Pathfinder Bancorp enters 2026 with an improved earnings outlook after completing a comprehensive commercial loan review and building risk-based reserves.

Pathfinder Bancorp, Inc. ("Pathfinder" or the "Company") (NASDAQ: PBHC) announced its financial results for the fourth quarter and full year ended December 31, 2025.

The holding company for Pathfinder Bank ("the Bank") reported a net loss attributable to common shareholders of $7.0 million, or $1.11 per diluted share, in the fourth quarter of 2025, and $3.4 million, or $0.54 per diluted share for full year 2025, reflecting an $11.2 million credit loss provision expense taken to build reserves following completion of a previously announced comprehensive review of the Bank's commercial loan portfolio. Net income attributable to common shareholders was $626,000, or $0.10 per diluted share, in the third quarter of 2025, $3.9 million or $0.63 per diluted share in the fourth quarter of 2024, and $3.4 million, or $0.54 per diluted share for full year 2024.

Fourth Quarter and Full Year 2025 Highlights and Key Developments

The net loss resulted primarily from an $11.2 million credit loss provision expense in the quarter, reflecting a $10.8 million increase in the Company's allowance for credit losses ("ACL") to $29.4 million, or 3.28% of loans, at December 31, 2025. The risk-based reserve build reflects the Company's forward-looking assessment of loans with unique risk characteristics identified through the comprehensive review of all commercial relationships with exposures of $500,000 or more, representing approximately 90% of the commercial portfolio, which was announced in October and completed in December 2025.

The Company transferred $6.3 million in substandard loans associated with one local commercial relationship to held-for-sale status and recorded a pre-tax loss of $398,000, as a fourth quarter 2025 lower of cost or market adjustment ("LOCOM HFS adjustment"), based on active sale negotiations. Nonperforming loans totaled $27.6 million at December 31, 2025, compared to $23.3 million on September 30, 2025 and $22.1 million on December 31, 2024.

Loans totaled $896.7 million at December 31, 2025, following the movement of $6.3 million in substandard loans to held-for-sale status, compared to $898.5 million on September 30, 2025 and $919.0 million on December 31, 2024. Commercial loans were $543.7 million or 60.6% of total loans at December 31, 2025, following the reclassification of loans to held-for-sale, compared to $543.7 million on September 30, 2025 and $539.7 million on December 31, 2024.

Deposits totaled $1.18 billion at December 31, 2025, down from $1.23 billion on September 30, 2025 and $1.20 billion on December 31, 2024, primarily due to runoff of the Bank's higher-cost brokered, and other time deposits. As a percentage of total deposits, core deposits expanded to 79.78% at December 31, 2025, compared to 78.37% on September 30, 2025 and 76.86% on December 31, 2024.

Net interest income was $10.5 million and net interest margin ("NIM") was 3.09% in the fourth quarter of 2025. For the linked quarter, net interest income was $11.6 million and NIM was 3.34%, including loan and investment prepayment penalties contributing a combined $260,000 to net interest income and 7 basis points to NIM. In the year-ago period, net interest income was $10.4 million and NIM was 3.02%. For the full year 2025, net interest income was $44.3 million and NIM was 3.21% compared to net interest income of $41.0 million and NIM of 2.98% in 2024.

Noninterest income was $1.3 million for the fourth quarter 2025, including the LOCOM HFS adjustment's $398,000 impact. Noninterest income was $1.5 million in the linked quarter and $4.9 million in the year-ago quarter including a $3.2 million gain from the insurance agency sold in October 2024.

Noninterest expense of $9.2 million represented 2.51% of average assets on an annualized basis, for the fourth quarter of 2025 compared to $8.9 million or 2.40% of average assets in the linked quarter and $8.5 million or 2.33% of average assets in the year-ago quarter. For full-year 2025 and 2024, noninterest expense represented 2.36% and 2.37% of average assets, respectively.

The efficiency ratio was 74.96% for the fourth quarter 2025, compared to 68.78% in the linked quarter and 72.25% in the year-ago quarter. For full-year 2025 and 2024, the efficiency ratio was 69.12% and 72.82%, respectively(1).

