UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
_____________________________


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2015

Commission File No. 001-36695
PATHFINDER BANCORP, INC.
(Exact name of registrant as specified in its charter)
     
Maryland
 
38-3941859
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
214 West First Street
Oswego, NY 13126
 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (315 ) 343-0057
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
  Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
  Yes ☒ 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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

             
Large Accelerated Filer ☐
 
Accelerated Filer ☐
 
Non-Accelerated Filer ☐
 
Smaller reporting company ☒
   
 (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 Act). Yes ☐ No ☒

As of May 8, 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.
   
   
3
   
4
   
5
   
6
   
7
   
8
       
Item 2.
 
32
 
and Results of Operations (Unaudited)
   
       
Item 3.
 
44
       
Item 4.
 
45
       
 
46
       
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
   
       
 
47
       
       
 
 
PART I -  FINANCIAL INFORMATION
Item 1 � Consolidated Financial Statements
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(Unaudited)

   
March 31,
   
December 31,
 
(In thousands, except share and per share data)
 
2015
   
2014
 
ASSETS:
       
Cash and due from banks
 
$
7,955
   
$
6,822
 
Interest earning deposits
   
15,098
     
4,534
 
Total cash and cash equivalents
   
23,053
     
11,356
 
Available-for-sale securities, at fair value
   
114,615
     
88,073
 
Held-to-maturity securities, at amortized cost (fair value of $46,940 and $42,139, respectively)
   
45,278
     
40,875
 
Federal Home Loan Bank stock, at cost
   
2,595
     
3,454
 
Loans
   
390,613
     
387,538
 
Less: Allowance for loan losses
   
5,462
     
5,349
 
Loans receivable, net
   
385,151
     
382,189
 
Premises and equipment, net
   
13,299
     
13,200
 
Accrued interest receivable
   
2,064
     
1,849
 
Foreclosed real estate
   
465
     
261
 
Intangible assets, net
   
226
     
175
 
Goodwill
   
4,536
     
4,367
 
Bank owned life insurance
   
10,441
     
10,356
 
Other assets
   
5,052
     
4,869
 
Total assets
 
$
606,775
   
$
561,024
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Deposits:
               
Interest-bearing
 
$
417,398
   
$
360,906
 
Noninterest-bearing
   
65,808
     
54,662
 
Total deposits
   
483,206
     
415,568
 
Short-term borrowings
   
32,000
     
55,100
 
Long-term borrowings
   
11,000
     
11,000
 
Junior subordinated debentures
   
5,155
     
5,155
 
Accrued interest payable
   
74
     
63
 
Other liabilities
   
5,370
     
4,934
 
Total liabilities
   
536,805
     
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
   
28,570
     
28,534
 
Retained earnings
   
31,458
     
31,085
 
Accumulated other comprehensive loss
   
(1,815
)
   
(2,119
)
Unearned ESOP
   
(1,709
)
   
(1,754
)
Total Pathfinder Bancorp, Inc. shareholders' equity
   
69,548
     
68,790
 
Noncontrolling interest
   
422
     
414
 
Total equity
   
69,970
     
69,204
 
Total liabilities and shareholders' equity
 
$
606,775
   
$
561,024
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

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

   
For the three
   
For the three
 
   
months ended
   
months ended
 
(In thousands, except per share data)
 
March 31, 2015
   
March 31, 2014
 
Interest and dividend income:
       
Loans, including fees
 
$
4,399
   
$
4,063
 
Debt securities:
               
Taxable
   
459
     
421
 
Tax-exempt
   
197
     
195
 
Dividends
   
29
     
33
 
Federal funds sold and interest earning deposits
   
2
     
3
 
       Total interest income
   
5,086
     
4,715
 
Interest expense:
               
Interest on deposits
   
445
     
529
 
Interest on short-term borrowings
   
37
     
19
 
Interest on long-term borrowings
   
101
     
147
 
       Total interest expense
   
583
     
695
 
          Net interest income
   
4,503
     
4,020
 
Provision for loan losses
   
383
     
245
 
          Net interest income after provision for loan losses
   
4,120
     
3,775
 
Noninterest income:
               
