$	1,434	$	1,531		$	3,279	$	3,279		$	1,603		$	1,845

- 51 -

The following is a discussion of key revenues within the scope of the new revenue guidance:

•

Service fees – Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.

•

Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The Company earns investment advisory fee income by providing investment management services to customers under investment management contracts. As the direction of investment management accounts is provided over time, the performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.

•

Card income – Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

•

Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and realized gain on sale of loans and foreclosed real estate is earned through the origination of residential

- 44 -

and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of Small Business Administration loans (“~~SBA”~~SBA loans”) ~~loans,~~, and sales of foreclosed real estate, and is earned as the transaction occurs.

Note 14: Leases

The Company has operating and finance leases for certain banking offices and land under noncancelable agreements. Our leases have remaining lease terms that vary from less than two years up to 2930 years, some of which include options to extend the leases for various renewal periods. All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal options will be exercised.

The components of ~~the~~ lease expense are as follows:

For the three months ended

For the six months ended

(In thousands)

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Operating lease cost

$
57

$
60

$
113

$
121

Finance lease cost

21

20

41

40

For the three months ended

For the six months ended

(In thousands)

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Cash paid for amount included in the measurement of lease liabilities:

     Operating cash flows from operating leases

$
51

$
55

$
103

$
111

     Operating cash flows from finance leases

21

20

41

40

     Financing cash flows from finance leases

18

17

36

35

	For the three months ended
(In thousands)	March 31, 2022		March 31, 2021
Operating lease cost	$	57	$	57
Finance lease cost		21		20

- 52 -Supplemental cash flow information related to leases was as follows:

	For the three months ended
(In thousands)	March 31, 2022		March 31, 2021
Cash paid for amount included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	52	$	52
Operating cash flows from finance leases		21		20
Financing cash flows from finance leases		18		18

Supplemental balance sheet information related to leases was as follows:

							For the three months ended
(In thousands, except lease term and discount rate)	June 30, 2021			December 31, 2020			March 31, 2022			March 31, 2021
Operating Leases:
Operating lease right-of-use assets	$	2,172		$	2,240		$	2,102		$	2,136
Operating lease liabilities	$	2,467		$	2,525		$	2,409		$	2,440

Finance Leases:
Financial Liability	$	592		$	587		$	599		$	596

Weighted Average Remaining Lease Term:
Operating Leases	18.79 years			19.08 years			18.16 years			18.29 years
Finance Leases	27.92 years			28.42 years			27.17 years			27.42 years

Weighted Average Discount Rate:
Operating Leases		3.72	%		3.73	%		3.73	%		3.73	%
Finance Leases		13.75	%		13.75	%		13.75	%		13.75	%

- 45 -

Maturities of lease liabilities were as follows:

Twelve Months Ending June 30,
Three Months Ending March 31, 2022
(In thousands)
2022	$	95
2023		104	$	85
2024		114		118
2025		122		118
2026		130		126
2027				133
Thereafter		2,494		2,428
Total minimum lease payments	$	3,059	$	3,008

The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was ~~$62,000~~$55,000 and ~~$71,000~~$63,000 for the three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020, respectively. Lease rental income was $125,000 and $142,000 for the six months ended June 30, 2021 and 2020,~~ respectively. All lease agreements, in which the Company is the lessor, are accounted for as operating leases.

Note 15: COVID-19

The World Health Organization (the ~~“WHO)~~“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 the first and second quarters of 2021. 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.

~~As a result~~ However, the percentage of unvaccinated people in the ~~initial~~United States, and ~~continuing outbreak, and governmental responses thereto,~~ the ~~spread~~potential for future mutations of the coronavirus, ~~has caused us to modify our business practices, including employee travel, employee work locations,~~remain significant long-term public health and 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. On

- 53 -

June 30, 2021, the Bank’s offices and branches were fully accessible to the public. We will take further actions, focused on safety, as may be required in the future by government authorities or that we determine to be in the best interests of our employees, customers and business partners.economic concerns.

Concerns about the spread of the disease and its anticipated negative impact on economic activity severely disrupted both domestic and international financial markets, prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, where it remains as of the date of this filing. The reductions in the Fed funds target rate included a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets. This significant reduction in short-term interest rates has reduced, and will continue to reduce, the Bank’s cost of funds and interest earning-asset yields, as long as these central bank monetary policies remain in effect. The long-term effects of the current interest rate environment, resulting from government and central bank responses to the pandemic, on the Bank’s net interest margin cannot be predicted with certainty at this time. However, it is likely that a prolonged period of the current monetary policy will result in the reduction of the Company’s net interest margin in future periods, primarily as a result of declines in interest earning-asset yields over time.

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 services 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 likewise 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 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.

On December 27, 2020, following passage by the United States Congress, President Donald J. Trump signed into law the Consolidated Appropriations Act, 2021 which included the Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”). The intent of this legislation was to provide another round of Economic Impact Payments to eligible individuals and families, renew the PPP to support small businesses and their employees, ensure needed access to unemployment benefits for Americans who had lost their jobs due to COVID-19, and provide additional funding for schools, vaccine distribution, and other important sectors of the economy. While CRRSSA 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.

On March 11, 2021, President Joseph R. Biden signed into law the American Rescue Plan Act of 2021. The intent of this legislation was to provide additional new funding for rural hospitals and health care providers for COVID-19 relief, to increase federal subsidies for COBRA coverage, and make changes to the Medicare wage index. The legislation also included provisions to bolster the nation’s COVID-19 health care response with additional resources for vaccines, treatment, personal protective equipment (PPE), testing, contact tracing and workforce development. In addition, non-health care specific provisions provide financial support for families and small businesses, and both extended and expanded support for housing, child care, food and the education system. While The American Rescue Plan Act of 2021 is expected to benefit the economic recovery and be supportive of the Company’s business activities, the 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, a ~~new~~ variant of the coronavirus, ~~generally~~ referred to as the ~~“Delta”~~“Omicron” variant, has emerged in the United States and remains a significant concern in some regions and potentially, throughout the country. ~~This variant is believed to be significantly more contagious than earlier variants of the coronavirus. Certain~~As a result, certain previously-relaxed social distancing and safety protocols have been reinstated in some areas 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.

Note 16: Related Party Transactions:

In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at March 31, 2022 or December 31, 2021.

- 5446 -

~~During~~The following represents the ~~most restrictive periods of~~activity associated with loans to related parties during the ~~pandemic,~~three months ended March 31, 2022 and the Bank granted loan payment deferrals to the substantial majority of commercial and consumer customers who had made requests for such accommodations. These deferrals were granted following individual discussions with each borrower and were generally for periods of 90 or 180 days at the outset. Following discussions with certain borrowers, additional loan payment deferral periods of up to 90 days were granted following the expiration of the initial 90- to 180-day deferral periods. Typically, scheduled interest payments placed into deferred status have been added to future scheduled payments and are expected to be collected in total at the original maturity date of the loan. As of June 30, 2021, the Bank had no loans on active pandemic-related deferral.year ended December 31, 2021:

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(In thousands)	2022			2021
Balance at the beginning of the period	$	22,427		$	22,445
Originations and related party additions		18			8,007
Principal payments and related party removals		(1,220	)		(8,025	)
Balance at the end of the period	$	21,225		$	22,427

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

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 (“~~Agency”~~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 ~~interests~~interest within the consolidated financial statements. At ~~June 30, 2021,~~March 31, 2022, the Company and subsidiaries had total consolidated assets of ~~$1.3~~$1.33 billion, total consolidated liabilities of ~~$1.2~~$1.22 billion and shareholders' equity of ~~$103.2~~$109.1 million, plus noncontrolling interest of ~~$297,000,~~$390,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at ~~June 30, 2021~~March 31, 2022 and the results of operations for the three month period ended March 31, 2022 and ~~six month periods ended June 30, 2021 and 2020.~~2021. Operating results for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021~~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 ~~2020~~2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March ~~30, 2021~~25, 2022 (“the consolidated annual financial statements”) as of December 31, ~~2020~~2021 and ~~2019~~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;

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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;

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•

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.

In addition to the risk factors enumerated above, the continuing economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations. The COVID-19 pandemic caused significant economic dislocation in the United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place. While certain restrictions have started to ease, particularly with the recent widespread availability of novel vaccines, the pace at which the economic recovery unfolds and the sustainability of that recovery cannot be predicted with certainty at this time.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

~~Demand for our products and services may decline, making it difficult to grow assets and income;~~

•

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•

~~Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;~~

•

~~Our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;~~

•

~~The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;~~

•

As the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•

~~A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;~~

•

~~Our cyber security risks are increased as the result of an increase in the number of employees working remotely;~~

•

~~We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and~~

•

~~Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.~~

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

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.

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COVID-19 Response

The World Health Organization (the ~~“WHO)~~“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 ~~first and second quarters of 2021.~~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 ~~has~~ caused us to modify our business practices, ~~including~~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 ~~June 30, 2021,~~March 31, 2022, the Bank’s offices and branches were fully accessible to the public. WeIn the best interests of our employees, customers, and business partners, we will take further ~~actions,~~action, focused on safety, as may be required in the future by government ~~authorities or that we determine to be in the best interests of our employees, customers and business partners.~~

Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, where it remains as of the date of this filing. The reductions in the Fed funds target rate included a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets. This significant reduction in short-term interest rates has reduced, and will continue to reduce, the Bank’s cost of funds and interest earning-asset yields, as long as these central bank monetary policies remain in effect. The long-term effects of the current interest rate environment, resulting from government and central bank responses to the pandemic, on the Bank’s net interest margin cannot be predicted with certainty at this time. However, it is likely that a prolonged period of the current monetary policy will result in the reduction of the Company’s net interest margin in future periods, primarily as a result of declines in interest earning-asset yields over time.authorities.

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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.

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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.

On March 11, 2021, President Joseph R. Biden, signed into law the American Rescue Plan Act of 2021. The intent of this legislation was to provide additional new funding for rural hospitals and health care providers for COVID-19 relief, to increase federal subsidies for COBRA coverage, and make changes to the Medicare wage index. The legislation also included provisions to bolster the nation’s COVID-19 health care response with additional resources for vaccines, treatment, personal protective equipment (PPE), testing, contact tracing and workforce development. In addition, non-health care specific provisions provide financial support for families and small businesses, and both extended and expanded support for housing, child care, food and the education system. While The American Rescue Plan Act of 2021 is expected to benefit the economic recovery and be supportive of the Company’s business activities, the 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, ~~a new variant~~variants of the coronavirus, ~~generally~~ referred to as the ~~“Delta”~~“Omicron” variant, ~~has~~along with sub-variants of Omicron, have emerged in the United States and ~~remains~~remain a ~~significant~~ concern in some regions and potentially, throughout the country. ~~This variant is~~These variants are believed to be ~~significantly~~ more contagious than earlier variants of the coronavirus. Certain previously-relaxed social distancing and safety protocols may have ~~been~~to be reinstated locally or in ~~some areas~~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.

