Pathfinder Bancorp, Inc. - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _______ to _______

PATHFINDER BANCORP, INC.

(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 Telephone Number including area code)

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 T NO *

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES T NO *

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

Large accelerated filer* Accelerated filer* Non-accelerated filer* Smaller reporting company T

(Do not check if a smaller reporting company)

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

As of August 10, 2015, there were 4,352,203 shares issued and outstanding of the registrant's common stock.

PATHFINDER BANCORP, INC.

INDEX

PART I - FINANCIAL INFORMATION		PAGE NO.

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Condition	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Changes in Shareholders' Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition	32
	and Results of Operations (Unaudited)

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	49

PART II - OTHER INFORMATION		50

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

SIGNATURES		51

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

(Unaudited)

	June 30,			December 31,
(In thousands, except share and per share data)	2015			2014
ASSETS:
Cash and due from banks	$	7,182		$	6,822
Interest earning deposits		10,228			4,534
Total cash and cash equivalents		17,410			11,356
Available-for-sale securities, at fair value		102,361			88,073
Held-to-maturity securities, at amortized cost (fair value of $44,875 and $42,139, respectively)		43,893			40,875
Federal Home Loan Bank stock, at cost		3,356			3,454
Loans		403,411			387,538
Less: Allowance for loan losses		5,900			5,349
Loans receivable, net		397,511			382,189
Premises and equipment, net		13,238			13,200
Accrued interest receivable		1,966			1,849
Foreclosed real estate		361			261
Intangible assets, net		222			175
Goodwill		4,536			4,367
Bank owned life insurance		10,506			10,356
Other assets		4,965			4,869
Total assets	$	600,325		$	561,024

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing	$	397,923		$	360,906
Noninterest-bearing		59,652			54,662
Total deposits		457,575			415,568
Short-term borrowings		48,000			55,100
Long-term borrowings		14,000			11,000
Junior subordinated debentures		5,155			5,155
Accrued interest payable		60			63
Other liabilities		5,461			4,934
Total liabilities		530,251			491,820
Shareholders' equity:
Preferred stock - SBLF, par value $0.01 per share; $1,000 liquidation preference;
13,000 shares authorized; 13,000 shares issued and outstanding		13,000			13,000
Common stock, par value $0.01; 25,000,000 authorized shares;
4,352,203 shares issued and shares outstanding		44			44
Additional paid in capital		28,614			28,534
Retained earnings		31,996			31,085
Accumulated other comprehensive loss		(2,319	)		(2,119	)
Unearned ESOP		(1,664	)		(1,754	)
Total Pathfinder Bancorp, Inc. shareholders' equity		69,671			68,790
Noncontrolling interest		403			414
Total equity		70,074			69,204
Total liabilities and shareholders' equity	$	600,325		$	561,024

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

Page - 3 -

Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	For the three			For the three		For the six			For the six
	months ended			months ended		months ended			months ended
(In thousands, except per share data)	June 30, 2015			June 30, 2014		June 30, 2015			June 30, 2014
Interest and dividend income:
Loans, including fees	$	4,551		$	4,104	$	8,950		$	8,168
Debt securities:
Taxable		516			466		975			886
Tax-exempt		190			194		387			389
Dividends		40			17		69			50
Interest earning time deposits		-			2		-			4
Federal funds sold and interest earning deposits		5			1		7			2
Total interest income		5,302			4,784		10,388			9,499
Interest expense:
Interest on deposits		483			497		928			1,026
Interest on short-term borrowings		35			21		72			39
Interest on long-term borrowings		105			148		206			295
Total interest expense		623			666		1,206			1,360
Net interest income		4,679			4,118		9,182			8,139
Provision for loan losses		401			275		784			520
Net interest income after provision for loan losses		4,278			3,843		8,398			7,619
Noninterest income:
Service charges on deposit accounts		288			305		554			584
Earnings and gain on bank owned life insurance		65			66		149			126
Loan servicing fees		41			67		93			120
Net gains on sales and redemptions of investment securities		49			24		101			26
Net (losses)/gains on sales of loans and foreclosed real estate		(4	)		26		(4	)		30
Debit card interchange fees		136			129		259			243
Other charges, commissions & fees		377			261		665			575
Total noninterest income		952			878		1,817			1,704
Noninterest expense:
Salaries and employee benefits		2,356			2,187		4,738			4,384
Building occupancy		441			364		944			771
Data processing		354			399		742			764
Professional and other services		229			173		449			348
Advertising		114			99		236			231
FDIC assessments		102			100		197			195
Audits and exams		59			61		120			125
Other expenses		577			380		1,030			852
Total noninterest expenses		4,232			3,763		8,456			7,670
Income before income taxes		998			958		1,759			1,653
Provision for income taxes		290			275		514			451
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc.		708			683		1,245			1,202
Net income attributable to noncontrolling interest		14			7		22			37
Net income attributable to Pathfinder Bancorp Inc.		694			676		1,223			1,165
Preferred stock dividends		33			30		65			30
Net income available to common shareholders	$	661		$	646	$	1,158		$	1,135

Earnings per common share - basic	$	0.16		$	0.15	$	0.28		$	0.27
Earnings per common share - diluted	$	0.16		$	0.15	$	0.28		$	0.27
Dividends per common share	$	0.03		$	0.03	$	0.06		$	0.06

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

Page - 4 -

Table of Contents

Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)

	For the three months ended						For the six months ended
(In thousands)	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014

Net Income	$	708		$	683		$	1,245		$	1,202

Other Comprehensive Income (Loss)

Retirement Plans:
Net unrealized gain on retirement plans		45			11			90			22

Unrealized holding gains on financial derivative:
Change in unrealized holding losses on financial derivative		(5	)		(4	)		(6	)		(7	)
Reclassification adjustment for interest expense included in net income		15			15			31			30
Net unrealized gain on financial derivative		10			11			25			23

Unrealized holding (losses) gains on available for sale securities
Unrealized holding (losses) gains arising during the period		(878	)		310			(413	)		631
Reclassification adjustment for net (losses) gains included in net income		(49	)		(24	)		(101	)		(26	)
Net unrealized (loss) gain on available for sale securities		(927	)		286			(514	)		605

Accretion of net unrealized loss on securities transferred to held-to-maturity⁽¹⁾		32			29			65			59

Other comprehensive (loss) income, before tax		(840	)		337			(334	)		709
Tax effect		336			(135	)		134			(284	)
Other comprehensive (loss) income, net of tax		(504	)		202			(200	)		425
Comprehensive income	$	204		$	885		$	1,045		$	1,627
Comprehensive income attributable to noncontrolling interest	$	14		$	7		$	22		$	37
Comprehensive income attributable to Pathfinder Bancorp, Inc.	$	190		$	878		$	1,023		$	1,590


Tax Effect Allocated to Each Component of Other Comprehensive Loss
Retirement plan net losses recognized in plan expenses	$	(18	)	$	(5	)	$	(36	)	$	(9	)
Change in unrealized holding losses on financial derivative		2			2			2			3
Reclassification adjustment for interest expense included in net income		(6	)		(6	)		(12	)		(12	)
Unrealized holding gains (losses) arising during the period		351			(124	)		165			(253	)
Reclassification adjustment for net gains included in net income		20			10			41			10
Accretion of net unrealized loss on securities transferred to held-to-maturity⁽¹⁾		(13	)		(12	)		(26	)		(23	)
Income tax effect related to other comprehensive income	$	336		$	(135	)	$	134			(284	)

(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.

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

Page - 5 -

Table of Contents

Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Six months ended June 30, 2015 and June 30, 2014

										Accumulated
					Additional					Other Com-									Non-
	Preferred		Common		Paid in		Retained			prehensive			Unearned			Treasury			controlling
(In thousands, except share and per share data)	Stock		Stock		Capital		Earnings			Loss			ESOP			Stock			Interest			Total

Balance, January 1, 2015	$	13,000	$	44	$	28,534	$	31,085		$	(2,119	)	$	(1,754	)	$	-		$	414		$	69,204

Net income		-		-		-		1,223			-			-			-			22			1,245

Other comprehensive loss, net of tax		-		-		-		-			(200	)		-			-			-			(200	)

Preferred stock dividends - SBLF		-		-		-		(65	)		-			-			-			-			(65	)

ESOP shares earned (12,222 shares)		-		-		38		-			-			90			-			-			128

Stock based compensation		-		-		42		-			-			-			-			-			42

Common stock dividends declared ($0.06 per share)		-		-		-		(247	)		-			-			-			-			(247	)

Distributions from affiliates		-		-		-		-			-			-			-			(33	)		(33	)
Balance, June 30, 2015	$	13,000	$	44	$	28,614	$	31,996		$	(2,319	)	$	(1,664	)	$	-		$	403		$	70,074

Balance, January 1, 2014	$	13,000	$	30	$	8,226	$	28,788		$	(1,745	)	$	(826	)	$	(4,761	)	$	358		$	43,070

Net income		-		-		-		1,165			-			-			-			37			1,202

Other comprehensive income, net of tax		-		-		-		-			425			-			-			-			425

Preferred stock dividends - SBLF		-		-		-		(30	)		-			-			-			-			(30	)

ESOP shares earned (6,250 shares)		-		-		36		-			-			55			-			-			91

Stock based compensation		-		-		42		-			-			-			-			-			42

Common stock dividends declared ($0.06 per share)		-		-		-		(152	)		-			-			-			-			(152	)
Balance, June 30, 2014	$	13,000	$	30	$	8,304	$	29,771		$	(1,320	)	$	(771	)	$	(4,761	)	$	395		$	44,648