Pre-tax, pre-provision ("PTPP") net income was $3.1 million for the fourth quarter 2025, compared to $4.1 million in the linked quarter and $3.3 million in the year-ago quarter(1).

Quarterly cash dividends payable to common stockholders of $0.10 per share were declared on December 22, 2025 and payable on February 6, 2026.

"We believe the legacy commercial credit quality issues that have previously contributed to elevated earnings volatility have been substantially addressed following the completion of our comprehensive portfolio review," President and Chief Executive Officer James Dowd said.

"Our fourth quarter and full-year results reflect a meaningful, risk-based reserve build based on the Company's forward-looking assessment of expected credit losses, following completion of the comprehensive loan portfolio review announced in October," Dowd added. "This action is aligned with the more rigorous approach to managing credit risk that our current management team began implementing over a year ago, including enhanced portfolio monitoring, strengthened policy standards, more stringent underwriting criteria, and an increased focus on new commercial originations that emphasize profitable, full-service banking relationships with high-quality small- and mid-sized businesses, complementing our healthy local retail lending operations.

We believe these actions position the Company to generate more consistent earnings during 2026, with reduced incremental reserve pressure, and support growth of the Company's capital ratios in 2026. These actions also enhance our flexibility to prudently evaluate capital allocation alternatives over time and to deploy the Bank's ample funding to support Central New York businesses and consumers, ultimately supporting the long-term creation of shareholder value."

Portfolio Review, Reserve Build, and Credit Culture

Over a year ago, Pathfinder began taking significant steps to enhance its credit risk management processes, including a third quarter 2024 review of nonperforming commercial loans and purchased loan pools. In the third quarter of 2025, the Company recorded an increase in the ACL by 16.7% in conjunction with its decision to initiate a comprehensive review of every performing and nonperforming loan associated with all 198 commercial relationships having exposures of $500,000 or more, representing approximately 90% of the commercial loan portfolio. Upon completion of the comprehensive portfolio review in December 2025, the Company identified 47 legacy commercial relationships, with unique risk characteristics and an average principal balance of $1.9 million. Based on management's forward-looking assessment of collateral dependent loans with unique risk characteristics and the expected credit losses associated with these relationships, the Company recorded an additional $11.4 million in provision for loans in the fourth quarter of 2025, increasing the ACL to $29.4 million, or 3.28% of total loans, as of December 31, 2025.

Now, with measures taken in the fourth quarter of 2025 to substantially address legacy commercial credit issues, management is confident that it has the team, policies, procedures and culture in place to strengthen its commercial credit quality while maintaining the historic health of its consumer and residential loan portfolio.

"Pathfinder has embraced an important cultural shift through the implementation of systemic changes to improve credit risk management," explained Senior Vice President and Chief Credit Officer Joseph Serbun. "These changes include a team-based approach to dynamic and proactive monitoring of commercial loans and relationships, adherence to rigorous policy standards with limited exceptions, more stringent underwriting criteria, and enhanced structural processes designed to support stronger decision-making at origination and improve the lifetime performance of loans. In addition, we have dedicated personnel and resources focused exclusively on the loan workout process, enabling more focused and productive resolutions of problem credits, including the legacy relationships identified in our recently completed portfolio review."