During the most restrictive periods of the pandemic, the Bank granted loan payment deferrals to the substantial majority of commercial and consumer customers who had made requests for such accommodations. These deferrals were granted following individual discussions with each borrower and were generally for periods of 90 or 180 days at the outset. Following discussions with certain borrowers, additional loan payment deferral periods of up to 90 days were granted following the expiration of the initial 90- to 180-day deferral periods. Typically, scheduled interest payments placed into deferred status have been added to future scheduled payments and are expected to be collected in total at the original maturity date of the loan. As of June 30, 2021, the Bank had no loans on active pandemic-related deferral.

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:

	For the three months ended				For the six months ended,
Unaudited									For the three months ended
(In thousands, except number of loans)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		March 31, 2022		March 31, 2021
Number of PPP loans originated in the period		57		674		478		674		-		421
Funded balance of PPP loans originated in the period	$	1,882	$	75,040	$	36,369	$	75,040	$	-	$	34,487
Number of PPP loans forgiven in the period	143			-	349			-	93			206
Average balance of PPP loans in the period	$	68,927	$	48,029	$	69,410	$	24,015
Balance of PPP loans forgiven in the period	$	23,985	$	-	$	42,566	$	-	$	6,096	$	18,581
Deferred PPP fee income recognized in the period	$	735	$	289	$	1,147	$	289	$	278	$	412

June 30, 2021

June 30, 2020

Unearned PPP deferred fee income at end of period

$
1,720

$
2,236

	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

	Number		Balance
(In thousands, except number of loans)					Number		Balance
Total PPP loans originated since inception		1,177	$	111,721		1,177	$	111,721
Total PPP loans forgiven since inception		479	$	58,110		1,025	$	98,429
Total PPP loans remaining at June 30, 2021		698	$	53,611
Total PPP loans remaining at March 31, 2022						152	$	13,292

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Application of Critical Accounting ~~Policies~~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~~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~~ 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

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and capital loss ~~carry forwards.~~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.

~~Effective in January 2018, the Company adopted a modification methodology that was at the time newly made available under~~On April 7, 2021, the New York State Legislature approved comprehensive tax ~~code, affecting how~~legislation as part of the ~~Company’s state income~~State’s 2022 Fiscal Year budget. The legislation includes increased taxes on businesses and high-income individuals among other tax ~~liability is computed. Under this adopted methodology, management determined in~~law revisions. Other provisions include amendments to the first quarter of 2019, it was unlikely that the Company would pay material income taxes to New York State in future periods under then-existing income tax laws in the State, and therefore in the quarter ended March 31, 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes. This valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York State income taxes to $0. Management is continuously monitoring its future tax consequences to determine if the Company’s deferred taxes are properly stated. In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.

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.

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 ~~have been~~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 ~~is evaluating~~continues to evaluate the projected impact of this newly

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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 ~~may~~require an increase in the Company’s income tax expense for the three months ended March 31, 2022, thereby requiring an increase in the ~~future. However, these potential increases in New York State income taxes are not expected~~Company’s effective tax rate to ~~be material~~21% for the three months ended March 31, 2022 as compared to the ~~future results~~effective tax rate of 20.6%, for the ~~Company’s operations.~~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, as well as~~credits. Other variances from the federal statutory federal tax rate are due to the effects of transitional adjustments related to state income ~~taxes and~~taxes. In addition, the tax effects of certain ~~taxes payable to states other than New York. The~~incentive stock option activity may reduce the Company’s effective tax rate ~~was 21.5% for the six month period ended June 30, 2021.~~ 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~~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

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~~not sufficient~~ 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;~~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, ~~2020~~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. The evaluation approach is described in Note 10 of the consolidated annual financial statements. Further information on the estimation of fair values can be found in Note 22 to the consolidated annual financial statements.

Recent Events

Following shareholder approval obtained on June 4, 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding shares of Series B Convertible Perpetual Preferred Stock to an equal number of newly-created Series A Non-Voting Common Stock. Neither the previously-issued Series B Convertible Perpetual Preferred Stock, nor the newly-issued Series A Non-Voting Common Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the new Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors, in the same per share amount as paid on the Company’s Voting Common Stock.

On ~~June 28, 2021,~~March 25, 2022, the Company announced that ~~the~~its Board of Directors declared a ~~quarterly~~ cash dividend of ~~$0.07~~$0.09 per share on the Company's voting common and non-voting common ~~share~~stock, and a cash dividend of ~~$0.07~~$0.09 per notional share for the issued ~~warrant.~~warrant relating to the fiscal quarter ended March 31, 2022. The ~~dividends are~~dividend was payable ~~on August 13, 2021~~ to all shareholders of record on ~~July 16, 2021.~~ April 22, 2022 and was paid on May 6, 2022.

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Overview and Results of Operations

The following represents the significant highlights of the Company’s operating results between the ~~second~~first quarter of ~~2021~~2022 and the ~~second~~first quarter of ~~2020.~~2021.

•

Net income increased ~~$1.2 million,~~$796,000, or ~~65.4%~~37.0%, to $3.0 million.

•

Basic and diluted earnings per ~~voting common~~ share were both ~~$0.50~~$0.49 per share and increased ~~$0.19~~$0.13 per share from $0.36 per share.

•

Return on average assets increased 3222 basis points to ~~0.95%~~0.90% as the increase in income outpaced the increase in average assets.

•

Net interest income, after provision for loan losses, increased ~~$2.8~~$1.8 million, or ~~43.0%~~24.3%, to ~~$9.3~~$9.4 million. Excluding the provision, net interest income increased ~~$2.6 million,~~$907,000, or ~~33.7%~~10.6%, to ~~$10.2~~$9.5 million. The increase in net interest income, after provision for loan losses, was primarily due to ~~a decrease in total interest expense, combined with an~~the increase in the average ~~balances~~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.

•

~~Net~~The net interest margin ~~increased by 67 basis points to 3.42% and reflects both~~for the first quarter of 2022 was 3.06%, a 2521 basis point increase incompared to 2.85% for the ~~average yield for interest-earning assets, and~~first quarter of 2021. This improvement reflects a 4936 basis point decline in the average cost ~~for interest-bearing liabilities.~~

•

The effective income tax rate increased 3.0% to 22.1% for the three months ended June 30, 2021 as compared to 19.1% for the same three month period in 2020. The increase in the tax rate in the second quarter of 2021, as compared to the same quarter in 2020, was primarily related to increases in accruals for New York State related taxes and the timing of certain potential deductions related to New York State taxable income.

~~The following represents significant highlights of the Company’s operating results between the first six months of 2021 and the first six months of 2020.~~

•~~Net income increased $1.6 million, or 45.4%, to $5.2 million.~~

•

~~Basic and diluted earnings per voting common share were both $0.87 per share and increased $0.27 per share.~~

•

~~Return~~paid on ~~average assets increased 19 basis points to 0.81% as the increase in income outpaced the increase in average assets.~~

•

Net interest income, after provision for loan losses, increased by $3.6 million, or 27.4%, to $16.8 million. This increase in net interest income after provision for loan losses was primarily due to the decrease in total interest expense, combined with an increase in the average balances of interest-earning assets.

•

~~Net interest margin increased by 25 basis points to 3.13%, primarily the result of a 50 basis point decline in the average cost for~~ interest-bearing liabilities, ~~partially offset by~~with a 1910 basis point decrease in the average yield ~~for~~earned on interest-earning assets.

•

The effective income tax rate increased ~~1.0%~~.40% to ~~21.5%~~21.0% for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 as compared to ~~20.5%~~20.6% for the same ~~six~~three month period in ~~2020.~~ 2021. The increase in the tax rate in the first ~~six months~~quarter of ~~2021,~~2022, as compared to the same ~~period~~quarter in ~~2020,~~2021, was primarily related to ~~increases~~an increase in ~~accruals for~~pretax income and an increase in New York State ~~related taxes and~~permanent differences, which created higher state taxable income subject to the ~~timing~~tax rate of ~~certain potential deductions related to New York State taxable income.~~7.25%.

The following reflects the significant changes in financial condition between December 31, ~~2020~~2021 and ~~June 30, 2021.~~March 31, 2022. In addition, the following reflects significant changes in asset quality metrics between ~~June 30, 2020~~December 31, 2021, March 31, 2022 and ~~June 30,~~March 31, 2021.

•

Total assets increased ~~$32.2~~$43.2 million, or ~~2.6%~~3.4% to ~~$1.3~~$1.33 billion at ~~June 30, 2021,~~March 31, 2022, as compared to December 31, ~~2020,~~2021, primarily ~~due to increases in loans~~driven by higher investment securities’ balances and investment securities. These increases were funded largely by increases in deposits, including brokered deposits, as well as the cash flow from maturities and principal reductions of investment securities.loan balances.

•

~~The Bank’s asset~~Asset quality metrics, as measured by net loan charge-offs, ~~to average loans,~~ remained stable, ~~for second quarter 2021. Net~~in comparison to recent reporting periods. The annualized net loan charge-offs to average loans ~~were 0.03%~~ratio was 0.02% for the ~~second quarter 2021, compared with 0.08% for the second~~first quarter of ~~2020 and~~2022, compared to 0.05% for the first quarter ~~ended March 31,~~of 2021, and 0.10% for the fourth quarter of 2021.

•

Nonperforming loans to total loans ~~were 1.92% at June 30, 2021, a decrease of 66~~decreased 154 basis points to 0.93% at March 31, 2022, compared to ~~2.58%~~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, ~~2020. The decrease in nonperforming loans at June 30, 2021, as compared to December 31, 2020 was primarily~~2021. Correspondingly, the ~~result~~ratio of one commercial real estate loan, with an outstanding balance of $7.4 million, being returned to accruing status as of June 30, 2021 following six months of timely principal and interest payments. Management is monitoring all nonaccrual loans closely and has incorporated our current estimate of the ~~ultimate collectability of these loans into the reported~~ allowance for loan losses to nonperforming loans was 163.8% at ~~June 30, 2021.~~March 31, 2022, as compared to 64.2% at March 31, 2021, and 156.0% at December 31, 2021.

- 6352 -

The Company had net income of $3.0 million for the three months ended ~~June 30, 2021~~March 31, 2022 compared to net income of ~~$1.8~~$2.2 million for the three months ended ~~June 30, 2020.~~March 31, 2021. The ~~$1.2 million~~$796,000 increase in net income was due primarily to a ~~$1.6 million~~$40,000 increase in interest and dividend income, ~~a $1.0 million~~an $867,000 decrease in interest expense, and a ~~$217,000~~$926,000 decrease in the provision for loan losses. ~~These~~Partially offsetting the increases ~~were partially offset by~~to net income was a ~~$1.1 million~~$242,000 decrease in noninterest income, a $616,000 increase in noninterest expense and a ~~$412,000~~$172,000 increase in income tax expense.