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

Page - 6 -

Table of Contents

Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
	For the six months ended June 30,
(In thousands)	2015			2014
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.	$	1,223		$	1,165
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for loan losses		784			520
Realized losses (gains) on sales, redemptions and calls of:
Real estate acquired through foreclosure		4			(30	)
Loans		(4	)		-
Available-for-sale investment securities		(101	)		(26	)
Depreciation		465			399
Amortization of mortgage servicing rights		7			7
Amortization of deferred loan costs		82			59
Earnings on bank owned life insurance		(149	)		(126	)
Net amortization of premiums and discounts on investment securities		436			339
Amortization of intangible assets		9			6
Stock based compensation and ESOP expense		170			133
Net change in accrued interest receivable		(117	)		(60	)
Net change in other assets and liabilities		687			(840	)
Net cash flows from operating activities		3,496			1,546
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale		(47,485	)		(25,688	)
Purchase of investment securities held-to-maturity		(5,034	)		(8,767	)
Net proceeds from (purchases of) Federal Home Loan Bank stock		98			(44	)
Proceeds from maturities and principal reductions of
investment securities available-for-sale		15,933			7,378
Proceeds from maturities and principal reductions of
investment securities held-to-maturity		2,015			399
Proceeds from sales, redemptions and calls of:
Available-for-sale investment securities		16,481			506
Real estate acquired through foreclosure		171			273
Acquisition of insurance agency		(225	)		-
Purchase of bank owned life insurance		-			(1,780	)
Net change in loans		(16,463	)		(17,989	)
Purchase of premises and equipment		(503	)		(1,051	)
Net cash flows from investing activities		(35,012	)		(46,763	)
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts,
money management deposit accounts, MMDA accounts and escrow deposits		45,933			29,707
Net change in time deposits and brokered deposits		(3,926	)		8,316
Net change in short-term borrowings		(7,100	)		1,000
Proceeds from (repayments of) long-term borrowings		3,000			(55	)
Cash dividends paid to preferred shareholder - SBLF		(65	)		(30	)
Cash dividends paid to common shareholders		(261	)		(157	)
Change in noncontrolling interest, net		(11	)		37
Net cash flows from financing activities		37,570			38,818
Change in cash and cash equivalents		6,054			(6,399	)
Cash and cash equivalents at beginning of period		11,356			16,575
Cash and cash equivalents at end of period	$	17,410		$	10,176
CASH PAID DURING THE PERIOD FOR:
Interest	$	1,209		$	1,379
Income taxes		462			331
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans		275			392

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

Notes to Consolidated Financial Statements (Unaudited)

Page - 7 -

Table of Contents

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 2014 consolidated financial statements may have been reclassified to conform to the current period presentation. These reclassifications impacted share and per share data as a result of the Conversion and Offering that occurred on October 16, 2014 and reported by the Company in its Annual Report on Form 10-K filed on March 18, 2015, and are further detailed in Note 3 to these unaudited consolidated financial statements located elsewhere on this form. These reclassifications had no effect on net income or comprehensive income as previously reported.

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 financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain 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 other 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 Agency's financial statements include the acquisition of the Huntington Agency which occurred in the first quarter of 2015. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.

On May 8, 2015, the Company announced that the Bank filed an application with the New York State Department of Financial Services ("NYSDFS") and the Federal Deposit Insurance Corporation ("FDIC") to combine with the Bank's wholly-owned subsidiary, Pathfinder Commercial Bank, a New York State-chartered commercial bank. Prior to or simultaneously with the combination, Pathfinder Commercial Bank's charter will be amended such that Pathfinder Commercial Bank will become a full-service commercial bank, rather than a limited purpose commercial bank, which it currently is, and its name will be changed to "Pathfinder Bank". The transaction is expected to be completed in either the third or fourth quarter of 2015 and will have little impact on the current activities or investments of the Bank and Pathfinder Commercial Bank, although the Bank expects some annual cost savings as a result of the conversion.

Note 2: New Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-07 – Fair Value Measurement (Topic 820). This ASU addressed the diversity in practice related to how certain investments measured at net asset value with future redemption dates are categorized. The amendments remove the requirement to categorize investments for which fair values are measured using the net asset value per share practical expedient. It also limits disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements. Earlier application is permitted. The Company does not expect a material impact on its consolidated statements of condition, results of operations, or cash flows.

Page - 8 -

Table of Contents

In June 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-10 – Technical Corrections and Improvements. The amendments cover a wide range of topics in the Codification and represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company does not expect a material impact on its consolidated statements of condition, results of operations, or cash flows.

Note 3: Earnings per Common Share

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders is net income to Pathfinder Bancorp, Inc. less the total of preferred dividends declared. Diluted earnings per share include the potential dilutive effect that could occur upon the assumed exercise of issued stock options using the Treasury Stock method. Anti-dilutive stock options, not included in the computation below, were -0- for the three months ended June 30, 2015 and 8,236 for the six months ended June 30, 2015 and 10,000 in the three and six month periods ended June 30, 2014. 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.

The following table sets forth the calculation of basic and diluted earnings per share. Historical share and per share data have been adjusted by the exchange ratio of 1.6472 used in the Conversion and Offering.

	Three months ended				Six months ended
	June 30,				June 30,
(In thousands, except per share data)	2015		2014		2015		2014
Basic Earnings Per Common Share
Net income available to common shareholders	$	661	$	646	$	1,158	$	1,135
Weighted average common shares outstanding		4,120		4,172		4,117		4,169
Basic earnings per common share	$	0.16	$	0.15	$	0.28	$	0.27

Diluted Earnings Per Common Share
Net income available to common shareholders	$	661	$	646	$	1,158	$	1,135
Weighted average common shares outstanding		4,120		4,172		4,117		4,169
Effect of assumed exercise of stock options		67		43		62		40
Diluted weighted average common shares outstanding		4,187		4,215		4,179		4,209
Diluted earnings per common share	$	0.16	$	0.15	$	0.28	$	0.27

Page - 9 -

Table of Contents

Note 4: Investment Securities

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

	June 30, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	28,889	$	12	$	(161	)	$	28,740
State and political subdivisions		8,137		91		(10	)		8,218
Corporate		18,342		85		(147	)		18,280
Residential mortgage-backed - US agency		29,336		236		(271	)		29,301
Collateralized mortgage obligations - US agency		15,856		152		(156	)		15,852
Total		100,560		576		(745	)		100,391
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		643		2		-			645
Large cap equity fund		456		168		-			624
Other mutual funds		183		226		-			409
Common stock - financial services industry		270		22		-			292
Total		1,552		418		-			1,970
Total available-for-sale	$	102,112	$	994	$	(745	)	$	102,361

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	7,846	$	81	$	(53	)	$	7,874
State and political subdivisions		21,260		690		-			21,950
Corporate		3,420		61		-			3,481
Residential mortgage-backed - US agency		8,460		94		(4	)		8,550
Collateralized mortgage obligations - US agency		2,907		113		-			3,020
Total held-to-maturity	$	43,893	$	1,039	$	(57	)	$	44,875

Page - 10 -

Table of Contents

	December 31, 2014
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	17,896	$	3	$	(149	)	$	17,750
State and political subdivisions		8,346		110		(13	)		8,443
Corporate		13,763		116		(19	)		13,860
Residential mortgage-backed - US agency		30,321		403		(149	)		30,575
Collateralized mortgage obligations - US agency		15,432		168		(124	)		15,476
Total		85,758		800		(454	)		86,104
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		643		5		-			648
Large cap equity fund		456		193		-			649
Other mutual funds		183		196		-			379
Common stock - financial services industry		270		23		-			293
Total		1,552		417		-			1,969
Total available-for-sale	$	87,310	$	1,217	$	(454	)	$	88,073

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	4,834	$	58	$	-		$	4,892
State and political subdivisions		22,610		824		(9	)		23,425
Corporate		2,487		33		(17	)		2,503
Residential mortgage-backed - US agency		8,043		242		-			8,285
Collateralized mortgage obligations - US agency		2,901		133		-			3,034
Total held-to-maturity	$	40,875	$	1,290	$	(26	)	$	42,139

The amortized cost and estimated fair value of debt investments at June 30, 2015 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
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
(In thousands)
Due in one year or less	$	6,881	$	6,925	$	196	$	196
Due after one year through five years		39,480		39,450		8,382		8,428
Due after five years through ten years		8,027		7,901		16,516		16,888
Due after ten years		980		962		7,432		7,793
Sub-total		55,368		55,238		32,526		33,305
Residential mortgage-backed - US agency		29,336		29,301		8,460		8,550
Collateralized mortgage obligations - US agency		15,856		15,852		2,907		3,020
Totals	$	100,560	$	100,391	$	43,893	$	44,875

Page - 11 -

Table of Contents

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, 2015
	Less than twelve months									Twelve months or more									Total
	Number of									Number of									Number of
	Individual		Unrealized				Fair			Individual		Unrealized				Fair			Individual		Unrealized				Fair
	Securities		Losses				Value			Securities		Losses				Value			Securities		Losses				Value
(Dollars in thousands)
Available-for-Sale
US Treasury, agencies and GSE's		11		$	(106	)		$	14,844		5		$	(55	)		$	5,941		16			(161	)		$	20,785
State and political subdivisions		15			(9	)			2,200		2			(1	)			504		17			(10	)			2,704
Corporate		13			(147	)			11,513		-			-				-		13			(147	)			11,513
Residential mortgage-backed - US agency		7			(115	)			9,705		5			(156	)			5,169		12			(271	)			14,874
Collateralized mortgage obligations - US agency		4			(83	)			5,925		3			(73	)			1,971		7			(156	)			7,896
Totals		50		$	(460	)		$	44,187		15		$	(285	)		$	13,585		65		$	(745	)		$	57,772
Held-to-Maturity
US Treasury, agencies and GSE's		2		$	(53	)		$	2,946		-		$	-			$	-		2		$	(53	)		$	2,946
State and political subdivisions		-			-				-		-			-				-		-			-				-
Corporate		-			-				-		-			-				-		-			-				-
Residential mortgage-backed - US agency		2			(4	)			1,705		-			-				-		2			(4	)			1,705
Collateralized mortgage obligations - US agency		-			-				-		-			-				-		-			-				-
Totals		4		$	(57	)		$	4,651		-		$	-			$	-		4		$	(57	)		$	4,651


	December 31, 2014
	Less than twelve months									Twelve months or more									Total
	Number of									Number of									Number of
	Individual		Unrealized				Fair			Individual		Unrealized				Fair			Individual		Unrealized				Fair
	Securities		Losses				Value			Securities		Losses				Value			Securities		Losses				Value
(Dollars in thousands)
Available-for-Sale
US Treasury, agencies and GSE's		7		$	(18	)		$	7,991		7		$	(131	)		$	7,856		14		$	(149	)		$	15,847
State and political subdivisions		19			(13	)			3,047		1			-				90		20			(13	)			3,137
Corporate		7			(19	)			4,520		-			-				-		7			(19	)			4,520
Residential mortgage-backed - US agency		2			(8	)			1,424		6			(141	)			6,256		8			(149	)			7,680
Collateralized mortgage obligations - US agency		3			(22	)			2,692		5			(102	)			3,963		8			(124	)			6,655
Totals		38		$	(80	)		$	19,674		19		$	(374	)		$	18,165		57		$	(454	)		$	37,839
Held-to-Maturity
US Treasury, agencies and GSE's		-		$	-			$	-		-		$	-			$	-		-		$	-			$	-
State and political subdivisions		1			(9	)			1,463		-			-				-		1			(9	)			1,463
Corporate		2			(17	)			1,108		-			-				-		2			(17	)			1,108
Residential mortgage-backed - US agency		-			-				-		-			-				-		-			-				-
Collateralized mortgage obligations - US agency		-			-				-		-			-				-		-			-				-
Totals		3		$	(26	)		$	2,571		-		$	-			$	-		3		$	(26	)		$	2,571

The Company conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment ("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.