Net Interest Income and Net Interest Margin

Fourth quarter 2025 net interest income was $10.5 million, a decrease of $1.1 million, or 9.4%, from the third quarter of 2025. A decrease in interest and dividend income of $1.4 million in the fourth quarter of 2025 from the linked quarter was primarily attributed to greater interest and dividend income in the third quarter 2025 that benefited from $260,000 in loan and securities prepayment penalties in the linked quarter, as well as what the Company views as a temporary reduction of securities balances in the fourth quarter of 2025 and an average yield decrease of 30 basis points on all interest-earning assets. A 35 basis point decrease in average loan yields comparing the fourth quarter of 2025 to the linked quarter reflected an elevated third quarter 2025 average loan yield that benefited by 9 basis points from loan prepayment penalty income. A 20 basis point decrease in taxable securities average yield when comparing the fourth quarter of 2025 to the linked quarter reflected an elevated third quarter 2025 average yield that benefited by 5 basis points from investment prepayment penalty income. In addition, average balances of loans, taxable securities and tax-exempt securities declined by $1.8 million, $30.6 million and $194,000, respectively when comparing the fourth quarter of 2025 to the linked quarter. Decreases in income from loan interest, taxable securities, and tax-exempt securities of $816,000, $626,000, and $70,000, respectively, were partially offset by increases in income from dividends and federal funds sold of $39,000 and $31,000, respectively when comparing the fourth quarter of 2025 to the linked quarter. A decrease in interest expense in the fourth quarter of 2025 from the third quarter of 2025 of $352,000 was attributed to a 3 basis point decline in the average cost of total interest-bearing liabilities, including reductions of 3 basis points in the average cost of interest-bearing deposits reflecting lower average brokered and other time deposits outstanding, as well as a 3 basis point decrease in the average cost of borrowings and lower average borrowings outstanding.

NIM was 3.09% in the fourth quarter of 2025, compared to 3.34% in the third quarter of 2025. The decrease of 25 basis points reflected an elevated third quarter 2025 NIM that benefited by 7 basis points from loan and investment prepayment penalties, as well as lower average interest-bearing deposit costs in the fourth quarter of 2025 and what the Company views as a temporary reduction of investment securities balances.

Fourth quarter 2025 net interest income was $10.5 million, an increase of $133,000, or 1.3%, from the year-ago period. A decrease in interest and dividend income of $1.2 million was attributed to what management views as a temporary reduction of securities balances, as well as declines in the average yields on total interest-earning assets, loans, taxable investment securities, tax exempt investment securities, and fed funds sold and interest-earning deposits of 31 basis points, 13 basis points, 56 basis points, 54 basis points, and 316 basis points, respectively. Average loan balances also declined by $15.9 million from the year-ago period, with a corresponding decrease in loan interest income of $540,000. A decrease in interest expense of $1.4 million was primarily attributed to a 47 basis point decline in the average cost of total interest-bearing liabilities, including reductions of 44 basis points in the average cost of interest bearing deposits reflecting lower average brokered deposits outstanding, as well as 115 basis points decline in the average cost of borrowings and lower average borrowings outstanding.

NIM was 3.09% in the fourth quarter of 2025, compared to 3.02% in the fourth quarter of 2024. NIM expansion in 2025 over the year-ago period was attributed to deliberate loan and deposit pricing adjustments, core deposit growth, and reduced borrowings, partially offset by lower earning asset yields.

Noninterest Income

Fourth quarter 2025 noninterest income includes a $398,000 lower of cost or market adjustment ("LOCOM HFS adjustment") in connection with loans reclassified as held-for-sale. The Company is engaged in active sale negotiations with a potential buyer to sell substandard loans associated with one commercial relationship dating back to 2017.

Fourth quarter 2025 noninterest income also includes a loss on the sale of premises and equipment of $37,000 for the disposal of a rental office property that was not occupied by the Bank and recently sold to a non-profit tenant, as well as a reduction of $115,000 for final settlement costs associated with the insurance agency business sold in October 2024.

Fourth quarter 2025 noninterest income totaled $1.3 million, reflecting the LOCOM HFS adjustment, the loss on premises and equipment, and final settlement costs associated with the 2024 insurance agency sale. Third quarter 2025 noninterest income was $1.5 million. Fourth quarter 2024 noninterest income totaled $4.9 million including $3.2 million in pre-tax gains from the 2024 insurance agency sale.

Compared to the linked quarter, fourth quarter 2025 noninterest income reflected decreases of $105,000 in debit card interchange fees, $56,000 in earnings and gain on BOLI, and $23,000 in service charges on deposit accounts. Compared to the linked quarter, fourth quarter 2025 noninterest income also reflected increases of $522,000 in net unrealized gains on marketable equity securities and $12,000 in gains on sales of loans and foreclosed real estate, a decrease of $9,000 in net realized losses on sales and redemptions of investment securities, and a decrease in loan servicing fees of $38,000.