Net interest income before the provision for loan losses increased ~~$2.6 million,~~$907,000, or ~~33.7%~~10.6%, to ~~$10.2~~$9.5 million for the three months ended ~~June 30, 2021~~March 31, 2022 as compared to ~~$7.6~~$8.6 million for the same three month period in ~~2020.~~2021. The increase was primarily ~~the~~a result of ana 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, ~~as well as increases~~primarily in the investment categories, offset by a decrease in the average ~~yields~~yield of ~~both loan and investment securities portfolios. These increases resulted in a 25~~interest-earning assets of 10 basis ~~point increase~~points to ~~4.03% in interest-earning asset yields~~3.54% for the three months ended ~~June 30, 2021 as compared to 3.78%~~March 31, 2022 from 3.6% for the same three month period of the previous year. ~~Net~~The increase in interest income was ~~further enhanced by a 49 basis point decrease~~partially reduced in the ~~average cost of interest-bearing liabilities~~three months ended March 31, 2022 by reductions in the ~~second~~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 ~~2021,~~2022, as compared to the same quarter of 2021. Average interest-bearing deposits increased $45.0 million in ~~2020, partially offset by~~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 ~~$47.7 million~~general increase in the average account balance ~~of interest-bearing liabilities.~~

~~The $97,000, or 6.3%, decrease in noninterest income in~~for consumer deposits consistent with similar increases generally reported throughout the quarter ended June 30, 2021, as compared to the same quarterly period in 2020, was primarily the result of a decrease of $972,000 in net gains on sales and redemptions of investment securities partially offset by a $771,000 increase in net gains on equity securities. Further contributing to the decrease in noninterest income was a net decrease of $58,000 in net gains on sales of loans and foreclosed real estate for the current period, as compared to the same three-month period in 2020. All other noninterest income categories increased by $104,000, or 6.8%, in the three months ended June 30, 2021, as compared to the same period in the prior year, primarily driven by increases in other charges, commissions and fees and services charges on deposit accounts, which increased $68,000 and $54,000, respectively.

The $1.1 million increase in noninterest expense in the quarter ended June 30, 2021, as compared to the same quarterly period in 2020, was due primarily as a result of an increase in salaries and employee benefits expense, building and occupancy costs, professional and other services, data processing costs, the FDIC assessment, and audits and exams costs of $529,000, $163,000, $150,000, $102,000, $82,000, and $52,000, respectively. The increase in salaries and employee benefit expense was primarily due to a $401,000 increase in net salaries expense and a $144,000 increase in commissions’ expense. The increase in net salaries expense was partially the result of increased PPP loan originations in 2020 and the deferral of employee-related expenses related to those originations. All other employee-related expenses declined an aggregate $18,000 in the second quarter of 2021, as compared to the same quarterly period in 2020. Building and occupancy costs increased as a result of an increase in maintenance costs and depreciation expense of $122,000 and $27,000, respectively.industry. These increases are ~~consistent~~expected to be transitory and relate primarily to significant levels of economic stimulus combined with ~~the Company’s recent refurbishments~~reduced levels of certain branch and administrative locations and the relative timing of certain maintenance activities. Professional and other services costs increased due to increased use of third party services. Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer and operational growth. The increases in audits and exams expense are primarilyconsumer spending related to the ~~Bank’s first year of increased internal controls testing under FDICIA requirements for institutions~~pandemic. At this time, it cannot be determined with ~~assets greater than $1 billion and additional expenses for the Company as a result of the COVID-19 pandemic.~~certainty how long it will be before these deposits return to historically normal levels.

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve needs on loans individually evaluated for impairment, in its determination of the adequacy of the allowance for loan losses. For the first three months ~~ended June 30, 2021,~~of 2022, we recorded ~~$929,000~~$102,000 in provision for loan losses as compared to ~~$1.1~~$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 second quarter provision for loan losses reflects a prudent addition to reserves considering loan growth and asset quality metrics. The credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its proven conservative loan classification and reserve building methodologies to the analysis of these portfolios.

~~In comparing the year-over-year second quarter periods, the Company’s return on average assets increased 32 basis points to 0.95% due to the combined effects of the increase~~decline 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 investment securities and average~~

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loans of $74.6 million and $60.1 million, respectively, in the second quarter of 2021 as compared to the same quarter of 2020. Average interest-bearing deposits increased $29.5 million in the second quarter of 2021, as compared with the same quarter in 2020. The increase in deposits was due to growth in retail and commercial relationship deposits as a result of the Bank’s participation in the PPP lending program. Average time deposits decreased $45.9 million as compared with the same quarter in 2020.

The Company had net income of $5.2 million for the six months ended June 30, 2021 compared to net income of $3.6 million for the six months ended June 30, 2020. The $1.6 million increase in net income was due primarily to a $3.4 million increase in net interest income and a $256,000 decrease in provision for loan losses. These fluctuations were partially offset by an increase of $1.5 million in noninterest expense and a $506,000 increase in income tax expense.

~~Net interest income before~~ the provision for loan losses ~~increased $3.4 million to $18.8 million for the six months ended June 30, 2021, as compared to $15.4 million for the same six month period~~ in 2020. The increase was due principally to a $1.5 million, or 6.7%, increase in interest and dividend income that was a result of growth in average interest-earning assets of $130.0 million compared to the prior year six month period. Average loans for the first ~~six months~~quarter of ~~2021 increased by $74.3 million, or 9.5%, over the prior year period,while the average interest yield earned on average loans decreased by 27 basis points. In addition, interest expense decreased $1.9 million to $4.2 million for the six months ended June 30, 2021~~2022, as compared to the prior year period. The average interest rate paid on interest-bearing liabilities decreased by 50 basis points for the six months ended June 30, 2021 as compared to the prior year period; however, average interest-bearing liabilities increased by $75.7 million, or 8.5%.

Noninterest income remained consistent for the six months ended June 30, 2021, when compared to the same six month period in 2020. Net gains on marketable equity securities increased $1.2 million and was offset by a decrease in net gains on the sales and redemptions of investment securities of $998,000. Net gains on the sale of loans and foreclosed real estate also decreased $610,000 when compared to the same period in 2020. Debit card interchange fees, other charges, commission and fees, earnings on bank owned life insurance and service charges on deposit accounts increased $94,000, $87,000, $32,000 and $30,000, respectively. The net increase in these categories of noninterest income were in part due to the ~~Company’s increased strategic focus on improving recurring noninterest income.~~

~~Total noninterest expense for the six month period~~first quarter of 2021, was ~~$13.5 million, an increase~~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 ~~$1.5 million, or 12.3%, compared with $12.0 million for~~2021 and the ~~prior year period. The increase was primarily a result~~first quarter of ~~higher salaries and benefit expense, professional and other services, building and occupancy, data processing expenses, and audits and exams expense~~2022 that followed the easing of ~~$623,000, $251,000, $202,000, $178,000, and $129,000, respectively.~~ ~~The increase in net salaries expense was partially~~ the ~~result~~most restrictive phases of ~~increased PPP loan originations~~the COVID-19 pandemic that had existed in 2020 and the ~~deferral~~first half of employee-related expenses related to those originations. The increases in professional and other services fees, and audits and exams expense were primarily related to the Bank’s first year of increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion and additional expenses for the Company as a result of the COVID-19 pandemic. Building and occupancy costs increased as a result of an increase in maintenance costs and depreciation expense of $168,000 and $51,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities. Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer and operational growth.

For the first six months of 2021, we recorded $2.0 million in provision for loan losses as compared to $2.2 million in the same prior year six 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.2021. The credit sensitive portfolios continue to be carefully ~~monitored, and the Bank will consistently apply its proven conservative loan classification and reserve building methodologies to the analysis of these portfolios.~~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~~.

Return on average assets increased 19 basis points to 0.81% between the year-over-year six month periods as the increase in net income in the six month period ended June 30, 2021 (the numerator of the ratio) increased by a higher percentage than the rate at which average assets (the denominator of the ratio) grew during the period. Average assets increased due to increases in average loans and investment securities of $74.3 million and $73.0 million, respectively, in the six months

- 65 -

period ended June 30, 2021 as compared to the same period of 2020. Average interest-bearing liabilities increased $75.7 million in the six month ended June 30 2021, as compared with the same period in 2020. The increase in deposits was due to growth in retail and commercial relationship deposits as a result of the Bank’s participation in the PPP lending program. Average time deposits decreased $25.0 million as compared with the same period in 2020.

- 66 -

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.

- 53 -

The following ~~tables set~~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 June 30,																For the three months ended March 31,
	2021								2020								2022								2021
						Average								Average								Average								Average
	Average					Yield /			Average					Yield /
Unaudited																	Average					Yield /			Average			��		Yield /
(Dollars in thousands)	Balance			Interest		Cost			Balance			Interest		Cost			Balance			Interest		Cost			Balance			Interest		Cost
Interest-earning assets:
Loans	$	856,380		$	9,784		4.57	%	$	796,267		$	8,832		4.44	%	$	845,461		$	8,692		4.11	%	$	849,676		$	8,847		4.16	%
Taxable investment securities		303,858			2,239		2.95	%		230,943			1,613		2.79	%		329,291			2,168		2.63	%		308,259			2,063		2.68	%
Tax-exempt investment securities		11,226			42		1.50	%		9,552			52		2.18	%		32,721			118		1.44	%		12,234			29		0.95	%
Fed funds sold and interest-earning deposits		24,948			1		0.02	%		76,203			17		0.09	%		31,830			4		0.05	%		32,414			3		0.04	%
Total interest-earning assets		1,196,412			12,066		4.03	%		1,112,965			10,514		3.78	%		1,239,303			10,982		3.54	%		1,202,583			10,942		3.64	%
Noninterest-earning assets:
Other assets		80,159								73,721								91,622								82,353
Allowance for loan losses		(14,016	)							(10,076	)							(13,031	)							(13,057	)
Net unrealized gains on available-for-sale securities		1,872								(1,804	)
Net unrealized (losses)/gains on available-for-sale securities																		(1,334	)							1,314
Total assets	$	1,264,427							$	1,174,806							$	1,316,560							$	1,273,193
Interest-bearing liabilities:
NOW accounts	$	92,412		$	74		0.32	%	$	80,712		$	35		0.17	%	$	106,894		$	71		0.27	%	$	94,951		$	57		0.24	%
Money management accounts		15,988			4		0.10	%		15,826			4		0.10	%		16,072			4		0.10	%		15,597			4		0.10	%
MMDA accounts		238,791			241		0.40	%		202,136			355		0.70	%		261,898			246		0.38	%		235,289			255		0.43	%
Savings and club accounts		121,584			40		0.13	%		94,684			22		0.09	%		138,585			48		0.14	%		111,317			33		0.12	%
Time deposits		372,807			785		0.84	%		418,722			1,788		1.71	%		377,907			596		0.63	%		399,176			1,178		1.18	%
Subordinated loans		32,643			408		5.00	%		15,139			192		5.07	%		29,578			412		5.57	%		39,412			557		5.65	%
Borrowings		88,109			299		1.36	%		87,415			478		2.19	%		63,528			138		0.87	%		85,070			298		1.40	%
Total interest-bearing liabilities		962,334			1,851		0.77	%		914,634			2,874		1.26	%		994,462			1,515		0.61	%		980,812			2,382		0.97	%
Noninterest-bearing liabilities:
Demand deposits		187,877								156,001								199,164								180,442
Other liabilities		11,598								12,828								11,904								11,944
Total liabilities		1,161,809								1,083,463								1,205,530								1,173,198
Shareholders' equity		102,618								91,343								111,030								99,995
Total liabilities & shareholders' equity	$	1,264,427							$	1,174,806							$	1,316,560							$	1,273,193
Net interest income				$	10,215							$	7,640							$	9,467							$	8,560
Net interest rate spread							3.26	%							2.52	%							2.93	%							2.67	%
Net interest margin							3.42	%							2.75	%							3.06	%							2.85	%
Ratio of average interest-earning assets to average interest-bearing liabilities							124.32	%							121.68	%							124.62	%							122.61	%