Page - 12 -

Table of Contents

Management does not believe any individual unrealized loss in the securities portfolio as of June 30, 2015 represents OTTI. All securities are rated A3 or better by Moody's or S&P, with the exception of three corporate securities. The agency and municipal securities have relatively insignificant unrealized loss positions ranging from 2.16% to 0.01% of their current book values.

The unrealized losses reported pertaining to securities issued by the US Government and its sponsored entities, include agency and mortgage-backed securities issued by FNMA, FHLMC, FHLB and FFCB which are currently rated Aaa by Moody's Investor Services, AA+ by Standard and Poors and are guaranteed by the US Government. The corporate security losses reflected have all been in an unrealized loss position for 6 months or less and represent 2.6% of the original security carrying value or less as of June 30, 2015. All corporate securities currently in an unrealized loss position are A rated or better, with the exception of securities issued by Citigroup and Goldman Sachs which are rated Baa2 by Moody's and A- by Standard and Poors. The unrealized losses reflected are primarily attributable to changes in interest rates since the securities were acquired. 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 recovery of the amortized cost. As such, management does not believe any individual unrealized loss as of June 30, 2015 represents OTTI.

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. Management has determined that we have the intent and ability to retain the equity securities for a sufficient period of time to allow for recovery. All of the Company's equity securities had a fair value greater than the book value at June 30, 2015.

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

	For the three months							For the six months
	ended June 30,							ended June 30,
(In thousands)	2015				2014			2015				2014
Realized gains		$	53			$	24		$	110			$	26
Realized losses			(4	)			-			(9	)			-
		$	49			$	24		$	101			$	26

As of June 30, 2015 and December 31, 2014, securities with a fair value of $89.7 million and $66.7 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $17.7 million and $19.9 million were pledged against certain borrowing arrangements.

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

Note 5: Pension and Postretirement Benefits

The Company had a non-contributory defined benefit pension plan that covered substantially all employees. 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 freeze became effective June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date. Participants as of June 30, 2012, who continue to be employed by the Bank, continue to earn vesting credit with respect to their frozen accrued benefits.

Prior to being frozen, the plan provided defined benefits based on years of service and final average salary. Although the plan was frozen, the Company maintains the responsibility for funding the plan, and its funding practice is to contribute at least the minimum amount annually to meet minimum funding requirements. The funded status of the plan has and will continue to be affected by market conditions. The Company expects to continue to fund this plan on an as needed basis and does not foresee any issues or conditions that could negatively impact the payment of benefit obligations to plan participants. In addition, the Company provides certain health and life insurance benefits for 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.

Page - 13 -

Table of Contents

In October 2014, the Society of Actuaries released new mortality tables with future mortality improvement assumptions which are expected to become the required standard for purposes of year end pension liability disclosures. As such, the Company has adopted the "White Collar" version of the new mortality tables which more closely approximates the Company's participants in the frozen defined benefit pension plan at December 31, 2014.

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
	For the three months ended June 30,														For the six months ended June 30,
(In thousands)	2015				2014				2015			2014			2015				2014				2015			2014

Service cost		$	-			$	-			$	-		$	-		$	-			$	-			$	-		$	-
Interest cost			117				102				5			4			234				203				9			9
Expected return on plan assets			(243	)			(235	)			-			-			(487	)			(471	)			-			-
Amortization of net losses			45				7				-			4			90				15				-			7
Net periodic benefit plan (benefit) cost		$	(81	)		$	(126	)		$	5		$	8		$	(163	)		$	(253	)		$	9		$	16

The Company will evaluate the need for further contributions to the defined benefit pension plan during 2015. The prepaid pension asset is recorded in other assets on the statement of condition as of June 30, 2015.

Page - 14 -

Table of Contents

Note 6: Loans

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

	June 30,			December 31,
(In thousands)	2015			2014
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	175,978		$	172,159
Construction		3,934			3,209
Total residential mortgage loans		179,912			175,368

Commercial loans:
Real estate		126,349			125,952
Lines of credit		18,119			17,407
Other commercial and industrial		42,290			34,660
Tax exempt loans		9,606			7,201
Total commercial loans		196,364			185,220

Consumer loans:
Home equity and junior liens		22,591			22,713
Other consumer		4,610			4,160
Total consumer loans		27,201			26,873

Total loans		403,477			387,461
Net deferred loan (fees) costs		(66	)		77
Less allowance for loan losses		(5,900	)		(5,349	)
Loans receivable, net	$	397,511		$	382,189

The Company originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Company 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.

As of June 30, 2015 and December 31, 2014, residential mortgage loans with a carrying value of $124.8 million and $121.1 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 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2015 and have not changed.

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

Page - 15 -

Table of Contents

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

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, 2015
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	170,628	$	1,148	$	3,461	$	741	$	175,978
Construction		3,934		-		-		-		3,934
Total residential mortgage loans		174,562		1,148		3,461		741		179,912
Commercial loans:
Real estate		117,552		2,965		5,257		575		126,349
Lines of credit		16,444		693		750		232		18,119
Other commercial and industrial		40,320		832		830		308		42,290
Tax exempt loans		9,606		-		-		-		9,606
Total commercial loans		183,922		4,490		6,837		1,115		196,364
Consumer loans:
Home equity and junior liens		21,916		66		502		107		22,591
Other consumer		4,559		32		19		-		4,610
Total consumer loans		26,475		98		521		107		27,201
Total loans	$	384,959	$	5,736	$	10,819	$	1,963	$	403,477

	As of December 31, 2014
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	166,352	$	1,384	$	3,370	$	1,053	$	172,159
Construction		3,209		-		-		-		3,209
Total residential mortgage loans		169,561		1,384		3,370		1,053		175,368
Commercial loans:
Real estate		119,521		1,157		5,132		142		125,952
Lines of credit		16,310		451		646		-		17,407
Other commercial and industrial		33,258		434		941		27		34,660
Tax exempt loans		7,201		-		-		-		7,201
Total commercial loans		176,290		2,042		6,719		169		185,220
Consumer loans:
Home equity and junior liens		21,722		333		574		84		22,713
Other consumer		4,113		10		37		-		4,160
Total consumer loans		25,835		343		611		84		26,873
Total loans	$	371,686	$	3,769	$	10,700	$	1,306	$	387,461

Page - 16 -

Table of Contents

Management has reviewed its loan portfolio and determined that, to the best of its knowledge, no 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.

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, 2015 and December 31, 2014, are detailed in the following tables:

	As of June 30,2015
	30-59 Days			60-89 Days			90 Days
	Past Due			Past Due			and Over			Total						Total Loans
(In thousands)	And Accruing			And Accruing						Past Due			Current			Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages		$	1,398		$	637		$	1,088		$	3,123		$	172,855		$	175,978
Construction			-			-			-			-			3,934			3,934
Total residential mortgage loans			1,398			637			1,088			3,123			176,789			179,912
Commercial loans:
Real estate			1,082			-			3,809			4,891			121,458			126,349
Lines of credit			705			-			412			1,117			17,002			18,119
Other commercial and industrial			170			-			650			820			41,470			42,290
Tax exempt loans			-			-			-			-			9,606			9,606
Total commercial loans			1,957			-			4,871			6,828			189,536			196,364
Consumer loans:
Home equity and junior liens			154			-			313			467			22,124			22,591
Other consumer			33			11			7			51			4,559			4,610
Total consumer loans			187			11			320			518			26,683			27,201
Total loans		$	3,542		$	648		$	6,279		$	10,469		$	393,008		$	403,477


	As of December 31, 2014
	30-59 Days			60-89 Days			90 Days
	Past Due			Past Due			and Over			Total						Total Loans
(In thousands)	And Accruing			And Accruing						Past Due			Current			Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages		$	1,455		$	687		$	1,902		$	4,044		$	168,115		$	172,159
Construction			-			-			-			-			3,209			3,209
Total residential mortgage loans			1,455			687			1,902			4,044			171,324			175,368
Commercial loans:
Real estate			1,462			32			3,547			5,041			120,911			125,952
Lines of credit			10			-			278			288			17,119			17,407
Other commercial and industrial			445			982			205			1,632			33,028			34,660
Tax exempt loans			-			-			-			-			7,201			7,201
Total commercial loans			1,917			1,014			4,030			6,961			178,259			185,220
Consumer loans:
Home equity and junior liens			120			17			313			450			22,263			22,713
Other consumer			6			17			11			34			4,126			4,160
Total consumer loans			126			34			324			484			26,389			26,873
Total loans		$	3,498		$	1,735		$	6,256		$	11,489		$	375,972		$	387,461

Page - 17 -

Table of Contents

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

	June 30,		December 31,
(In thousands)	2015		2014
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	1,088	$	1,902
		1,088		1,902
Commercial loans:
Real estate		3,809		3,547
Lines of credit		412		278
Other commercial and industrial		650		205
		4,871		4,030
Consumer loans:
Home equity and junior liens		313		313
Other consumer		7		11
		320		324
Total nonaccrual loans	$	6,279	$	6,256

There were no loans past due ninety days or more and still accruing interest at June 30, 2015 or December 31, 2014.

The Company is required to disclose certain activities related to Troubled Debt Restructurings ("TDRs") in accordance with accounting guidance. Certain loans have been modified in 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 Company has determined that there were no new TDRs in the three month period ended June 30, 2015 and one new TDR in the six month period ended June 30, 2015. The following details the nature of this TDR, which occurred in the first quarter of 2015.

The modification made within the commercial real estate loan class resulted in a pre-modification and post-modification recorded investment of $678,000 and $324,000, respectively. Economic concessions granted included extended payment terms without an associated increase in collateral. The Company was required to increase the specific reserve against this loan by an additional $354,000 which was a component of the provision of loan losses.