Compared to the year-ago period, fourth quarter 2025 noninterest income reflected an increase of $61,000 in earnings and gains on BOLI and decreases of $153,000 in debit card interchange fees and $24,000 in service charges on deposit accounts. In addition, fourth quarter 2025 noninterest income, compared to the year-ago period, included increases of $501,000 in net unrealized gains on marketable equity securities and $94,000 in gains on sales of loans and foreclosed real estate, an increase of $252,000 in net realized losses on sales and redemptions of investment securities, and a decrease of $21,000 in loan servicing fees.

Noninterest Expense

Noninterest expense totaled $9.2 million in the fourth quarter of 2025, increasing $213,000 from $8.9 million in the third quarter of 2025 and $606,000 from $8.5 million in the fourth quarter of 2024.

Salaries and benefits were $4.9 million in the fourth quarter of 2025, decreasing $81,000 from the linked quarter and increasing $801,000 from the year-ago period. The decrease from the third quarter of 2025 was attributable to a $36,000 increase in FASB91 payroll deferrals resulting from increased loan originations and lower employee benefit expenses in the fourth quarter of 2025. The increase from the fourth quarter of 2024 was primarily driven by general salary increases and a change in workforce composition in 2025, as the Company strategically added more senior, key personnel across the organization.

Building and occupancy costs were $1.3 million in the fourth quarter of 2025, decreasing $62,000 from the linked quarter and increasing $83,000 from the year-ago quarter. The decrease from the linked quarter reflected modest reductions across all building and occupancy expense categories, while the increase from the year-ago period was primarily attributed to higher periodic maintenance, utility and property tax expenses.

Data processing expense was $698,000 in the fourth quarter of 2025, increasing $57,000 from the linked quarter and decreasing $23,000 from the year-ago period. The increase from the linked quarter reflected higher costs primarily associated with check and ATM processing charges, while the decrease from the year-ago period was driven by lower data processing supplies, ATM processing, and internet banking service expenses.

Other expenses were $798,000 in the fourth quarter of 2025, increasing $196,000 from the linked quarter and $54,000 from the year-ago period. The fourth quarter 2025 increase primarily related to fees on the loans held- for-sale.

Annualized noninterest expense represented 2.51% of average assets in the fourth quarter of 2025, compared to 2.40% and 2.33% in the linked and year-ago periods. The efficiency ratio was 74.96% in the fourth quarter of 2025 compared to 68.78% and 72.25% in the linked and year-ago periods, respectively(2).

Net Income

For the fourth quarter of 2025, net loss attributable to common shareholders was $7.0 million, or $1.12 per basic share and $1.11 per diluted share, compared to net income available to common shareholders of $626,000, or $0.10 per basic and diluted share, in the linked quarter and $3.9 million or $0.63 per basic and diluted share in the year-ago period.

Statement of Financial Condition

As of December 31, 2025, the Company's statement of financial condition reflects total assets of $1.43 billion, compared to $1.47 billion on each of September 30, 2025 and December 31, 2024.

Loans totaled $896.7 million on December 31, 2025, following the $6.3 million reclassification of substandard loans to held-for-sale, decreasing $1.9 million or 0.2% during the fourth quarter 2025 and $22.3 million or 2.4% from one year prior. Consumer and residential loans totaled $354.3 million on December 31, 2025, decreasing $1.8 million or 0.5% during the fourth quarter 2025 and $26.6 million or 7.0% from one year prior. Commercial loans totaled $543.7 million on December 31, 2025, following the movement of loans to held-for-sale, in line with outstanding balances on September 30, 2025 and decreasing $4.0 million or 0.7% from one year prior.

Investment securities totaled $413.2 million on December 31, 2025, decreasing $29.2 million or 6.6% in the fourth quarter 2025. The decrease from the linked quarter reflects $10.0 million in calls and $19.2 million of maturities and scheduled amortization. Investment securities decreased by $18.9 million, or 4.4%, from December 31, 2024.