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For the six months ended June 30,

2021

2020

Average

Average

Average

Yield /

Average

Yield /

(Dollars in thousands)

Balance

Interest

Cost

Balance

Interest

Cost

Interest-earning assets:

Loans

$
852,972

$
18,631

4.37
%

$
778,709

$
18,074

4.64
%
Taxable investment securities

306,278

4,302

2.81
%

239,297

3,375

2.82
%
Tax-exempt investment securities

11,495

71

1.24
%

5,458

59

2.16
%
Fed funds sold and interest-earning deposits

28,660

4

0.03
%

45,943

49

0.21
%
Total interest-earning assets

1,199,405

23,008

3.84
%

1,069,407

21,557

4.03
%
Noninterest-earning assets:

Other assets

81,248

75,263

Allowance for loan losses

(13,539
)

(9,390
)

Net unrealized losses
on available for sale securities

1,595

(843
)

Total assets

$
1,268,709

$
1,134,437

Interest-bearing liabilities:

NOW accounts

$
93,598

$
130

0.28
%

$
78,247

$
65

0.17
%
Money management accounts

15,794

8

0.10
%

15,005

9

0.12
%
MMDA accounts

237,050

496

0.42
%

198,298

756

0.76
%
Savings and club accounts

116,479

72

0.12
%

90,901

48

0.11
%
Time deposits

385,918

1,965

1.02
%

410,967

3,882

1.89
%
Subordinated loans

36,009

965

5.36
%

15,135

398

5.26
%
Borrowings

86,598

597

1.38
%

87,217

980

2.25
%
Total interest-bearing liabilities

971,446

4,233

0.87
%

895,770

6,138

1.37
%
Noninterest-bearing liabilities:

Demand deposits

184,180

134,179

Other liabilities

11,769

12,446

Total liabilities

1,167,395

1,042,395

Shareholders' equity

101,314

92,042

Total liabilities & shareholders' equity

$
1,268,709

$
1,134,437

Net interest income

$
18,775

$
15,419

Net interest rate spread

2.97
%

2.66
%
Net interest margin

3.13
%

2.88
%
Ratio of average interest-earning assets
to average interest-bearing liabilities

123.47
%

119.38
%

As indicated in the above ~~tables,~~table, net interest income, before provision for loan losses, increased ~~$2.6 million,~~$907,000, or ~~33.7%~~10.6%, to ~~$10.2~~$9.5 million for the three months ended ~~June 30, 2021~~March 31, 2022 as compared to ~~$7.6~~$8.6 million for the same prior year period. This increase was due principally to the ~~$83.4~~$36.7 million, or ~~7.5%~~3.1%, increase in the average balance of interest-earning assets, ~~combined with an increase~~offset by a decrease of 2510 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 ~~$47.7~~$13.7 million, or ~~5.2%, but with~~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 4936 basis points on the average interest rate paid on those liabilities. In total, net interest margin increased 6721 basis points to 3.42% due largely to the increase in average yields earned on average interest-earning assets, and an 87 and 83 basis point decrease in the average rate paid on time deposits and borrowings, respectively.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 -

Interest and dividend income increased ~~$1.6 million,~~$40,000, or ~~14.8%~~0.1%, to ~~$12.1~~$11.0 million for the three months ended ~~June 30, 2021~~March 31, 2022 compared to ~~$10.5~~$10.9 million for the same three month period in ~~2020. The~~2021. This increase ~~in interest income~~ was due ~~principally~~ to the increase in average interest-earning assets (primarily taxable investment securities, tax exempt investment securities and loans). The increase in interest income on taxable investment securities was due principally to thean increase in the average balance of ~~those securities,~~interest earning assets, which increased ~~31.6% in~~between the year-over-year ~~second~~first quarter ~~periods. The average balance~~periods by 3.1%, primarily as a result of ~~loans increased by $60.1 million, while the average yield earned on those loans increased by 13 basis points. The~~an increase

- 68 -

in the average balance of ~~loans reflected purchased loan growth.~~investment securities. The ~~increase~~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 ~~recognized~~ in the period due to the increased levels of forgiveness in the three month period ended ~~June 30,~~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 ~~June 30, 2021~~March 31, 2022 decreased ~~$1.0 million~~$867,000, or ~~35.6%~~36.4%, to ~~$1.9~~$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 ~~$1.1 million,~~$562,000, or ~~48.1%~~36.8%, to ~~$1.1 million~~$965,000 due ~~primarily~~ to a 5428 basis ~~point~~points decrease in the annualized average rate paid on deposits to ~~0.54%~~0.43% for the three months ended ~~June 30, 2021,~~March 31, 2022, as compared to ~~1.09%~~0.71% for the three months ended ~~June 30, 2020.~~March 31, 2021. This was partially offset by a ~~$29.5~~$45.0 million increase in the average balance of interest-bearing deposits during the same time ~~periods.~~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 ~~an 87~~a 55 basis ~~point~~points decrease in the average ~~rate~~rates paid on time deposits during the three months ended ~~June 30, 2021~~March 31, 2022, as compared to the same three month period in ~~2020~~2021, due to the general decline in market interest rates during 2021 after the ~~second~~first quarter of ~~2021.~~ that year.

~~For the six month period ended June 30, 2021, net~~Net interest income ~~before~~for the ~~provision for loan losses, increased $3.4 million, or 21.8%, to $18.8~~three months ended March 31, 2022 was $9.5 million, compared to ~~$15.4~~$9.7 million for the ~~six~~three months ended June 30, 2020. Interest and dividend income increased $1.5 million, or 6.7%, to $23.0 million for the six months ended June 30, 2021 from $21.6 million for the same six month period in 2020. The increase in interest income was due principally to the increase in average balances of loans and taxable investment securities. The increase in the average balance of loans reflected continued success in its expansion within the greater Syracuse, New York market and purchased loan growth. The increase in the average balance of securities reflected increased purchases in 2021 compared to 2020. These increases were offset by a reduction of the average balance of federal funds sold and interest-earning deposits, which decreased 37.6% in the year over-year six month periods. The decrease in the average balance of federal funds sold and interest-earning deposits in 2021 was primarily the result of the effects of the COVID-19 pandemic. The Bank substantially increased its on-hand liquidity in 2020 to support the potential needs of the customers and the communities it serves during the six month period ended June 30, 2020. This level of liquidity was not considered necessary inDecember 31, 2021.

Interest expense for the six months ended June 30, 2021 decreased $1.9 million, or 31.0%, to $4.2 million as compared to $6.1 million for the six months ended June 30, 2020. The decrease in interest expense was due principally to a 50 basis point decrease in the average rate paid on interest-bearing liabilities to 0.87%, partially offset by a $75.7 million increase in the average balance of these liabilities. The decrease in interest expense was due to a $2.1 million decrease in deposit interest expense and a $383,000 decrease in borrowings expense. These decreases were partially offset by a $567,000 increase in subordinated loan expense due to the increase in the average balance of those subordinated loans period over period. The average balance of ~~interest-bearing deposits, which include brokered deposits,~~interest-earning assets increased ~~$55.4~~$54.2 million ~~between the year-over-year six month periods. The average rate paid on interest-bearing deposits decreased 57 basis points to 0.63%~~ for the ~~six~~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 ~~June 30,~~December 31, 2021 asto 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 ~~with~~to $11.2 million for the ~~same six month period in 2020.~~three months ended December 31, 2021. This decrease was primarily due to ~~an 87 basis point decrease~~a $238,000 quarter-over-quarter decline in loan income in the ~~average rate paid on time deposits, during the six months~~quarter ended ~~June 30, 2021~~March 31, 2022, as compared to the ~~same time period~~immediately preceding quarter, This decline in ~~2020.~~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 ~~decrease~~nonrecurring settlement adjustments related to two purchased loan pools, with an aggregate amortized cost of $43.5 million, acquired in the ~~average~~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 ~~paid on those deposits reflected~~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 ~~general decline in market interest rates during~~accuracy of the ~~first half of 2021.~~

-resultant forward projections. 69 -

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 -

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 ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~ 2021.

	Three months ended June 30,									Six months ended June 30,									Three months ended March 31,
	2021 vs. 2020									2021 vs. 2020									2022 vs. 2021
	Increase/(Decrease) Due to									Increase/(Decrease) Due to									Increase/(Decrease) Due to
							Total									Total									Total
							Increase									Increase
Unaudited																									Increase
(In thousands)	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
Interest Income:
Loans	$	2,285		$	(2,270	)	$	15		$	5,110		$	(2,840	)	$	2,270		$	(47	)	$	(108	)	$	(155	)
Taxable investment securities		867			(417	)		450			524			(964	)		(440	)		312			(207	)		105
Tax-exempt investment securities		70			(93	)		(23	)		(31	)		(30	)		(61	)		68			21			89
Interest-earning deposits		(5	)		(9	)		(14	)		222			(457	)		(235	)		-			1			1
Total interest income		3,217			(2,789	)		428			5,825			(4,291	)		1,534			333			(293	)		40
Interest Expense:
NOW accounts		7			15			22			15			4			19			8			6			14
Money management accounts		-			-			-			2			(3	)		(1	)		-			-			-
MMDA accounts		294			(394	)		(100	)		149			(427	)		(278	)		116			(125	)		(9	)
Savings and club accounts		4			7			11			11			(16	)		(5	)		9			6			15
Time deposits		(80	)		(530	)		(610	)		1,436			(2,725	)		(1,289	)		(60	)		(522	)		(582	)
Subordinated loans		341			24			365			3			(64	)		(61	)		(137	)		(8	)		(145	)
Borrowings		(12	)		(168	)		(180	)		145			(268	)		(123	)		(64	)		(96	)		(160	)
Total interest expense		554			(1,046	)		(492	)		1,761			(3,499	)		(1,738	)		(128	)		(739	)		(867	)
Net change in net interest income	$	2,663		$	(1,743	)	$	920		$	4,064		$	(792	)	$	3,272		$	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~~. 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 ~~$929,000~~$102,000 in provision for loan losses for the three month period ended ~~June 30, 2021,~~March 31, 2022, as compared to ~~$1.1~~$1.0 million for the three month period ended ~~June 30, 2020. For the first six months of 2021, we recorded $2.0 million in provision for loan losses as compared to $2.2 million in the same prior year six month period.~~ March 31, 2021. The provisioning in ~~2021~~the first quarter of 2022 and ~~2020~~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, and the Bank will consistently apply its proven conservative loan classification and reserve building methodologies to the analysis of these portfolios.~~

- 70 -

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 ~~increased~~decreased to ~~2.36%~~2.12% at ~~June 30, 2021~~March 31, 2022 as compared to ~~1.85%~~2.14% at December 31, ~~2020.~~2021. Delinquent loans (numerator) increased ~~$4.5 million~~$283,000 while total loan balances (denominator) increased ~~$5.8~~$23.1 million at ~~June 30, 2021,~~March 31, 2022, as compared to December 31, ~~2020.~~2021. The increase in past due loans was primarily driven by an increase

- 56 -

of ~~$4.3~~$1.4 million in loans delinquent 60-89 days, partially offset by a $761,000 decrease in loans delinquent 30-59 days ~~of which $3.4 million relate to~~past due, and a ~~single commercial borrower.~~$318,000 decrease in loans delinquent 90 days and over.