The Company has determined that there were no new TDR's for the three or six month periods ended June 30, 2014.

The Company has determined that there were no TDR payment defaults, for new TDRs done in the prior 12 months, during the six month period ending June 30, 2015.

When the Company modifies a loan within a portfolio segment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate 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, an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period.

Page - 18 -

Table of Contents

Impaired Loans

The following tables summarize impaired loan information by portfolio class at the indicated dates:

	June 30, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(In thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
1-4 family first-lien residential mortgages	$	479	$	479	$	-	$	1,138	$	1,163	$	-
Commercial real estate		2,148		2,233		-		2,083		2,154		-
Commercial lines of credit		380		397		-		185		197		-
Other commercial and industrial		702		727		-		335		356		-
Home equity and junior liens		-		-		-		21		21		-
Other consumer		7		7		-		-		-		-
With an allowance recorded:
1-4 family first-lien residential mortgages		-		-		-		-		-		-
Commercial real estate		2,670		2,743		1,064		2,927		2,972		552
Commercial lines of credit		232		232		150		93		99		93
Other commercial and industrial		250		250		220		268		268		238
Home equity and junior liens		294		294		5		340		340		31
Other consumer		-		-		-		11		11		3
Total:
1-4 family first-lien residential mortgages		479		479		-		1,138		1,163		-
Commercial real estate		4,818		4,976		1,064		5,010		5,126		552
Commercial lines of credit		612		629		150		278		296		93
Other commercial and industrial		952		977		220		603		624		238
Home equity and junior liens		294		294		5		361		361		31
Other consumer		7		7		-		11		11		3
Totals	$	7,162	$	7,362	$	1,439	$	7,401	$	7,581	$	917

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
	June 30,				June 30,
(In thousands)	2015		2014		2015		2014
1-4 family first-lien residential mortgages	$	633	$	1,333	$	801	$	1,206
Commercial real estate		4,875		5,330		4,920		4,733
Commercial lines of credit		543		472		455		442
Other commercial and industrial		861		555		775		505
Home equity and junior liens		295		413		317		428
Other consumer		8		9		9		6
Total	$	7,215	$	8,112	$	7,277	$	7,320

Page - 19 -

Table of Contents

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
	June 30,				June 30,
(In thousands)	2015		2014		2015		2014
1-4 family first-lien residential mortgages	$	5	$	4	$	9	$	9
Commercial real estate		34		27		50		55
Commercial lines of credit		7		-		7		1
Other commercial and industrial		13		7		18		20
Home equity and junior liens		-		3		10		6
Other consumer		-		-		-		-
Total	$	59	$	41	$	94	$	91

Page - 20 -

Table of Contents

Note 7: Allowance for Loan Losses

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 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, 2015
	1-4 family
	first-lien				Residential										Other
	residential				construction			Commercial				Commercial			commercial
(In thousands)	mortgage				mortgage			real estate				lines of credit			and industrial
Allowance for loan losses:
Beginning Balance		$	498			$	-		$	3,165			$	441		$	938
Charge-offs			(27	)			-			-				-			-
Recoveries			38				-			-				25			3
Provisions			35				-			123				51			169
Ending balance		$	544			$	-		$	3,288			$	517		$	1,110
Ending balance: related to loans
individually evaluated for impairment			-				-			1,064				150			220
Ending balance: related to loans
collectively evaluated for impairment		$	544			$	-		$	2,224			$	367		$	890

Loans receivables:
Ending balance		$	175,978			$	3,934		$	126,349			$	18,119		$	42,290
Ending balance: individually
evaluated for impairment			479				-			4,818				612			952
Ending balance: collectively
evaluated for impairment		$	175,499			$	3,934		$	121,530			$	17,508		$	41,337


					Home equity			Other
	Municipal				and junior liens			Consumer				Unallocated			Total
Allowance for loan losses:
Beginning Balance		$	4			$	329		$	87			$	-		$	5,462
Charge-offs			-				-			(12	)			-			(39	)
Recoveries			-				-			10				-			76
Provisions			1				2			20				-			401
Ending balance		$	5			$	331		$	105			$	-		$	5,900
Ending balance: related to loans
individually evaluated for impairment			-				5			-				-			1,439
Ending balance: related to loans
collectively evaluated for impairment		$	5			$	326		$	105			$	-		$	4,461

Loans receivables:
Ending balance		$	9,606			$	22,591		$	4,610						$	403,477
Ending balance: individually
evaluated for impairment			-				294			7							7,162
Ending balance: collectively
evaluated for impairment		$	9,606			$	22,298		$	4,603						$	396,315

Page - 21 -

Table of Contents

	For the six months ended June 30, 2015
	1-4 family
	first-lien				Residential												Other
	residential				construction				Commercial				Commercial				commercial
(In thousands)	mortgage				mortgage				real estate				lines of credit				and industrial
Allowance for loan losses:
Beginning Balance		$	509			$	-			$	2,801			$	460			$	1,034
Charge-offs			(165	)			-				(29	)			(10	)			(108	)
Recoveries			38				-				-				36				5
Provisions			162				-				516				31				179
Ending balance		$	544			$	-			$	3,288			$	517			$	1,110


					Home equity				Other
	Tax exempt				and junior liens				consumer				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	3			$	388			$	98			$	56			$	5,349
Charge-offs			-				-				(32	)			-				(344	)
Recoveries			-				7				25				-				111
Provisions			2				(64	)			14				(56	)			784
Ending balance		$	5			$	331			$	105			$	-			$	5,900

Page - 22 -

Table of Contents

	For the three months ended June 30, 2014
	1-4 family
	first-lien				Residential												Other
	residential				construction				Commercial				Commercial				commercial
(In thousands)	mortgage				mortgage				real estate				lines of credit				and industrial
Allowance for loan losses:
Beginning Balance		$	604			$	-			$	2,436			$	523			$	974
Charge-offs			(30	)			-				-				-				(95	)
Recoveries			1				-				-				1				2
Provisions			(84	)			-				188				30				(30	)
Ending balance		$	491			$	-			$	2,624			$	554			$	851
Ending balance: related to loans
individually evaluated for impairment			-				-				681				229				118
Ending balance: related to loans
collectively evaluated for impairment		$	491			$	-			$	1,943			$	325			$	733

Loans receivables:
Ending balance		$	169,095			$	1,444			$	109,381			$	16,127			$	33,674
Ending balance: individually
evaluated for impairment			1,312				-				5,260				468				505
Ending balance: collectively
evaluated for impairment		$	167,783			$	1,444			$	104,121			$	15,659			$	33,169


					Home equity				Other
	Municipal				and junior liens				Consumer				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	1			$	432			$	102			$	(73	)		$	4,999
Charge-offs			-				-				(9	)			-				(134	)
Recoveries			-				-				22				-				26
Provisions			-				(10	)			(6	)			187				275
Ending balance		$	1			$	422			$	109			$	114			$	5,166
Ending balance: related to loans
individually evaluated for impairment			-				34				7				-				1,069
Ending balance: related to loans
collectively evaluated for impairment		$	1			$	388			$	102			$	114			$	4,097

Loans receivables:
Ending balance		$	3,122			$	21,554			$	4,144							$	358,541
Ending balance: individually
evaluated for impairment			-				371				15								7,931
Ending balance: collectively
evaluated for impairment		$	3,122			$	21,183			$	4,129							$	350,610

Page - 23 -

Table of Contents

	For the six months ended June 30, 2014
	1-4 family
	first-lien				Residential												Other
	residential				construction				Commercial				Commercial				commercial
(In thousands)	mortgage				mortgage				real estate				lines of credit				and industrial
Allowance for loan losses:
Beginning Balance		$	649			$	-			$	2,302			$	397			$	834
Charge-offs			(42	)			-				(47	)			(85	)			(153	)
Recoveries			1				-				-				3				3
Provisions			(117	)			-				369				239				167
Ending balance		$	491			$	-			$	2,624			$	554			$	851

					Home equity				Other
	Municipal				and junior liens				consumer				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	2			$	433			$	136			$	288			$	5,041
Charge-offs			-				(50	)			(60	)			-				(437	)
Recoveries			-				-				35				-				42
Provisions			(1	)			39				(2	)			(174	)			520
Ending balance		$	1			$	422			$	109			$	114			$	5,166

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.

			June 30,					December 31,
(Dollars in thousands)	Number of properties		2015			Number of properties		2014
Foreclosed real estate
Foreclosed residential mortgage loans		5		$	361		4		$	261

At June 30, 2015, the Company reported $215,000 in residential real estate loans in the process of foreclosure.

Note 9: Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit 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 $1.6 million of standby letters of credit as of June 30, 2015. 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:

Page - 24 -

Table of Contents

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 securities available-for-sale 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.

Interest rate swap derivative: The fair value of the interest rate swap derivative is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The curve utilized for discounting and projecting 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.

Page - 25 -

Table of Contents

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, 2015
											Total Fair
(In thousands)	Level 1			Level 2				Level 3			Value
Available-for-sale portfolio
Debt investment securities:
US Treasury, agencies and GSEs		$	-		$	28,740			$	-		$	28,740
State and political subdivisions			-			8,218				-			8,218
Corporate			-			18,280				-			18,280
Residential mortgage-backed - US agency			-			29,301				-			29,301
Collateralized mortgage obligations - US agency			-			15,852				-			15,852
Equity investment securities:
Mutual funds:
Ultra short mortgage fund			645			-				-			645
Large cap equity fund			624			-				-			624
Other mutual funds			-			409				-			409
Common stock - financial services industry			43			249				-			292
Total available-for-sale securities		$	1,312		$	101,049			$	-		$	102,361

Interest rate swap derivative		$	-		$	(57	)		$	-		$	(57	)


	December 31, 2014
											Total Fair
(In thousands)	Level 1			Level 2				Level 3			Value
Available-for-sale portfolio
Debt investment securities:
US Treasury, agencies and GSEs		$	-		$	17,750			$	-		$	17,750
State and political subdivisions			-			8,443				-			8,443
Corporate			-			13,860				-			13,860
Residential mortgage-backed - US agency			-			30,575				-			30,575
Collateralized mortgage obligations - US agency			-			15,476				-			15,476
Equity investment securities:
Mutual funds:
Ultra short mortgage fund			648			-				-			648
Large cap equity fund			649			-				-			649
Other mutual funds			-			379				-			379
Common stock - financial services industry			43			250				-			293
Total available-for-sale securities		$	1,340		$	86,733			$	-		$	88,073