With respect to liabilities, deposits totaled $1.18 billion on December 31, 2025, decreasing $41.2 million or 3.4% during the fourth quarter 2025 and $20.7 million or 1.7% from one year prior. The decrease from the linked quarter reflects runoff of the Bank's higher-cost brokered deposits, and decreases in both MMDA and time deposits. The decrease from the previous year was primarily driven by runoff of the Bank's higher-cost brokered deposits and lower time deposits, partially offset by higher MMDA deposits.

Shareholders' equity totaled $121.0 million on December 31, 2025, decreasing $5.4 million or 4.3% in the fourth quarter 2025 and $516,000 or 0.4% from one year prior. The fourth quarter 2025 decrease primarily reflected a $7.7 million decrease in retained earnings, partially offset by a $1.9 million decrease in accumulated other comprehensive loss ("AOCL") and a $416,000 increase in additional paid in capital.

Asset Quality

The Company's asset quality metrics reflect ongoing efforts the Bank is undertaking as part of its commitment to continuously improve its credit risk management approach.

Nonperforming loans were $27.6 million, or 3.07% of total loans on December 31, 2025, compared to $23.3 million or 2.59% on September 30, 2025, and $22.1 million or 2.40% on December 31, 2024. The increase primarily reflected certain legacy commercial loans moving to nonperforming status, including loans that may have been less than 90 days delinquent but were identified as having unique risk characteristics through the Company's 2025 portfolio review.

Net charge-offs ("NCOs") after recoveries declined to $604,000, or an annualized 0.27% of average loans in the fourth quarter of 2025, from $670,000 or 0.30% in the linked quarter and $1.0 million or 0.44% in the year-ago period.

Provision for credit loss expense was $11.2 million in the fourth quarter of 2025, reflecting the $10.8 million increase in the Company's ACL in the fourth quarter of 2025 in conjunction with December's completion of the Company's previously announced portfolio review. The provision was $3.5 million and $988,000 in the linked and year-ago quarters, respectively.

The Company believes it is sufficiently collateralized and reserved, with an ACL of $29.4 million on December 31, 2025, compared to $18.7 million on September 30, 2025 and $17.2 million on December 31, 2024. As a percentage of total loans, ACL represented 3.28% on December 31, 2025, 2.08% on September 30, 2025, and 1.88% on December 31, 2024.

Liquidity

The Company has diligently ensured a strong liquidity profile as of December 31, 2025 to meet its ongoing financial obligations. The Bank's liquidity management, as evaluated by its cash reserves and operational cash flows from loan repayments and investment securities, remains robust and is effectively managed by the institution's leadership.

The Bank's analysis indicates that expected cash inflows from loans and investment securities are more than sufficient to meet all projected financial obligations. Total deposits were $1.18 billion on December 31, 2025, compared to $1.23 billion on September 30, 2025 and $1.20 billion on December 31, 2024. Core deposits represented 79.78% of total deposits on December 31, 2025, compared to 78.37% of total deposits on September 30, 2025 and 76.86% on December 31, 2024. The Bank continues to implement strategic initiatives to enhance its core deposit franchise, including targeted marketing campaigns and customer engagement programs aimed at deepening banking relationships and enhancing deposit stability.

On December 31, 2025, Pathfinder Bancorp had an available additional funding capacity of $157.5 million with the Federal Home Loan Bank of New York and $13.5 million with the Federal Reserve Bank, which complements its liquidity reserves. Moreover, the Bank maintains additional unused credit lines totaling $15.0 million, which provide a buffer for additional funding needs. These facilities, including access to the Federal Reserve's Discount Window, are part of a comprehensive liquidity strategy that ensures flexibility and readiness to respond to any funding requirements.

Cash Dividend Declared

On December 22, 2025, Pathfinder's Board of Directors declared a cash dividend of $0.10 per share for holders of both voting common and non-voting common stock.

In addition, this dividend also extends to the notional shares of the Company's warrants. Shareholders as of January 16, 2026 will be eligible for the dividend, which is scheduled for disbursement on February 6, 2026. This distribution aligns with Pathfinder Bancorp's philosophy of consistent and reliable delivery of shareholder value.

Evaluating the Company's market performance, the closing stock price as of December 31, 2025 stood at $14.11 per share. This positions the annualized dividend yield at 2.83%.

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