At ~~June 30, 2021,~~March 31, 2022, there were ~~$19.8~~$18.1 million in loans past due including ~~$8.1~~$4.5 million in loans 30-59 days past due, ~~$5.5~~$6.0 million in loans 60-89 days past due and ~~$6.2~~$7.7 million in loans 90 or more days past due. At December 31, ~~2020,~~2021, there were ~~$15.3~~$17.9 million in loans past due including ~~$3.8~~$5.2 million in loans 30-59 days past due, ~~$5.4~~$4.6 million in loans 60-89 days past due and ~~$6.1~~$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:

	For the three months ended										For the six months ended,
Unaudited																						For the three months ended
(Dollars in thousands)	June 30, 2021		June 30, 2020			Change					June 30, 2021		June 30, 2020			Change						March 31, 2022		March 31, 2021		Change
Service charges on deposit accounts	$	357	$	303		$	54		17.8	%	$	689	$	659		$	30			4.6	%	$	259	$	331	$	(72	)	-21.8	%
Earnings and gain on bank owned life insurance		129		106			23		21.7	%		254		222			32			14.4	%		162		125		37		29.6	%
Loan servicing fees		11		79			(68	)	-86.1	%		101		128			(27	)		-21.1	%		117		90		27		30.0	%
Debit card interchange fees		241		205			36		17.6	%		462		368			94			25.5	%		228		221		7		3.2	%
Insurance agency revenue		234		185			49		26.5	%		514		522			(8	)		-1.5	%		299		280		19		6.8	%
Other charges, commissions and fees		323		255			68		26.7	%		565		478			87			18.2	%		413		243		170		70.0	%
Noninterest income before gains (losses)		1,295		1,133			162		14.3	%		2,585		2,377			208			8.8	%
Net gains on sales and redemptions of investment securities		51		1,023			(972	)	-95.0	%		51		1,049			(998	)		-95.1	%
Gains/(losses) on marketable equity securities		49		(722	)		771		106.8	%		283		(916	)		1,199			-130.9	%
Net gains on sales of loans and foreclosed real estate		39		97			(58	)	-59.8	%		159		769			(610	)		-79.3	%
Gains on sale of premises and equipment		-		-			-		-			201		-			201		>100%
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	$	1,434	$	1,531		$	(97	)	-6.3	%	$	3,279	$	3,279		$	-			0.0	%	$	1,603	$	1,845	$	(242	)	-13.1	%

~~The $97,000,~~First quarter 2022 noninterest income was $1.6 million, a decrease of $242,000, or ~~6.3%~~13.1%, compared to $1.8 million for the same three-month period in 2021. The decrease in noninterest income, ~~in the quarter ended June 30, 2021,~~ as compared to the same ~~quarterly period in 2020,~~quarter of the previous year, was primarily ~~the result of~~due to a $201,000 ~~decrease~~non-recurring gain, recorded in ~~income from~~ the ~~combined investment related activities of (1) net gains on sales and redemptions of investment securities and (2) net losses on equity securities. During the second~~first quarter of 2021, ~~net gains on sales and redemptions of investment securities decreased $972,000, as compared~~related to the ~~previous year period, and this decrease~~Bank’s sale of land previously held for development. Noninterest income categorized as recurring noninterest income was ~~partially offset by~~$1.5 million for the first quarter of 2022, reflecting a ~~$771,000 increase in~~$188,000, or 14.6%, improvement over the first quarter of the prior year. Recurring noninterest income excludes unrealized gains on equity securities, ~~compared to the second quarter of 2020. Further contributing to the decrease in noninterest income was a net decrease of $58,000 in net~~ 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, ~~for the current period.~~

~~Excluding the effects of the quarter over quarter fluctuations discussed above, all other noninterest income categories increased by $162,000, or 14.3%,~~and a $166,000 decrease in the three months ended June 30, 2021, as compared to the same prior year period. Noninterest income was significantly muted in the second quarter of 2020 by reduced customer transactional activity levels and the Bank’s increased levels of fee waivers and other forbearances in response to the local economic effects of the COVID-19 pandemic.

~~Noninterest income remained consistent for the six months ended June 30, 2021, when compared to the same six month period in 2020. Net~~ gains on marketable equity securities ~~increased $1.2 million and was partially offset by a decrease~~ in ~~net gains on~~ the ~~sales and redemptions of investment securities of $998,000. Net gains on the sale of loans and foreclosed real estate also decreased $610,000 when~~quarter ended March 31, 2022, as compared to the prior year in the same ~~period in 2020. Debit card interchange fees, other charges,~~quarter.

- 7157 -

commission and fees, earnings on bank owned life insurance and services charges on deposit accounts increased $94,000, $87,000, $32,000 and $30,000, respectively. The net increase in these categories of noninterest income were in part due to the Company’s increased strategic focus on improving recurring noninterest income.

Noninterest Expense

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

	For the three months ended									For the six months ended,
Unaudited																			For the three months ended
(Dollars in thousands)	June 30, 2021		June 30, 2020		Change					June 30, 2021		June 30, 2020		Change					March 31, 2022		March 31, 2021		Change
Salaries and employee benefits	$	3,501	$	2,972	$	529		17.8	%	$	6,842	$	6,219	$	623		10.0	%	$	4,049	$	3,341	$	708		21.2	%
Building and occupancy		870		707		163		23.1	%		1,663		1,461		202		13.8	%		826		793		33		4.2	%
Data processing		654		552		102		18.5	%		1,330		1,152		178		15.5	%		550		676		(126	)	-18.6	%
Professional and other services		451		301		150		49.8	%		868		617		251		40.7	%		393		417		(24	)	-5.8	%
Advertising		259		261		(2	)	-0.8	%		505		437		68		15.6	%		187		246		(59	)	-24.0	%
FDIC assessments		232		150		82		54.7	%		430		339		91		26.8	%		222		198		24		12.1	%
Audits and exams		177		125		52		41.6	%		379		250		129		51.6	%		141		202		(61	)	-30.2	%
Insurance agency expense		194		212		(18	)	-8.5	%		400		404		(4	)	-1.0	%		204		206		(2	)	-1.0	%
Community service activities		34		12		22		183.3	%		122		119		3		2.5	%		62		88		(26	)	-29.5	%
Foreclosed real estate expenses		16		5		11		220.0	%		22		35		(13	)	-37.1	%		13		6		7		116.7	%
Other expenses		457		461		(4	)	-0.9	%		920		970		(50	)	-5.2	%		605		463		142		30.7	%
Total noninterest expenses	$	6,845	$	5,758	$	1,087		18.9	%	$	13,481	$	12,003	$	1,478		12.3	%	$	7,252	$	6,636	$	616		9.3	%

~~The $1.1 million, or 18.9%, increase in~~Total noninterest expense ~~between~~for the ~~year-over-year second~~first quarter ~~periods~~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 a result of higher salaries and employee benefit expense, building and occupancy costs, professional and other services, and data processing expenses. The detail of the components of the overall increase in noninterest expense is as follows:

•

The increase in salaries and employee benefits expense was primarily due to a $401,000 increase in net salaries and employee benefits expense and a $144,000 increase in commissions’ expense. The year-over-year increase in salaries and employee benefit expense was partially attributable to factors related to PPP loan originations, as discussed below.

•

~~The $163,000, $150,000, and $102,000~~driven by increases in building occupancy expenses, professional and other services, and data processing expenses, respectively, are consistent with the Company’s customer and operational growth and with the additional factors discussed below.

•

~~All other noninterest expenses increased in aggregate in the year-over-year three-month periods by a total of $143,000, or 2.5%.~~

~~The increase~~ in salaries and employee ~~benefit expense was primarily due to a $401,000 increase in net salaries and~~ benefits expense and a $144,000 increase in commissions’ expense. The $401,000 increase in net salaries and benefits expense in the three months ended June 30, 2021, as compared to the same three month period in 2020, was partially the result of reduced PPP loan origination-related salary expense deferrals in the amount of $416,000 in 2021, as compared to the previous year, as PPP loan origination volume declined from $75.0 million in the second quarter of 2020 to $1.9 million in the second quarter 2021. Commissions’ expense increased primarily due to the full resumption of accruals related to employee and officer incentive programs in the second quarter of 2021. These accruals were substantially reduced in the second quarter of 2020 in response to the uncertainties presented by the pandemic. All other employee-related expenses declined in aggregate by $18,000 in the second quarter of 2021, as compared to the same quarterly period in 2020. Building and occupancy costs increased primarily as a result of an increase in maintenance costs and depreciation expense of $122,000 and $27,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities. ~~Professional and other services costs increased due to increased use of third party services.~~ Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer growth and operational growth, and the increased functionality now being offered to business customers and increased utilization of the Company’s electronic product and service channels. $708,000, or 21.2%.

- 72 -

The ~~$1.5 million, or 12.3%, increase in noninterest expenses between the six month period ended June 30, 2021 and the same six month period in the prior year was principally due to an~~$708,000 year-over-year increase in salaries and employee benefits expense ~~professional~~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 ~~services, building~~salaries and ~~occupancy~~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, ~~and audits and exams expense. The detail~~primarily the result of ~~the components of the overall increase~~a reduction in ~~noninterest expense is as follows:~~ATM processing fees that was in turn primarily driven by third-party vendor refunds obtained through contract renegotiation activities.

•

The $623,000 increase in salaries and employee benefits expense in the first six months of 2021, as compared to the same six month period in 2020, was primarily the result of an increase in net salaries expense and commissions expense of $410,000 and $237,000, respectively. The $410,000 increase in net salaries and benefits expense in the six months ended June 30, 2021, as compared to the same six month period in 2020, was partially the result of reduced PPP loan origination-related salary expense deferrals in the amount of $132,000 in 2021, as compared to the previous year, as PPP loan origination volume declined from $75.0 million in the first half of 2020 to $36.4 million in the first half of 2021. Commissions’ expense increased primarily due to the resumption of accruals related to employee and officer incentive programs in the first half of 2021. These accruals were substantially reduced in the first half of 2020 in response to the uncertainties presented by the pandemic. All other employee-related expenses decreased in aggregate by $25,000 in the first half of 2021, as compared to the same six month period in 2020.

•

The $251,000 increase in professional and other services and the $129,000 increase in audits and exams expense was primarily related to the Bank’s first year of increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion and additional expenses incurred by the Company as a result of the COVID-19 pandemic.

•

~~Building and occupancy costs increased primarily as a result of an increase in maintenance costs and depreciation expense of $168,000 and $~~51~~,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities.~~

•

Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer growth and operational growth, and the costs of increased functionality now being offered to business customers as well as generally increased utilization of the Company’s electronic product and service delivery channels.

•

~~All other noninterest expenses increased in aggregate in the year-over-year six month periods by a total of $95,000, or 0.8%, due to a broad range of individually immaterial variances.~~

At ~~June 30, 2021,~~March 31, 2022, the Bank serviced ~~518~~507 residential mortgage loans in the aggregate amount of ~~$54.3~~$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 ~~or six~~ month periods ended in either ~~June 30, 2021~~March 31, 2022 or ~~June 30, 2020.~~March 31, 2021. Management

- 58 -

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.