Interest rate swap derivative		$	-		$	(82	)		$	-		$	(82	)

Page - 26 -

Table of Contents

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014:

	June 30, 2015
										Total Fair
(In thousands)	Level 1			Level 2			Level 3			Value
Impaired loans		$	-		$	-		$	1,794		$	1,794
Foreclosed real estate		$	-		$	-		$	52		$	52


	December 31, 2014
										Total Fair
(In thousands)	Level 1			Level 2			Level 3			Value
Impaired loans		$	-		$	-		$	1,277		$	1,277
Foreclosed real estate		$	-		$	-		$	105		$	105

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 30,2015
Impaired loans	Appraisal of collateral	Appraisal Adjustments	5% - 20% (11%)
	(Sales Approach)	Costs to Sell	7% - 15% (12%)
	Discounted Cash Flow

Foreclosed real estate	Appraisal of collateral	Appraisal Adjustments	15% - 15% (15%)
	(Sales Approach)	Costs to Sell	6% - 8% (7%)


		Quantitative Information about Level 3 Fair Value Measurements

	Valuation	Unobservable	Range
	Techniques	Input	(Weighted Avg.)
At December 31, 2014
Impaired loans	Appraisal of collateral	Appraisal Adjustments	5% - 25% (13%)
	(Sales Approach)	Costs to Sell	6% - 50% (13%)
	Discounted Cash Flow

Foreclosed real estate	Appraisal of collateral	Appraisal Adjustments	15% - 15% (15%)
	(Sales Approach)	Costs to Sell	6% - 8% (7%)

There have been no transfers of assets into or out of any fair value measurement level during the quarter ended June 30, 2015.

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.

Page - 27 -

Table of Contents

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.

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 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.

Investment securities – The fair values of securities available-for-sale and held-to-maturity are obtained from an independent third party and are based on quoted prices on nationally recognized exchange 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.

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.

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.

Page - 28 -

Table of Contents

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.

Junior subordinated debentures – The Company secures a quote from its pricing service based on a discounted cash flow methodology which results in a Level 2 classification for this borrowing.

Interest rate swap derivative – The fair value of the interest rate swap derivative is obtained from a third party pricing agent and is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value hierarchy.

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, 2015				December 31, 2014
	Fair Value		Carrying		Estimated		Carrying		Estimated
(Dollars In thousands)	Hierarchy		Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and cash equivalents		1	$	17,410	$	17,410	$	11,356	$	11,356
Investment securities - available-for-sale		1		1,312		1,312		1,340		1,340
Investment securities - available-for-sale		2		101,049		101,049		86,733		86,733
Investment securities - held-to-maturity		2		43,893		44,875		40,875		42,139
Federal Home Loan Bank stock		2		3,356		3,356		3,454		3,454
Net loans		3		397,511		402,856		382,189		388,151
Accrued interest receivable		1		1,966		1,966		1,849		1,849

Financial liabilities:
Demand Deposits, Savings, NOW and MMDA		1	$	308,938	$	308,938	$	263,004	$	263,004
Time Deposits		2		148,637		148,543		152,564		152,457
Borrowings		2		62,000		62,078		66,100		66,282
Junior subordinated debentures		2		5,155		4,576		5,155		4,799
Accrued interest payable		1		60		60		63		63
Interest rate swap derivative		2		57		57		82		82

Note 11: Interest Rate Derivatives

Derivative instruments are entered into primarily as a risk management tool of the Company. Financial derivatives are recorded at fair value as other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any ineffective portion of a cash flow hedge is recognized currently in earnings. See Note 10 for further discussion of the fair value of the interest rate derivative.

Page - 29 -

Table of Contents

The Company has $5.0 million of floating rate trust preferred debt indexed to 3-month LIBOR. As a result, it is exposed to variability in cash flows related to changes in projected interest payments caused by changes in the benchmark interest rate. During the fourth quarter of fiscal 2009, the Company entered into an interest rate swap agreement, with a $2.0 million notional amount, to convert a portion of the variable-rate junior subordinated debentures to a fixed rate for a term of approximately 7 years at a rate of 4.96%. The derivative is designated as a cash flow hedge. The hedging strategy ensures that changes in cash flows from the derivative will be highly effective at offsetting changes in interest expense from the hedged exposure.

The following table summarizes the fair value of the outstanding derivative and its presentation on the statements of condition:

	June 30,			December 31,
(In thousands)	2015			2014
Cash flow hedge:
Other liabilities		$	57		$	82

The change in accumulated other comprehensive loss on a pretax basis and the impact on earnings from the interest rate swap that qualifies as a cash flow hedge for the periods indicated below were as follows:

	Three months ended June 30,
(In thousands)	2015			2014
Balance as of March 31:	$	(67	)	$	(123	)
Amount of (gains) recognized in other comprehensive income		(5	)		(4	)
Amount of loss reclassified from other comprehensive income
and recognized as interest expense		15			15
Balance as of June 30:	$	(57	)	$	(112	)


	Six months ended June 30,
(In thousands)		2014			2014
Balance as of December 31:	$	(82	)	$	(135	)
Amount of losses recognized in other comprehensive income		(6	)		(7	)
Amount of loss reclassified from other comprehensive income
and recognized as interest expense		31			30
Balance as of June 30:	$	(57	)	$	(112	)

No amount of ineffectiveness has been included in earnings and the changes in fair value have been recorded in other comprehensive (loss) income. Some, or all, of the amount included in accumulated other comprehensive (loss) income would be reclassified into current earnings should a portion of, or the entire hedge no longer be considered effective, but at this time, management expects the hedge to remain fully effective during the remaining term of the swap.

The Company posted cash of $201,000 under arrangements to satisfy collateral requirements associated with the interest rate swap contract.

Page - 30 -

Table of Contents

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 table below.

	For the three months ended June 30, 2015
(In thousands)	Retirement Plans				Unrealized Gains and Losses on Financial Derivative				Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Loss on Securities Transferred to Held-to-Maturity				Total
Beginning balance		$	(1,767	)		$	(40	)		$	705			$	(713	)		$	(1,815	)
Other comprehensive (loss) income before reclassifications			-				(3	)			(527	)			19				(511	)
Amounts reclassified from AOCI			27				9				(29	)			-				7
Ending balance		$	(1,740	)		$	(34	)		$	149			$	(694	)		$	(2,319	)
	For the six months ended June 30, 2015
(In thousands)	Retirement Plans				Unrealized Gains and Losses on Financial derivative				Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Loss on Securities Transferred to Held-to-Maturity				Total
Beginning balance		$	(1,794	)		$	(49	)		$	457			$	(733	)		$	(2,119	)
Other comprehensive (loss) income before reclassifications			-				(4	)			(248	)			39				(213	)
Amounts reclassified from AOCI			54				19				(60	)			-				13
Ending balance		$	(1,740	)		$	(34	)		$	149			$	(694	)		$	(2,319	)

	For the three months ended June 30, 2014
(In thousands)	Retirement Plans			Unrealized Gains and Losses on Financial derivative			Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Loss on Securities Transferred to Held-to-Maturity			Total
Beginning balance	$	(975	)	$	(74	)	$	290		$	(763	)	$	(1,522	)
Other comprehensive (loss) income before reclassifications		-			(2	)		185			18			201
Amounts reclassified from AOCI		6			9			(14	)		-			1
Ending balance	$	(969	)	$	(67	)	$	461		$	(745	)	$	(1,320	)
	For the six months ended June 30, 2014
(In thousands)	Retirement Plans			Unrealized Gains and Losses on Financial derivative			Unrealized Gains and Losses on Available-for-Sale Securities			Securities reclassified from AFS to HTM			Total
Beginning balance	$	(982	)	$	(81	)	$	99		$	(781	)		(1,745	)
Other comprehensive (loss) income before reclassifications		-			(4	)		378			36			410
Amounts reclassified from AOCI		13			18			(16	)		-			15
Ending balance	$	(969	)	$	(67	)	$	461		$	(745	)	$	(1,320	)

Page - 31 -

Table of Contents

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

	Amount Reclassified							Amount Reclassified
	from AOCI¹							from AOCI¹
	(Unaudited)
(In thousands)	For the three months ended							For the six months ended
Details about AOCI¹ components	June 30, 2015			June 30, 2014			Affected Line Item in the Statement of Income	June 30, 2015			June 30, 2014

Unrealized holding gain on financial derivative:
Reclassification adjustment for
interest expense included in net income	$	(15	)	$	(15	)	Interest on long term borrowings	$	(31	)	$	(30	)
		6			6		Provision for income taxes		12			12
	$	(9	)	$	(9	)	Net Income	$	(19	)	$	(18	)
Retirement plan items
Retirement plan net losses
recognized in plan expenses²	$	(45	)	$	(11	)	Salaries and employee benefits	$	(90	)	$	(22	)
		18			5		Provision for income taxes		36			9
	$	(27	)	$	(6	)	Net Income	$	(54	)	$	(13	)

Available-for-sale securities
Realized gain on sale of securities	$	49		$	24		Net gains on sales and redemptions of investment securities	$	101		$	26
		(20	)		(10	)	Provision for income taxes		(41	)		(10	)
	$	29		$	14		Net Income	$	60		$	16

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.

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 primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York savings bank, which is 100% owned by the Company and the Company is 100% owned by public shareholders. At June 30, 2015, the Company had 4,352,203 shares of common stock outstanding. The Bank has four wholly owned operating subsidiaries, Pathfinder Commercial Bank, Pathfinder Risk Management Company, Inc. ("PRMC"), Pathfinder REIT, Inc. and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC ("FitzGibbons"), 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 noncontrolling interests within the consolidated financial statements. At June 30, 2015, the Company and subsidiaries had total assets of $600.3 million, total liabilities of $530.3 million and shareholders' equity of $69.7 million plus noncontrolling interest of $403,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at June 30, 2015 and the results of operations for the three and six month periods ended June 30, 2015 and 2014. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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 as of December 31, 2014 and 2013 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.

Page - 32 -

Table of Contents

Statement Regarding Forward-Looking Statements

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:

·	general economic conditions, either nationally or in our market area, that are worse than expected;

·	inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

·	increased competitive pressures among financial services companies;

·	changes in consumer spending, borrowing and savings habits;

·	our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;

·	legislative or regulatory changes that may adversely affect our business;

·	adverse changes in the securities markets;

·	changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Securities and Exchange Commission;

·	inability of third-party providers to perform their obligations to us; and

·	changes in our organization, compensation and benefit plans.

Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company's loan or investment portfolios. 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.

Application of Critical Accounting Policies

Page - 33 -

Table of Contents

The most significant accounting policies followed by the Company are presented in Note 1 to the annual audited consolidated financial statements included in the 2014 Annual Report filed with the Securities and Exchange Commission on Form 10-K on March 18, 2015, ("the 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 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 evaluation of goodwill for impairment, and the estimation of fair values for accounting and disclosure purposes 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.

The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being impaired which are on nonaccrual and have been risk rated under the Company's risk rating system as substandard, doubtful, or loss. In addition, an accruing substandard loan could be identified as being impaired. Impairment is measured by either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of the Company's impaired loans and leases utilize the fair value of the underlying collateral.

·	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.

The loan portfolio also represents the largest asset type on the consolidated statement of condition. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses.

Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The affect 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. A valuation allowance of $458,000 was maintained at June 30, 2015, as management believes it may not generate sufficient capital gains to offset its capital loss carry forward. The Company's effective tax rate differs from the statutory rate due primarily to non-taxable income from investment securities and bank owned life insurance.

We maintain a noncontributory defined benefit pension plan covering substantially all 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 12 to the consolidated annual financial statements.

Page - 34 -

Table of Contents

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, 2014 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. The evaluation approach is described in Note 9 of the annual audited consolidated financial statements. Further information on the estimation of fair values can be found in Note 20 to the annual audited consolidated 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 security 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 security (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 not sufficient 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 rating agency, 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 investment securities available-for-sale, the interest rate derivative, intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the annual audited consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.

Fair values for securities available-for-sale are obtained from an independent third party pricing service. 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 source. 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.

Recent Events

Page - 35 -

Table of Contents

On June 25, 2015, the Company announced that its Board of Directors declared a quarterly dividend of $0.03 per common share. The dividend is payable on August 3, 2015 to shareholders of record on July 15, 2015.

Overview and Results of Operations

The following represents the significant highlights of the Company's operating results between the second quarter of 2015 and the second quarter of 2014.

·	Net income improved by 2.7% to $694,000.

·	Basic and diluted earnings per share improved by $0.01 to $0.16 per share due to the increase in earnings. Return on average assets decreased 3 basis points to 0.46%.

Net interest income increased 13.6% to $4.7 million due to our increase in asset size. Net interest margin decreased slightly by 1 basis point to 3.33%, but was offset by the increase in average balances of interest earning assets and the decrease in average rates paid on time deposits and borrowings.

The following represents significant highlights of the Company's operating results between the first six months of 2015 and the first six months of 2014.

·	Net income improved by 5.0% to $1.2 million.

·	Basic and diluted earnings per share improved by $0.01 to $0.28 per share. Return on average assets decreased by 3 basis points to 0.41% as the increase in average assets outpaced the increased in net income.

·	Net interest income increased 12.8% to $9.2 million. Net interest margin decreased by 5 basis points to 3.31% as the decrease in average yield on interest earning assets was greater than the decrease in average rates paid on time deposits and borrowings.

Asset quality exhibited signs of improvement between December 31, 2014 and June 30, 2015. Delinquencies decreased, the ratio of annualized net loan charge-offs to average loans decreased by 13 basis points to 0.12%, and the ratio of nonperforming loans to period end loans decreased by 5 basis points to 1.56%. Offsetting these improvements was the need for an increase in specific reserves on impaired loans from $917,000 to $1.4 million due to two large commercial relationships.

The following reflects the changes in financial condition between December 31, 2014 and June 30, 2015.

·	Total assets increased 7.0% to $600.3 million. Increases were recorded in investment securities, loans, and cash and equivalents. This was funded largely by the increases in Money Market Deposit Accounts ("MMDA") and business and municipal demand deposits.

·	Gross loans reported an increase of 4.1% to $403.4 million.

We had net income of $694,000 for the three months ended June 30, 2015 compared to net income of $676,000 for the three months ended June 30, 2014. The increase in net income was due primarily to a $561,000 increase in net interest income as a result of the increase in average interest-earning asset balances and the decrease in the average cost of interest-bearing liabilities between year over year second quarter periods. Offsetting these improvements to net income was a $126,000 increase in provision for loan losses and a $469,000 increase in noninterest expenses.

Return on average assets decreased 3 basis points to 0.46% between the year over year second quarter periods as the increase in net income (the numerator in the ratio) was outpaced by the increase in average assets (the denominator in the ratio). Average assets increased due to the increase in average deposits seen in the second quarter of 2015 as compared to the second quarter of 2014. Average deposits increased in the second quarter of 2015 due to the MMDA promotion and the increase in average NOW account balances due principally to one large IOLA relationship.

Page - 36 -

Table of Contents

Net income for the six months ended June 30, 2015 was $1.2 million, an increase of $58,000 or 5.0% over the comparable prior year period. The increase in net income was primarily due to the increase in net interest income of $1.0 million resulting from higher average balances of interest earning assets and a decrease in average rates paid on interest bearing liabilities. The increase in net interest income was partially offset by the $264,000 increase in provision for loan losses and a $786,000 increase in noninterest expense.

Return on average assets decreased 3 basis points to 0.41% between the year over year six month periods due to reasons similar to those mentioned during the year over year second quarter comparisons.

Page - 37 -

Table of Contents

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.

The following tables set forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and resultant yield information in the tables 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. The prior year has been reclassified so as not to include adjustments for tax equivalency. Additionally, the prior year has been reclassified to include Fed funds sold to be categorized with interest-earning deposits.

	For the three months ended June 30,
	2015								2014
						Average								Average
	Average					Yield /			Average					Yield /
(Dollars in thousands)	Balance			Interest		Cost			Balance			Interest		Cost
Interest-earning assets:
Loans	$	395,934		$	4,551		4.60	%	$	352,280		$	4,104		4.66	%
Taxable investment securities		124,068			556		1.79	%		106,602			483		1.81	%
Tax-exempt investment securities		27,906			190		2.72	%		26,960			194		2.88	%
Interest-earning time deposit		-			-		0.00	%		500			2		1.60	%
Fed funds sold and Interest-earning deposits		14,330			5		0.14	%		6,223			1		0.06	%
Total interest-earning assets		562,238			5,302		3.77	%		492,565			4,784		3.88	%
Noninterest-earning assets:
Other assets		40,535								39,106
Allowance for loan losses		(5,605	)							(5,077	)
Net unrealized gains
on available-for sale-securities		1,075								723
Total assets	$	598,243							$	527,317
Interest-bearing liabilities:
NOW accounts	$	48,655		$	21		0.17	%	$	37,342		$	16		0.17	%
Money management accounts		13,184			5		0.15	%		13,342			5		0.15	%
MMDA accounts		128,883			160		0.50	%		98,551			96		0.39	%
Savings and club accounts		76,095			16		0.08	%		74,793			16		0.09	%
Time deposits		148,358			281		0.76	%		159,982			364		0.91	%
Junior subordinated debentures		5,155			40		3.10	%		5,155			41		3.18	%
Borrowings		42,140			100		0.95	%		35,842			128		1.43	%
Total interest-bearing liabilities		462,470			623		0.54	%		425,007			666		0.63	%
Noninterest-bearing liabilities:
Demand deposits		60,970								54,269
Other liabilities		4,241								3,602
Total liabilities		527,681								482,878
Shareholders' equity		70,562								44,439
Total liabilities & shareholders' equity	$	598,243							$	527,317
Net interest income				$	4,679							$	4,118
Net interest rate spread							3.23	%							3.25	%
Net interest margin							3.33	%							3.34	%
Ratio of average interest-earning assets
to average interest-bearing liabilities							121.57	%							115.90	%

Page - 38 -

Table of Contents

	For the six months ended June 30,
	2015								2014
						Average								Average
	Average					Yield /			Average					Yield /
(Dollars in thousands)	Balance			Interest		Cost			Balance			Interest		Cost
Interest-earning assets:
Loans	$	392,636		$	8,950		4.56	%	$	349,003		$	8,168		4.68	%
Taxable investment securities		121,398			1,044		1.72	%		100,514			936		1.86	%
Tax-exempt investment securities		28,327			387		2.73	%		27,053			389		2.88	%
Interest-earning time deposit		-			-		0.00	%		500			4		1.60	%
Fed funds sold and interest-earning deposits		13,239			7		0.11	%		7,012			2		0.06	%
Total interest-earning assets		555,600			10,388		3.74	%		484,082			9,499		3.92	%
Noninterest-earning assets:
Other assets		39,889								38,964
Allowance for loan losses		(5,490	)							(5,082	)
Net unrealized gains
on available for sale securities		977								590
Total assets	$	590,976							$	518,554
Interest-bearing liabilities:
NOW accounts	$	46,724		$	39		0.17	%	$	39,086		$	33		0.17	%
Money management accounts		13,066			10		0.15	%		13,327			10		0.15	%
MMDA accounts		115,287			270		0.47	%		94,529			190		0.40	%
Savings and club accounts		75,351			31		0.08	%		74,865			31		0.08	%
Time deposits		156,049			578		0.74	%		155,946			762		0.98	%
Junior subordinated debentures		5,155			80		3.10	%		5,155			80		3.10	%
Borrowings		44,844			198		0.88	%		35,055			254		1.45	%
Total interest-bearing liabilities		456,476			1,206		0.53	%		417,963			1,360		0.65	%
Noninterest-bearing liabilities:
Demand deposits		61,061								53,167
Other liabilities		3,248								3,563
Total liabilities		520,785								474,693
Shareholders' equity		70,191								43,861
Total liabilities & shareholders' equity	$	590,976							$	518,554
Net interest income				$	9,182							$	8,139
Net interest rate spread							3.21	%							3.27	%
Net interest margin							3.31	%							3.36	%
Ratio of average interest-earning assets
to average interest-bearing liabilities							121.72	%							115.82	%

As indicated in the above tables, net interest income increased $561,000, or 13.6%, to $4.7 million for the three months ended June 30, 2015 as compared to the same prior year period due principally to the increase in average balances of interest earning assets and the decrease in average rates paid on average time deposits and borrowings. Net interest margin reported a nominal decrease of 1 basis point to 3.33% due largely to the decrease in average yields earned on all of the Company's major interest earning assets. 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.