- 73 -

During the most restrictive periods following the inception of the Covid-19 pandemic, which began in March 2020, the Company experienced material declines in substantially all forms of noninterest expenses. These reductions in noninterest expenses were the result of the curtailment or elimination of a significant portion of non-critically-essential business and business development activities during that time. These activities were reduced or eliminated for the duration of the substantial restrictions imposed by governmental officials and as a consequence of the internal safety and social distancing protocols initiated by the Company and/or its customers. These effects were most pronounced in the second and third quarters of 2020 and extended, to lessening degrees, at least through the end of the first quarter of 2021. Accordingly, as the Company progressively returned to less restricted operations, noninterest expenses progressively returned to the levels considered by its management to be prudent for the effective long-term management of the Company. Management has elected to provide a supplemental comparison between 2021 noninterest expenses and the same three and six month periods in 2019, which were the most recent three and six month periods not affected by the pandemic. The following table details the components of noninterest expense for the three and six months ended June 30, 2021 and 2019:

For the three months ended

For the six months ended,

(Dollars in thousands)

June 30, 2021

June 30, 2019

Change

June 30, 2021

June 30, 2019

Change

Salaries and employee benefits

$
3,501

$
3,454

$
47

1.4
%

$
6,842

$
7,104

$
(262
)

-3.7
%
Building and occupancy

870

632

238

37.7
%

1,663

1,287

376

29.2
%
Data processing

654

587

67

11.4
%

1,330

1,162

168

14.5
%
Professional and other services

451

380

71

18.7
%

868

716

152

21.2
%
Advertising

259

242

17

7.0
%

505

481

24

5.0
%
FDIC assessments

232

130

102

78.5
%

430

241

189

78.4
%
Audits and exams

177

100

77

77.0
%

379

200

179

89.5
%
Insurance agency expense

194

229

(35
)

-15.3
%

400

428

(28
)

-6.5
%
Community service activities

34

144

(110
)

-76.4
%

122

282

(160
)

-56.7
%
Foreclosed real estate expenses

16

59

(43
)

-72.9
%

22

296

(274
)

-92.6
%
Other expenses

457

582

(125
)

-21.5
%

920

1,053

(133
)

-12.6
%
Total noninterest expenses

$
6,845

$
6,539

$
306

4.7
%

$
13,481

$
13,250

$
231

1.7
%

- 74 -

Income Tax Expense

Income tax expense increased ~~$412,000~~$172,000 to ~~$851,000,~~$721,000, with an effective tax rate of ~~19.2%~~21.0%, for the quarter ended ~~June 30, 2021,~~March 31, 2022, as compared to ~~$439,000,~~$549,000, with an effective tax rate of ~~19.2%~~20.6%, for the same three month period in 2020. Income tax expense increased $506,000 to $1.4 million, with an effective tax rate of 21.5% for the six months ended June 30, 2021 as compared to $894,000, with an effective tax rate of 20.5%, for the same six month period in 2020.2021. The increase in income tax expense in the current quarter, ~~and year to date,~~ as compared to the same quarter ~~and period~~ in ~~2020,~~2021, was primarily attributable to the year-over-year ~~second quarter and six month~~quarterly increase in pre-tax net income.

~~Effective in January 2018,~~The federal statutory rate applied to pretax income was 21% for the Company adopted a modification methodology that was at the time newly made available under the New York State tax code, affecting how the Company’s state income tax liability is computed. Under this adopted methodology, management determined in the first quarter of 2019, it was unlikely that the Company would pay material income taxes to New York State in futurethree month periods ~~under then-existing income tax laws in the State, and therefore in the quarter~~ ended March 31, ~~2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against~~ deferred tax assets related to New York State income taxes. This valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York State income taxes to $0. Management is continuously monitoring its future tax consequences to determine if the Company’s deferred taxes are properly stated. In the first quarter of 2020, consistent with policy, management reviewed all facts2022 and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020. 2021.

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 ~~is evaluating~~continues to evaluate the ~~projected~~ impact of this amended New York State tax legislation on the Company’s financial condition and results of operations and ~~believes that~~has incorporated these ~~provisions may increase~~analyses into the ~~Company’s income~~recorded effective tax ~~expense in~~rate for the ~~future. However, these potential increases in New York State income taxes are not expected to be material to the future results of the Company’s operations.~~ three months ended March 31, 2022.

The Company’s effective tax rate ~~typically differs from the~~of 21% ~~federal statutory tax rate~~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, as well as~~credits. Other variances from the federal statutory federal tax rate are due to the effects of transitional adjustments related to state income ~~taxes and certain taxes payable to states other than New York.~~taxes. In addition, the tax effects of certain incentive stock option activity may ~~also~~ reduce the Company’s effective tax rate on a sporadic basis.

Earnings per Share

Basic and diluted earnings per ~~voting common~~ share were ~~$0.50~~$0.49 per share for the ~~second~~first quarter of ~~2021,~~2022, as compared to ~~$0.31~~$0.36 per basic and diluted share for the same quarter of ~~2020.~~

~~Basic and diluted earnings per voting common share were $0.87 for the six month period ended June 30, 2021, as compared to $0.60 for the same prior year period.~~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.

- 75 -

Changes in Financial Condition

Assets

Total assets increased ~~$32.2~~$43.2 million, or ~~2.6%~~3.4%, to ~~$1.3~~$1.33 billion at ~~June 30, 2021~~March 31, 2022 as compared to ~~$1.2~~$1.29 billion at December 31, ~~2020.~~2021. This increase was due primarily to increases in loans and investment securities.

~~Total net loans receivable increased $7.6~~Loans totaled $855.6 million, ~~or 0.9%,~~an increase of $23.1 million compared to ~~$820.3 million at June 30, 2021 from $812.7~~$832.5 million at December 31, ~~2020. The increase was primarily the result~~2021. Primarily due to increases of ~~an increase of $5.4~~$14.4 million in ~~consumer~~commercial real estate loans and ~~a $4.5~~$14.0 million ~~increase~~ in commercial business loans.

~~Cash and cash equivalents decreased $2.3~~Investment securities increased $14.5 million, or ~~5.3%~~4.1%, to ~~$41.2~~$370.9 million at ~~June 30, 2021,~~March 31, 2022, as compared to ~~$43.5~~$356.4 million at December 31, ~~2020. Total restricted cash was $1.6 million at both June 30,~~ 2021, ~~and December 31, 2020.~~

~~Investment securities increased $20.8 million, or 6.9%, to $322.1 million at June 30, 2021, as compared to $301.3 million at December 31, 2020,~~ due principally to purchases of securities during the first ~~six~~three months of ~~2021.~~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 ~~$26.4~~$44.4 million, or ~~2.3%~~3.8%, to ~~$1.2~~$1.22 billion at ~~June 30, 2021~~March 31, 2022, compared to ~~$1.1~~$1.17 billion at December 31, ~~2020.~~2021. Deposits increased ~~$35.8~~$58.7 million, or ~~3.6%~~5.6%, to ~~$1.0~~$1.11 billion at ~~June 30, 2021,~~March 31, 2022, compared to ~~$995.9 million~~$1.06

- 59 -

billion at December 31, ~~2020. Noninterest-bearing~~2021. Interest-bearing deposits were the primary driver of growth between the comparable periods and totaled ~~$183.7~~$909.3 million at ~~June 30, 2021,~~March 31, 2022, an increase of ~~$21.6~~$45.9 million, or ~~13.3%,~~5.3% from the 2020 year end, and an increase of $23.5 million, or 14.7%, compared to June 30, 2020. The increase in noninterest-bearing deposits was primarily a result of the Bank’s participation in the PPP, as well as ongoing growth in business banking relationships. Interest-bearing deposits totaled $848.0 million at June 30, 2021 an increase of $14.2 million, or 1.7%, for the 2020 year end. Interest-bearing deposit growth was a result of municipal deposit inflows related to seasonal tax collections, as well as increases in retail and commercial deposits. year-end.

Borrowed funds balances from the FHLB-NY ~~increased $1.7~~decreased $14.6 million, or ~~2.1%~~18.9%, to ~~$83.7~~$62.5 million at ~~June 30, 2021~~March 31, 2022 from ~~$82.1~~$77.1 million at December 31, ~~2020. Subordinated loans were $29.5 million~~2021 as the Bank primarily used net incoming deposit cash flows to repay borrowings at June 30, 2021, a 25.2% decrease from $39.4 million as of the 2020 year end. The Company exercised its option to redeem $10.0 million of the loans that were outstanding at June 30, 2021 on April 1, 2021. This redemption of outstanding debt prospectively reduces interest expense after April 1, 2021 by $625,000 annually.their scheduled maturity dates.

Shareholders’ Equity

The Company’s shareholders’ equity, exclusive of the noncontrolling interest, ~~increased $5.8~~decreased $1.2 million, or ~~5.9%~~1.1%, to ~~$103.2~~$109.1 million at ~~June 30, 2021,~~March 31, 2022, from ~~$97.5~~$110.3 million at December 31, ~~2020.~~2021. This ~~increase~~decrease was principally due to a ~~$4.3~~$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 ~~a $427,000 increase in additional paid in capital, a $90,000 increase in ESOP shares earned and a $1.0~~of $2.4 million, ~~increase in comprehensive income.~~or 3.9%, to $63.4 million at March 31, 2022, from $60.9 million at December 31, 2021. Comprehensive ~~income~~loss increased primarily as the result of increases in the unrealized ~~gain~~losses on the available-for sale investment portfolio ~~during the six month period. The increase in retained earnings resulted from $5.2 million in net income recorded~~ in the ~~first six~~three months ended March 31, 2022 as a result of ~~2021. Partially offsetting this increase~~increases in retained earnings were $626,000 for cash dividends declared on our common stock, $97,000 for cash dividends declared on our Non-Voting common stock, $97,000 for cash dividends declared on our preferred stock, $17,000 for cash dividends declared on our issued warrant, and $65,000 in cumulative effect of our affiliate capital allocation.

~~Non-Voting Common Stock Issued~~

During the second quarter of 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding shares of Series B Convertible Perpetual Preferred Stock to an equal number of newly-created Series A Non-Voting Common Stock. Neither the previously-issued Series B Perpetual Preferred Stock, nor the newly-issued Series A Non-Voting Common Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the new Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors, in the same per share amount as paid on the Company’s Voting Common Stock.

- 76 -

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 ~~June 30, 2021,~~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. ~~The capital conservation buffer requirement is now fully implemented at 2.5% of risk-weighted assets.~~ At ~~June 30, 2021,~~March 31, 2022, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.

As a result of the ~~recently enacted~~ 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%. Pursuant to the CARES Act, the federal banking agencies in April 2020 issued interim final rules to set the Community Bank Leverage Ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 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:

Actual

Minimum For
Capital Adequacy
Purposes

Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions

Minimum For
Capital Adequacy
with Buffer

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of June 30, 2021:

Total Core Capital (to Risk-Weighted Assets)

$
120,708

14.82
%

$
65,174

8.00
%

$
81,468

10.00
%

$
85,541

10.50
%
Tier 1 Capital (to Risk-Weighted Assets)

$
110,470

13.56
%

$
48,881

6.00
%

$
65,174

8.00
%

$
69,247

8.50
%
Tier 1 Common Equity (to Risk-Weighted Assets)

$
110,470

13.56
%

$
36,660

4.50
%

$
52,954

6.50
%

$
57,027

7.00
%
Tier 1 Capital (to Assets)

$
110,470

8.83
%

$
50,046

4.00
%

$
62,557

5.00
%

$
62,557

5.00
%
As of December 31, 2020

Total Core Capital (to Risk-Weighted Assets)

$
115,289

13.13
%

$
70,270

8.00
%

$
87,838

10.00
%

$
92,230

10.50
%
Tier 1 Capital (to Risk-Weighted Assets)

$
104,287

11.87
%

$
52,703

6.00
%

$
70,270

8.00
%

$
74,662

8.50
%
Tier 1 Common Equity (to Risk-Weighted Assets)

$
104,287

11.87
%

$
39,527

4.50
%

$
57,095

6.50
%

$
61,487

7.00
%
Tier 1 Capital (to Assets)

$
104,287

8.63
%

$
48,314

4.00
%

$
60,392

5.00
%

$
60,392

5.00
%

- 7760 -

	Actual					Minimum For Capital Adequacy Purposes					Minimum To Be "Well-Capitalized" Under Prompt Corrective Provisions					Minimum For Capital Adequacy with Buffer
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of 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.

June 30,

December 31,

(Dollars in thousands)
2021

2020

Regulatory Capital Ratios (Bank Only)

Total capital (to risk-weighted assets)

Total equity (GAAP)
$
113,896

$
106,720

Goodwill

(4,536
)

(4,536
)

Intangible assets

(125
)

(133
)

Addback: Accumulated other comprehensive income

1,235

2,236

       Total Tier 1 Capital
$
110,470

$
104,287

Allowance for loan and lease losses

10,238

11,002

       Total Tier 2 Capital
$
10,238

$
11,002

       Total Tier 1 plus Tier 2 Capital (numerator)
$
120,708

$
115,289

Risk-weighted assets (denominator)

814,675

878,380

      Total core capital to risk-weighted assets

14.82

%

13.13

%

Tier 1 capital (to risk-weighted assets)

Total Tier 1 capital (numerator)
$
110,470

$
104,287

Risk-weighted assets (denominator)

814,675

878,380

      Total capital to risk-weighted assets

13.56

%

11.87

%

Tier 1 capital (to adjusted assets)

Total Tier 1 capital (numerator)
$
110,470

$
104,287

Total average assets

1,255,806

1,212,512

Goodwill

(4,536
)

(4,536
)

Intangible assets

(125
)

(133
)

Adjusted assets (denominator)
$
1,251,145

$
1,207,843

      Total capital to adjusted assets

8.83

%

8.63

%

Tier 1 Common Equity (to risk-weighted assets)

Total Tier 1 capital (numerator)
$
110,470

$
104,287

Risk-weighted assets (denominator)

814,675

878,380

      Total Tier 1 Common Equity to risk-weighted assets

13.56

%

11.87

%

- 7861 -

	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-performing assets~~non-accrual loans at the indicated dates:

	June 30,			December 31,			June 30,			March 31,			December 31,			March 31,
(Dollars In thousands)	2021			2020			2020			2022			2021			2021
Nonaccrual loans:
Commercial and commercial real estate loans	$	11,803		$	17,978		$	6,807		$	5,567		$	6,297		$	17,842
Consumer		1,310			747			540			1,283			1,104			602
Residential mortgage loans		2,881			2,608			1,038			1,098			891			2,899
Total nonaccrual loans		15,994			21,333			8,385			7,948			8,292			21,343
Total nonperforming loans		15,994			21,333			8,385			7,948			8,292			21,343
Foreclosed real estate		-			-			26			-			-			-
Total nonperforming assets	$	15,994		$	21,333		$	8,411		$	7,948		$	8,292		$	21,343

Accruing troubled debt restructurings	$	5,315		$	3,554		$	2,020		$	3,926		$	3,605		$	5,378

Nonperforming loans to total loans		1.92	%		2.58	%		1.04	%		0.93	%		1.00	%		2.47	%
Nonperforming assets to total assets		1.27	%		1.74	%		0.72	%		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 ~~nonaccruing~~ TDR loan ~~with an aggregate carrying value of $74,000 included among the~~in nonaccrual ~~loans detailed in the table above~~status at ~~June 30, 2021.~~ March 31, 2022.

Pursuant to the CARES Act, ~~and as extended by the Consolidated Appropriations Act, 2021,~~ financial institutions ~~have~~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 ~~the earlier of (i)~~ January 1, ~~2022 or (ii) 60 days after the end of the COVID-19 national emergency.~~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 ~~June 30, 2021~~March 31, 2022 were ~~$16.0~~$7.9 million and were ~~$5.3 million~~$344,000 lower than the ~~$21.3~~$8.3 million reported at December 31, ~~2020, which~~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 ~~$6.2 million~~ decrease in commercial ~~real estate nonaccrual loans. This was primarily the result of one~~and commercial real estate ~~loan totaling $7.4~~loans of $12.3 million ~~being removed from nonaccrual as~~and a decrease of ~~June 30, 2021 due to the resumption of timely principal and interest payments for six consecutive months.~~$1.8 million in residential mortgage loans. This decrease was partially offset by an increase of ~~$563,000~~$681,000 in nonperforming consumer ~~loans and a $273,000 increase in nonperforming residential mortgage~~ 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.

- 79 -

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 ~~$14.6~~$13.0 million and ~~$12.8~~$12.9 million at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The ratio of the allowance for loan losses to total loans ~~increased 20~~decreased 3 basis points to ~~1.75%~~1.52% at ~~June 30, 2021~~March 31, 2022 from 1.55% at December 31, ~~2020.~~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 ~~June 30, 2021.~~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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company had ~~$17.3~~$11.2 million and ~~$22.8~~$11.4 million in loans, respectively, which were deemed to be impaired, having established specific reserves of ~~$3.3~~$2.0 million and ~~$2.8~~$1.9 million, respectively, on these loans. The decrease in impaired loans between these two dates was primarily driven by decreases of $5.8 million and $348,000, in impaired commercial real estate loans and residential real estate loans, respectively. The $500,000 increase in specific reserves for impaired loans at June 30, 2021 as compared to December 31, 2020 was primarily due to a $574,000 increase in specific reserves for other commercial and industrial 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 ~~$32.4~~$42.4 million as of ~~June 30, 2021, an increase~~March 31, 2022, a decrease of ~~$9.2~~$1.3 million, or ~~39.8%~~3.0%, as compared to ~~$23.2~~$43.7 million at December 31, ~~2020.~~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 ~~has infrequently sold~~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 ~~buyer.~~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~~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.

- 80 -

Loans to a single borrower, or to a related group of borrowers, are referred to as related credits. Total related credits encompass all related or affiliated borrower loan balances, including available unused lines of credit, for both personal and business loans. At June 30, 2021, the Company had 30 total related credit relationships, comprised of 273 individual loans, with outstanding balances in excess of $5.0 million. These total related credits ranged from $5.0 million to $15.0 million at June 30, 2021 with aggregate balances of $258.2 million. Of the $258.2 million in total related credits, $238.4 million was secured by various collateral assets, primarily commercial real estate, $9.5 million was unsecured, and $10.3 million were PPP loans.

- 81 -

In addition, the future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by type of loan and the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral type within major categories as of June 30, 2021:

(Dollars in thousands)

Balance

Number
of Loans

Average
Loan
Balance

Minimum/
Maximum
Loan Balance

Allowance for Loan Losses

Percent
of
Total
Loans

Residential Mortgage Loans

$
235,742

2,104

$
112

$
0

-
$
1,529

$
875

0
%

Commercial Real Estate:

Mixed Use

$
50,280

56

$
898

$
39

-
$
11,341

$
1,055

6
%
Multi-Family Residential

44,043

59

746

24

-

6,269

924

5
%
Hotels and Motels

35,595

10

3,560

327

-

11,500

747

4
%
Office

33,921

62

547

-

-

4,799

712

4
%
Retail

23,614

46

513

31

-

5,092

495

3
%
1-4 Family Residential

19,639

152

129

3

-

1,207

412

2
%
Automobile Dealership

16,815

11

1,529

3

-

6,691

353

2
%
Skilled Nursing Facility

11,555

2

5,778

3,800

-

7,755

242

1
%
Recreation/ Golf Course/
   Marina

11,286

15

752

13

-

3,150

237

1
%
Warehouse

9,836

13

757

71

-

2,664

206

1
%
Manufacturing/Industrial

7,592

16

475

89

-

1,402

159

1
%
Restaurant

6,131

24

255

40

-

1,231

129

1
%
Automobile Repair

6,098

29

210

15

-

737

128

1
%
Hospitals

4,671

11

425

45

-

2,288

98

1
%
Not-For-Profit & Community Service Real Estate

3,639

3

1,213

77

-

3,105

76

1
%
Land

3,421

3

1,140

105

-

1,758

72

1
%
All Other

3,542

6

590

67

-

2,000

74

0
%
Total Commercial Real Estate Loans

$
291,678

518

$
563

$
6,120

35
%

Commercial and Industrial:

Secured Term Loans

$
57,901

369

$
157

$
-

-
$
4,485

$
2,263

7
%
Unsecured Term Loans

16,515

114

145

3

-

2,244

646

2
%
Secured Lines of Credit

50,885

263

193

-

-

6,787

1,989

6
%
Unsecured Lines of Credit

9,212

142

65

-

-

4,052

360

1
%
Total Commercial and
   Industrial Loans

$
134,513

888

$
151

$
5,258

16
%

Tax Exempt Loans

$
6,554

20

$
328

$
6

-
$
2,248

$
1

1
%

Paycheck Protection Loans

$
53,611

698

$
77

$
-

-
$
2,628

$
-

6
%

Consumer:

Home Equity Lines of Credit

$
34,649

957

$
36

$
-

-
$
504

$
805

4
%
Vehicle

22,645

1,543

15

0

-

348

353

3
%
Consumer Secured

38,484

1,466

26

20

-

119

599

5
%
Consumer Unsecured

17,003

4,377

4

-

-

99

265

2
%
All Others

2,137

598

4

-

-

58

33

0
%
Total Consumer Loans

$
114,918

8,941

$
13

$
2,055

14
%

Net deferred loan fees

(2,064
)

-

-

-

-

Unallocated allowance for
   loan losses

-

-

-

294

-

Total Loans

$
834,952

13,169

$
63

$
14,603

100
%

- 82 -

Including the potential effects of the COVID-19 outbreak on the Company’s loan portfolios, the ongoing and dynamic nature of the pandemic and the resultant, potentially severe and long-lasting, economic dislocations, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

~~Demand for our products and services may decline, making it difficult to grow assets and income;~~

•

~~Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;~~

•

~~Our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;~~

•

~~The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;~~

•

~~A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;~~

•

~~Our cyber security risks are increased as the result of an increase in the number of employees working remotely;~~

•

~~We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and~~

•

~~Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.~~

~~Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.~~

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

- 83 -

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 ~~six~~three months of ~~2021,~~2022, as indicated in the consolidated statement of cash flows, the Company reported net cash ~~flows~~flow from operating activities of ~~$8.6~~$4.1 million and net cash ~~outflows~~outflow of ~~$37.7~~$47.8 million related to investing activities. The net cash ~~outflows~~outflow from investing activities primarily was due to a $23.8 million increase in net ~~$20.8~~investment activity, a $23.4 million increase in net loan activity and a $635,000 net increase in all other investing activities in ~~aggregate combined with a $9.5 million increase in loan balances.~~aggregate. The Company reported net cash flows from financing activities of ~~$26.9~~$43.8 million generated principally by increased customer deposit balances of ~~$62.7~~$58.8 million, partially offset by ~~decreased brokered deposits balances of $26.9~~a $14.6 million decrease in net borrowings, and an aggregate decrease in net cash ~~outflow~~ of ~~$8.3 million~~$384,000 from all other financing sources, ~~and~~including dividends paid to common voting and non-voting shareholders and warrants of ~~$590,000.~~$428,000.