Interest income increased $518,000, or 10.8%, to $5.3 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase in interest income was due principally to the increase in average balances of loans and taxable investment securities which increased 12.4% and 16.4%, respectively, between the year over year second quarter periods. The increase in the average balances of loans reflects the Company's continued success in its expansion within the greater Syracuse market in conjunction with organic growth as a result of our new Syracuse business banking office which opened in the third quarter of 2014. These increases helped offset the decrease in average yield on each of these interest earning assets as the yield on loans decreased 6 basis points and the yield on taxable investment securities decreased 2 basis points between these same two periods. The decrease in the yield on loans was the result of those loans maturing at higher rates and being replaced by new loans at the lower current market rates. The decrease in the average yield on taxable investment securities was the result of maturing taxable investment securities and new purchases at the current lower market rates and with durations less than those within the Company's portfolio during the second quarter of 2014.

Page - 39 -

Table of Contents

Interest expense for the three months ended June 30, 2015 decreased $43,000, or 6.5%, to $623,000 when compared to the same prior year period. This decrease was primarily due to the decrease in average rates paid on time deposits as maturing certificates of deposit at higher rates were replaced with certificates of deposit at the current lower market rates. Also contributing to the decrease in total interest expense was the decrease in average rates paid on FHLBNY advances due, similarly, to higher rate long term maturing advances being replaced with advances of shorter duration and at the current lower market rates.

For the six month period ended June 30, 2015, interest income increased $889,000, or 9.4%, to $10.4 million compared to the same prior year period. The increase in interest income was due primarily to the increase in average balances of loans and taxable investment securities, which increased 12.5% and 20.8%, respectively. The increase in the average balances of loans was the direct result of the Company's success in filling the borrowing needs of credit worthy customers within our established market areas and our successful entry into the greater Syracuse marketplace. Partially offsetting the interest income generated by the increases in average balances of these two product segments were decreases in average yields on these two product segments of 12 basis points and 14 basis points, respectively, and for reasons similar to those cited previously for the decrease in yields for the second quarter year over year comparisons.

Interest expense for the six months ended June 30, 2015 decreased $154,000 or 11.3% to $1.2 million due principally to the 24 basis points reduction on average rates paid on time deposits. Additionally, interest expense on borrowings decreased $56,000 due principally to the decrease of 57 basis points in average rates paid on FHLBNY advances, partially offset by the $9.8 million increase in average balances of FHLBNY advances.

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 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.

Page - 40 -

Table of Contents

	Three months ended June 30,									Six months ended June 30,
	2015 vs. 2014									2015 vs. 2014
	Increase/(Decrease) Due to									Increase/(Decrease) Due to
							Total									Total
							Increase									Increase
(In thousands)	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
Interest Income:
Loans	$	799		$	(352	)	$	447		$	1,351		$	(569	)	$	782
Taxable investment securities		108			(35	)		73			288			(180	)		108
Tax-exempt investment securities		31			(35	)		(4	)		37			(39	)		(2	)
Interest-earning time deposits		(1	)		(1	)		(2	)		(2	)		(2	)		(4	)
Interest-earning deposits		2			2			4			3			2			5
Total interest income		939			(421	)		518			1,677			(788	)		889
Interest Expense:
NOW accounts		5			-			5			7			(1	)		6
Money management accounts		-			-			-			-			-			-
MMDA accounts		34			30			64			46			34			80
Savings and club accounts		1			(1	)		-			-			-			-
Time deposits		(25	)		(58	)		(83	)		2			(186	)		(184	)
Junior subordinated debentures		-			(1	)		(1	)		-			-			-
Borrowings		108			(136	)		(28	)		142			(198	)		(56	)
Total interest expense		123			(166	)		(43	)		197			(351	)		(154	)
Net change in net interest income	$	816		$	(255	)	$	561		$	1,480		$	(437	)	$	1,043

Provision for Loan Losses

We established 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.

We recorded $401,000 in provision for loan losses for the three month period ended June 30, 2015, as compared to $275,000 for the three month period ended June 30, 2014. The increase in the provision for loan losses was due principally to the need for approximately $345,000 in additional specific reserves related to one newly impaired large commercial borrower with a total related credit of $891,000 across three loans. In compliance with Company policy, a third party appraisal of collateral value is ordered when any new impaired loan is identified. Additionally, the increase in the provision between these two time periods was due to the 12.4% increase in average loan balances and the estimable and probable loan losses inherent in the loan portfolio.

For the first six months of 2015 we recorded $784,000 in provision for loan losses as compared to $520,000 in the same prior year period. This increase was due primarily to the additional specific reserves required for the commercial relationship discussed in the previous paragraph as well as the need for $371,000 in additional specific reserves on a previously impaired large commercial relationship due to the receipt of updated collateral value information. Additionally, the 12.5% increase in average loan balances between the first six months of 2015 and the first six months of 2014 was responsible for a component of the increase in the provision for loan losses between these two time periods.

Management extensively reviews recent trends in historical losses, environmental factors and specific reserve needs on loans individually evaluated for impairment in its determination of the adequacy of the allowance for loan losses.

Page - 41 -

Table of Contents

We measure delinquency based on the amount of past due loans as a percentage of total loans. Delinquency trends improved to 2.6% at June 30, 2015 as compared to 3.0% at December 31, 2014. This improvement was concentrated in the 60-89 day and 90 days and over past due categories. This improvement was centered in the commercial loan and residential loan product segments. The consumer loan product segment, representing 6.7% of the total loan portfolio, reported a small increase in delinquencies between December 31, 2014 and June 30, 2015.

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:

	Three months ended June 30,										Six months ended June 30,
(Dollars in thousands)	2015			2014		Change					2015			2014		Change
Service charges on deposit accounts	$	288		$	305	$	(17	)	-5.6	%	$	554		$	584	$	(30	)	-5.1	%
Earnings and gain on bank owned life insurance		65			66		(1	)	-1.5	%		149			126		23		18.3	%
Loan servicing fees		41			67		(26	)	-38.8	%		93			120		(27	)	-22.5	%
Debit card interchange fees		136			129		7		5.4	%		259			243		16		6.6	%
Other charges, commissions and fees		377			261		116		44.4	%		665			575		90		15.7	%
Noninterest income before gains		907			828		79		9.5	%		1,720			1,648		72		4.4	%
Net gains on sales and redemptions of investment securities		49			24		25		104.2	%		101			26		75		288.5	%
Net (losses)/gains on sales of loans and foreclosed real estate		(4	)		26		(30	)	-115.4	%		(4	)		30		(34	)	-113.3	%
Total noninterest income	$	952		$	878	$	74		8.4	%	$	1,817		$	1,704	$	113		6.6	%

The increase in total noninterest income between year over year second quarter periods was due largely to the increase in commission income from the FitzGibbons Agency ("Agency") and the investment services business unit, which provides brokerage services. The $72,000 increase in income from the Agency was the direct result of the first quarter acquisition of the Baldwinsville, New York based Huntington Agency. Additionally, commission income from the investment services business unit recorded a year over year second quarter increase of $33,000. Partially offsetting the increases in noninterest income was the decrease in net gains on sales of loans and foreclosed real estate as the second quarter activity recorded a nominal loss as compared to the $26,000 in net gains on the sale of four foreclosed real estate properties in the second quarter of 2014.

The increase in total noninterest income for the six months ended June 30, 2015 as compared to the same prior year period was due to the increase in other charges, commission and fees due principally to the Agency and the Investment Services business unit. Additionally, the Company recorded gains on the sale of five mortgage backed securities and rotated out of lower yielding agency securities that were previously acquired as collateral for a large influx of municipal deposits that was deemed to be temporary.

Page - 42 -

Table of Contents

Noninterest Expense

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

	Three months ended June 30,									Six months ended June 30,
(Dollars in thousands)	2015		2014		Change					2015		2014		Change
Salaries and employee benefits	$	2,356	$	2,187	$	169		7.7	%	$	4,738	$	4,384	$	354		8.1	%
Building occupancy		441		364		77		21.2	%		944		771		173		22.4	%
Data processing		354		399		(45	)	-11.3	%		742		764		(22	)	-2.9	%
Professional and other services		229		173		56		32.4	%		449		348		101		29.0	%
Advertising		114		99		15		15.2	%		236		231		5		2.2	%
FDIC assessments		102		100		2		2.0	%		197		195		2		1.0	%
Audits and exams		59		61		(2	)	-3.3	%		120		125		(5	)	-4.0	%
Other expenses		577		380		197		51.8	%		1,030		852		178		20.9	%
Total noninterest expenses	$	4,232	$	3,763	$	469		12.5	%	$	8,456	$	7,670	$	786		10.2	%

The increase in noninterest expenses between year over year second quarter periods was due principally to an increase in salaries and employee benefits and other expenses. The detail of these components follows;

·	The increase in salaries and employee benefits between the year over year second quarter periods was principally due to wage increases and the operation of the new Syracuse business banking office which opened in the third quarter of 2014.

·	The increase in building occupancy expenses was principally due to $31,000 in additional property taxes, $15,000 in additional building maintenance, and $19,000 in additional lease expense due to the new Syracuse business banking office.

·	The increase in professional and other services expenses was due largely to additional legal and consulting fees.

Other expenses increased in the year over year second quarter periods due principally to community service donations, foreclosure loss accruals, and differences in non-recurring other expenses as the latter recorded a credit in the second quarter of 2014 from the recapture of the prior year's fraud losses.

The increase in noninterest expenses between the six month period ended June 30, 2015 and the same prior year period was principally due to an increase in salaries and employee benefits, building occupancy expenses, and other expenses. The detail of these components follows;

The increase in salaries and employee benefits between these two time periods was due to wage and merit increases and personnel expenses related to the operation of the new Syracuse business banking office, ESOP compensation expenses driven by the increase in market value of our common stock shares, and employee benefits.

·	The increase in building occupancy expenses related to a $62,000 increase in property taxes, $34,000 related to the lease on the new Syracuse business banking office, and $42,000 related to the increase in building maintenance driven by the unusually harsh winter.

·	Other expenses increased due to an additional $87,000 in community service donations, an additional $14,000 in debit rewards expenses and $31,000 in meals and entertainment.