The Company has a number of existing credit facilities available to it. At ~~June 30, 2021,~~March 31, 2022, total credit available to the Company under the existing lines of credit was approximately ~~$147.4~~$146.9 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. As of ~~June 30, 2021,~~March 31, 2022, the Company had ~~$83.7~~$62.5 million of the available lines of credit utilized on its existing lines of credit with ~~$63.7~~$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 ~~June 30, 2021,~~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 ~~June 30, 2021,~~March 31, 2022, the Company had ~~$196.4~~$237.2 million in outstanding commitments to extend credit and standby letters of credit.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information relating to this item.

Item 4 – ~~Controls and Procedures~~

~~Disclosure~~ Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) (the Company’s principal executive officer and principal financial officer), management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~June 30, 2021.~~March 31, 2022. The term “disclosure controls and procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of ~~June 30, 2021,~~March 31, 2022, our CEO and CFO concluded that ~~solely as a result of the material weaknesses in internal control over financial reporting described below, which continued to exist as of June 30, 2021,~~ our disclosure controls and procedures were ~~not~~ effective as of ~~June 30, 2021.~~

- 84 -

~~Previously Disclosed Material Weakness~~

~~The Company disclosed in Item 8 – Financial Statements and Supplementary Data in its Annual Report on Form 10-K for the year ended December 31, 2020 two areas~~ that under applicable SEC accounting rules, each constituted a “material weakness.” The first material weakness identified ineffectiveness in the controls related to Related Party (as defined in applicable regulations) transactions that included procedural and documentary deficiencies related to underwriting risk ratings and the completeness of borrower reviews. The second identified area of material weakness related to loan authorization, disbursement and file maintenance controls. As a result of the material weaknesses described above, management has concluded that, as of June 30, 2021, our internal control over financial reporting was not effective.

~~Management’s Financial Reporting Remediation Initiatives~~

In order to remediate the material weakness related to transactions with Related Parties, management has commenced to initiate enhanced training programs and revise internal operating procedures designed to identify, summarize and monitor all such transactions and relationships.

In order to remediate the material weakness related to loan authorization, disbursement and file maintenance controls, management has commenced the redesign of specific processes and controls associated with each of the loan operations and will increase staffing levels where appropriate, improve training, increase the use of certain automated productivity tools, and install enhanced process oversight and functional controls to ensure that these internal controls are effective.

Management is committed to maintaining a strong internal control environment and believes these remediation efforts will result in an improvement in existing controls. Management anticipates that the new controls, as implemented and when tested for a sufficient period of time, will remediate the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or modify certain activities of the remediation measures described above.

~~Changes in Internal Control over Financial Reporting~~date.

There were no changes made in our internal controls during the quarter ended ~~June 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 8565 -

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At ~~June 30, 2021,~~March 31, 2022, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material and adverse effect on the financial condition or results of operations of the Company.

Item 1A – Risk Factors

A smaller reporting company is not required to provide the information relating to this item.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
~~April~~January 1, ~~2021~~2022 through ~~April 30, 2021~~January 31, 2022		-	$	-		-		74,292

~~May~~February 1, ~~2021~~2022 through ~~May 31, 2021~~February 28, 2022		-	$	-		-		74,292

~~June~~March 1, ~~2021~~2022 through ~~June 30, 2021~~March 31, 2022		-	$	-		-		74,292

(1) On August 29, 2016, our Board of Directors authorized the repurchase of up to 217,692 shares of our common stock, or 5% of the Company’s shares outstanding as of that date.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

None

Item 6 – Exhibits

Exhibit No.	Description

31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
101	Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements tagged as blocks of text.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

- 8666 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PATHFINDER BANCORP, INC.

(registrant)

~~August~~May 16, ~~2021~~2022	/s/ ~~Thomas W. Schneider~~James A. Dowd
	~~Thomas W. Schneider~~James A. Dowd
	President and Chief Executive Officer

~~August~~May 16, ~~2021~~2022	/s/ Walter F. Rusnak
	Walter F. Rusnak
	Senior Vice President, Chief Financial Officer

- 8767 -

FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money management deposit accounts, MMDA accounts and escrow deposits		65,864			100,069
Net change in time deposits		(3,188	)		(39,454	)
Net change in brokered deposits		(26,913	)		28,085
Net change in short-term borrowings		(2,020	)		(14,980	)
Payments on long-term borrowings		(3,391	)		(18,060	)
Proceeds from long-term borrowings		7,095			15,312
Payments on sub-debt borrowings		(10,000	)		-
Proceeds from exercise of stock options		162			195
Cash dividends paid to common shareholders		(589	)		(567	)
Cash dividends paid to preferred shareholders		(180	)		(139	)
Cash dividends paid on warrants		(17	)		(15	)
Change in noncontrolling interest, net		31			57
Net cash flows from financing activities		26,854			70,503
Change in cash and cash equivalents		(2,310	)		24,963
Cash and cash equivalents at beginning of period		43,464			20,160
Cash and cash equivalents at end of period	$	41,154		$	45,123
CASH PAID DURING THE PERIOD FOR:
Interest	$	4,282		$	6,259
Income taxes		755			550
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans		-			58
RESTRICTED CASH
Collateral deposits for hedge position included in cash and due from banks		1,600			1,600

Loan Type	Collateral Type	Number of Loans		Loan Balance		Average Loan Balance		Weighted LTV at Origination/ Modification			Status
Secured residential mortgage:
	Real Estate		33	$	2,881	$	87		88	%	Under active resolution management by the Bank.

Secured commercial real estate:
	Private Museum		1		1,385		1,385		79	%	The Bank is working on a modification with the borrower. The borrower has substantial deposits with the Bank.
	Recreational		1		1,234		1,234		50	%	The loan is currently classified as a Troubled Debt Restructuring (TDR). Next payment is due August 1, 2021.
	All Others		14		2,210		158		79	%	Under active resolution management by the Bank.

Commercial lines of credit			4		172		43	N/A			Under active resolution management by the Bank.

Commercial and industrial:
	Real Estate		1		4,485		4,485		41	%	The Bank modified the loan and the next payment is due August 1, 2021. Repayment is expected from operations, pledges and collateral value.
	All Others		11		2,317		211	N/A			Under active resolution management by the Bank.

Consumer loans			31		1,310		42	N/A			Under active resolution management by the Bank.
			96	$	15,994

	For the six months ended June 30, 2020
	1-4 family
	first-lien			Residential									Other			Paycheck
	residential			construction			Commercial			Commercial			commercial			Protection
(In thousands)	mortgage			mortgage			real estate			lines of credit			and industrial			Program
Allowance for loan losses:
Beginning Balance	$	580		$	0		$	4,010		$	1,195		$	1,645		$	0
Charge-offs		(125	)		0			0			(48	)		(9	)		0
Recoveries		1			0			0			2			0			0
Provisions (credits)		300			0			248			59			430			0
Ending balance	$	756		$	0		$	4,258		$	1,208		$	2,066		$	0

				Home equity			Other
	Tax exempt			and junior liens			consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1		$	553		$	413		$	272		$	8,669
Charge-offs		0			(28	)		(185	)		0			(395	)
Recoveries		0			29			34			0			66
Provisions (credits)		0			90			793			293			2,213
Ending balance	$	1		$	644		$	1,055		$	565		$	10,553

(Dollars in thousands)	Balance			Number of Loans		Average Loan Balance		Minimum/ Maximum Loan Balance					Allowance for Loan Losses		Percent of Total Loans
Residential Mortgage Loans	$	235,742			2,104	$	112	$	0	-	$	1,529	$	875		0	%

Commercial Real Estate:
Mixed Use	$	50,280			56	$	898	$	39	-	$	11,341	$	1,055		6	%
Multi-Family Residential		44,043			59		746		24	-		6,269		924		5	%
Hotels and Motels		35,595			10		3,560		327	-		11,500		747		4	%
Office		33,921			62		547		-	-		4,799		712		4	%
Retail		23,614			46		513		31	-		5,092		495		3	%
1-4 Family Residential		19,639			152		129		3	-		1,207		412		2	%
Automobile Dealership		16,815			11		1,529		3	-		6,691		353		2	%
Skilled Nursing Facility		11,555			2		5,778		3,800	-		7,755		242		1	%
Recreation/ Golf Course/ Marina		11,286			15		752		13	-		3,150		237		1	%
Warehouse		9,836			13		757		71	-		2,664		206		1	%
Manufacturing/Industrial		7,592			16		475		89	-		1,402		159		1	%
Restaurant		6,131			24		255		40	-		1,231		129		1	%
Automobile Repair		6,098			29		210		15	-		737		128		1	%
Hospitals		4,671			11		425		45	-		2,288		98		1	%
Not-For-Profit & Community Service Real Estate		3,639			3		1,213		77	-		3,105		76		1	%
Land		3,421			3		1,140		105	-		1,758		72		1	%
All Other		3,542			6		590		67	-		2,000		74		0	%
Total Commercial Real Estate Loans	$	291,678			518	$	563						$	6,120		35	%

Commercial and Industrial:
Secured Term Loans	$	57,901			369	$	157	$	-	-	$	4,485	$	2,263		7	%
Unsecured Term Loans		16,515			114		145		3	-		2,244		646		2	%
Secured Lines of Credit		50,885			263		193		-	-		6,787		1,989		6	%
Unsecured Lines of Credit		9,212			142		65		-	-		4,052		360		1	%
Total Commercial and Industrial Loans	$	134,513			888	$	151						$	5,258		16	%

Tax Exempt Loans	$	6,554			20	$	328	$	6	-	$	2,248	$	1		1	%

Paycheck Protection Loans	$	53,611			698	$	77	$	-	-	$	2,628	$	-		6	%

Consumer:
Home Equity Lines of Credit	$	34,649			957	$	36	$	-	-	$	504	$	805		4	%
Vehicle		22,645			1,543		15		0	-		348		353		3	%
Consumer Secured		38,484			1,466		26		20	-		119		599		5	%
Consumer Unsecured		17,003			4,377		4		-	-		99		265		2	%
All Others		2,137			598		4		-	-		58		33		0	%
Total Consumer Loans	$	114,918			8,941	$	13						$	2,055		14	%

Net deferred loan fees		(2,064	)		-		-							-		-
Unallocated allowance for loan losses		-			-		-							294		-
Total Loans	$	834,952			13,169	$	63						$	14,603		100	%