Income Tax Expense

Income tax expense increased by $15,000 for the quarter ended June 30, 2015 as compared to the same period in 2014 primarily due to an increase in pretax income and an increase in the effective tax rate for the year over year second quarter periods. The effective tax rate for the second quarter of 2015 was 29.9%, exclusive of the net income attributable to our controlling interest in the Insurance Agency. For the three-month period ended June 30, 2014, the effective tax rate was 29.1%. The increase in the effective tax rate between the year over year second quarter periods reflected a smaller proportion of tax-exempt items as a proportion of our taxable income in the second quarter of 2015.

Page - 43 -

Table of Contents

Income tax expense increased by $63,000 for the six month period ended June 30, 2015 as compared to the same prior year period due principally to the increase in pretax income and an increase in the effective tax rates between these two periods. The effective tax rate was 30.0% for the first six months of 2015 as compared to 28.6% for the same prior year period, exclusive of the net income attributable to our controlling interest in the Insurance Agency. This increase was due to the same reasons given for the increase in the year over year second quarter periods.

Earnings per Share

Basic and diluted earnings per share were $0.16 for the second quarter of 2015 as compared to $0.15 for the second quarter of 2014. This increase was driven principally by the increase in net income between these two periods.

Basic and diluted earnings per share were $0.28 for the six month period ended June 30, 2015 as compared to $0.27 for the same prior year period. The increase in earnings per share between these two periods was due to the increase in net income between these two time periods, offset partially by the increase in preferred stock dividends. During the first quarter of 2014, the Company incurred a credit on its dividend due to prior updated lending information to the US Treasury, avoiding the need to declare a dividend at that time. Further information on earnings per share can be found in Note 3 to our unaudited consolidated financial statements.

Page - 44 -

Table of Contents

Changes in Financial Condition

Assets

Total assets increased $39.3 million, or 7.0%, to $600.3 million at June 30, 2015 as compared to December 31, 2014. This increase was due primarily to an increase in investment securities, loans, and total cash and cash equivalents.

Investment securities increased $17.3 million, or 13.4%, to $146.3 million at June 30, 2015 due principally to the need to collateralize the increase in municipal deposits between these two dates. Of the total increase in investment securities, $14.3 million was classified within the available-for-sale portfolio. The remaining increase was recorded in the held-to-maturity investment securities portfolio. When new investment securities are acquired, management reviews certain security characteristics and determines the Company's intent and ability to hold the security to maturity. Based on the security characteristics and management's intentions, the security is classified as either available-for-sale or held-to-maturity.

Total loans receivable increased $15.9 million, or 4.1%, to $403.4 million at June 30, 2015 from December 31, 2014. All loan product segments recorded increases between these two dates led by increases in commercial and industrial loans and 1-4 family first-lien residential mortgages. Pathfinder Bank's disciplined customer contact efforts have allowed us to continue to grow in our targeted market areas while maintaining our credit standards.

Liabilities

Total liabilities increased $38.4 million to $530.3 million at June 30, 2015. Deposits increased $42.0 million, or 10.1%, to $457.6 million at June 30, 2015. The increase was due largely to the second quarter MMDA promotion resulting in business and municipal deposit increases. Additionally, demand deposit accounts increased in the business market segment and both demand deposit accounts and NOW accounts increased within the municipal market segment prompted by the seasonal tax collection increase through the first quarter. These increases allowed the total of short term and long term borrowings from the FHLB to be paid down by $4.1 million.

Shareholders' Equity

The Company's shareholders' equity, exclusive of the noncontrolling interest, increased $881,000 to $69.7 million at June 30, 2015 from $68.8 million at December 31, 2014. This increase was principally due to a $911,000 increase in retained earnings offset by a $200,000 increase in accumulated comprehensive loss. The increase in retained earnings resulted from $1.2 million in net income offset by $247,000 in dividends declared on our common stock and $65,000 in dividends declared on our SBLF preferred stock. The increase in accumulated comprehensive loss was the result of the decrease in fair market value of our available for sale investment securities during the second quarter of 2015.

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 subsidiary banks that supports growth and expansion activities while at the same time exceeding regulatory standards. At June 30, 2015, Pathfinder Bank exceeded all regulatory required minimum capital ratios and 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%.

Page - 45 -

Table of Contents

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

													Minimum
													To Be "Well-
							Minimum						Capitalized"
							For Capital						Under Prompt
	Actual						Adequacy Purposes						Corrective Provisions
(Dollars in thousands)	Amount			Ratio			Amount			Ratio			Amount			Ratio
As of June 30, 2015
Total Core Capital (to Risk-Weighted Assets)		$	65,169		16.75	%		$	31,122		8.00	%		$	38,902		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		$	60,115		15.45	%		$	23,341		6.00	%		$	31,122		8.00	%
Tier 1 Common Equity (to Risk-Weighted Assets)		$	60,115		15.45	%		$	17,506		4.50	%		$	25,286		6.50	%
Tier 1 Capital (to Assets)		$	60,115		10.12	%		$	23,749		4.00	%		$	29,687		5.00	%
As of December 31, 2014:
Total Core Capital (to Risk-Weighted Assets)		$	63,831		16.60	%		$	30,754		8.00	%		$	38,443		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		$	58,842		15.31	%		$	15,377		4.00	%		$	23,066		6.00	%
Tier 1 Capital (to Assets)		$	58,842		10.55	%		$	22,302		4.00	%		$	27,878		5.00	%

Loan and Asset Quality and Allowance for Loan Losses

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

	June 30,			December 31,			June 30,
(Dollars In thousands)	2015			2014			2014
Nonaccrual loans:
Commercial loans	$	4,871		$	4,030		$	3,658
Consumer		320			324			316
Residential mortgage loans		1,088			1,902			2,475
Total nonaccrual loans		6,279			6,256			6,449
Total nonperforming loans		6,279			6,256			6,449
Foreclosed real estate		361			261			770
Total nonperforming assets	$	6,640		$	6,517		$	7,219

Troubled debt restructurings not included above	$	1,963		$	2,219		$	1,949

Nonperforming loans to total loans		1.56	%		1.61	%		1.80	%
Nonperforming assets to total assets		1.11	%		1.16	%		1.33	%

Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings ("TDR"), and foreclosed real estate. 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 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 following categories of nonaccrual loans or TDRs not included above (the latter also known as accruing TDRs).

As indicated in the table above, nonperforming assets at June 30, 2015 were $6.6 million and slightly higher than the $6.5 million reported at December 31, 2014, due primarily to an increase of $841,000 of nonperforming commercial loans. This increase in nonperforming commercial loans was partially offset by an improvement, between these between these two dates, within the residential mortgage loan product segment as both the number and dollar amount of nonperforming residential mortgages decreased.

As indicated in the nonperforming asset table above, foreclosed real estate ("FRE") balances increased at June 30, 2015 from December 31, 2014 due to the addition of one residential mortgage property. There were no foreclosed commercial real estate properties at either of these two dates. More information regarding foreclosed real estate can be found in Note 8 to our unaudited consolidated financial statements.

Page - 46 -

Table of Contents

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, and in accordance with Accounting Standards Update 2014-04, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate's fair value less costs to sell. Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis for the FRE property.

The allowance for loan losses represents management's estimate of the probable losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for loan losses was $5.9 million and $5.3 million at June 30, 2015 and December 31, 2014, respectively. The Company reported an increase in the ratio of the allowance for loan losses to gross loans to 1.46% at June 30, 2015 as compared to 1.38% at December 31, 2014. The increase was due, in part, to the increase in the specific reserves on impaired loans between these two dates. 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, 2015.

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 Pathfinder 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 are discounted due to the market's perception of a reduced price Bank-owned property and the Bank's desire to sell the property quicker 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, 2015 and December 31, 2014, the Company had $7.2 million and $7.4 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $1.4 million and $917,000, respectively, on these loans. The decrease in impaired loans between these two dates was driven by the decrease in impaired 1-4 family first lien residential mortgages, and partially offset by an increase in impaired loans within the commercial lines of credit and other commercial and industrial loan classes. The increase in the specific reserves between these two dates was due largely to the increase in the specific reserve of approximately $345,000 on one large newly impaired commercial relationship as a result of receipt of updated collateral value information.

Page - 47 -

Table of Contents

Management has identified potential problem loans totaling $11.4 million as of June 30, 2015 and $3.0 million greater than the $8.4 million in potential problem loans reported at December 31, 2014. The increase was principally due to the addition of one large commercial relationship across two loans totaling $2.6 million rated as special mention. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. Management has identified potential credit problems which required heightened management attention and may result in the borrowers not being able to comply with the current loan repayment terms and which may result in it being included in future impaired loan reporting.

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, Pathfinder Bank has infrequently sold residential mortgage loans and participation interests in commercial loans. As is typical in the industry, Pathfinder Bank makes certain representations and warranties to the buyer. Pathfinder Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal.

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, whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans.

Through the first six months of 2015, as indicated in the Consolidated Statement of Cash Flows, the Company reported net cash flows from financing activities of $37.6 million generated principally by increased balances of demand, savings and money market deposit accounts. This increase was the result of organic growth and new customer relationships within our existing marketplace concentrated in the business and municipal customer segments coupled with targeted promotions for our MMDA product. This was invested in purchases of investment securities of $18.1 million, net of proceeds from maturities, sales and redemptions. In addition, $16.5 million was invested in new loan generation. Net cash flows from operating activities provided an additional $3.5 million through the first six months of 2015 resulting in an increase in cash and equivalents of $6.1 million through this time period. As a recurring source of liquidity, the Company's investment securities provided $17.9 million in proceeds from maturities and principal reductions through the first six months of 2015.

The Company has a number of existing credit facilities available to it. At June 30, 2015, total credit available to the Company under the existing lines of credit was approximately $157.0 million at FHLBNY, the Federal Reserve Bank, and three other correspondent banks. At June 30, 2015, the Company had $62.0 million outstanding on its existing lines of credit with $95.0 million available.

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, 2015, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Page - 48 -

Table of Contents

Item 4 – Controls and Procedures

Under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There has been no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting.

Page - 49 -

Table of Contents

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

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

None

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

32.1 Section 1350 Certification of the Chief Executive Officer and Chief Financial

Officer

101

The following materials from Pathfinder Bancorp, Inc. Form 10-Q for the quarter ended June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Financial Condition, (iii) Consolidated Statements of Cash Flows, and (iv) related notes

Page - 50 -

Table of Contents

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 13, 2015 /s/ Thomas W. Schneider

Thomas W. Schneider

President and Chief Executive Officer

August 13, 2015 /s/ James A. Dowd

James A. Dowd

Senior Vice President and Chief Financial Officer

Page - 51 -