Service charges on deposit accounts
   
266
     
279
 
Earnings and gain on bank owned life insurance
   
85
     
60
 
Loan servicing fees
   
52
     
54
 
Net gains on sales and redemptions of investment securities
   
52
     
2
 
Net gains on sales of loans and foreclosed real estate
   
-
     
3
 
Debit card interchange fees
   
123
     
114
 
Other charges, commissions & fees
   
287
     
314
 
          Total noninterest income
   
865
     
826
 
Noninterest expense:
               
Salaries and employee benefits
   
2,381
     
2,197
 
Building occupancy
   
502
     
407
 
Data processing
   
388
     
364
 
Professional and other services
   
202
     
175
 
Advertising
   
140
     
133
 
FDIC assessments
   
95
     
95
 
Audits and exams
   
62
     
64
 
Other expenses
   
453
     
471
 
          Total noninterest expenses
   
4,223
     
3,906
 
Income before income taxes
   
762
     
695
 
Provision for income taxes
   
225
     
176
 
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc.
   
537
     
519
 
Net income attributable to noncontrolling interest
   
8
     
30
 
Net income attributable to Pathfinder Bancorp Inc.
 
$
529
   
$
489
 
Preferred stock dividends
   
32
     
-
 
Net income available to common shareholders
 
$
497
   
$
489
 
                 
Earnings per common share - basic
 
$
0.12
   
$
0.12
 
Earnings per common share - diluted
 
$
0.12
   
$
0.12
 
Dividends per common share
 
$
0.03
   
$
0.03
 

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

Pathfinder Bancorp, Inc.
       
Consolidated Statements of Comprehensive Income
(Unaudited)
       
         
         
   
For the Three months ended
 
(In thousands)
 
March 31, 2015
   
March 31, 2014
 
         
Net Income
 
$
537
   
$
519
 
                 
Other Comprehensive Income (Loss)
               
                 
Retirement Plans:
               
Net unrealized gain on retirement plans
   
45
     
11
 
                 
Unrealized holding gains on financial derivative:
               
Change in unrealized holding losses on financial derivative
   
-
     
(3
)
Reclassification adjustment for interest expense included in net income
   
15
     
15
 
Net unrealized gain on financial derivative
   
15
     
12
 
                 
Unrealized holding gains on AFS
               
Unrealized holding gains arising during the period
   
465
     
320
 
Reclassification adjustment for net gains included in net income
   
(52
)
   
(2
)
Net unrealized gain on securities
   
413
     
318
 
                 
Accretion of net unrealized loss on securities transferred to held-to-maturity (1)
   
33
     
30
 
                 
Other comprehensive income,  before tax
   
506
     
371
 
Tax effect
   
(202
)
   
(148
)
Other comprehensive income, net of tax
   
304
     
223
 
Comprehensive income
 
$
841
   
$
742
 
Comprehensive income attributable to noncontrolling interest
 
$
8
   
$
30
 
Comprehensive income attributable to Pathfinder Bancorp, Inc.
 
$
833
   
$
712
 
                 
                 
Tax Effect Allocated to Each Component of Other Comprehensive Loss
               
Retirement plan net losses recognized in plan expenses
 
$
(18
)
 
$
(4
)
Change in unrealized holding  losses on financial derivative
   
-
     
1
 
Reclassification adjustment for interest expense included in net income
   
(6
)
   
(6
)
Unrealized holding (losses) gains arising during the period
   
(186
)
   
(128
)
Reclassification adjustment for net gains included in net income
   
21
     
1
 
Accretion of net unrealized loss on securities transferred to held-to-maturity (1)
   
(13
)
   
(12
)
Income tax effect related to other comprehensive income
 
$
(202
)
   
(148
)
                 
(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.
               
 

 
 
PATHFINDER BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
Three months ended March 31, 2015 and March 31, 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
   
-
     
-
     
-
     
529
     
-
     
-
     
-
     
8
     
537
 
                                                                         
 Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
304
     
-
     
-
     
-
     
304
 
 
                                                                       
 Preferred stock dividends - SBLF
   
-
     
-
     
-
     
(32
)
   
-
     
-
     
-
     
-
     
(32
)
                                                                         
 ESOP shares earned (6,111 shares)
   
-
     
-
     
15
     
-
     
-
     
45
     
-
     
-
     
60
 
                                                                         
 Stock based compensation
   
-
     
-
     
21
     
-
     
-
     
-
     
-
     
-
     
21
 
                                                                         
 Common stock dividends declared ($0.03 per share)
   
-
     
-
     
-
     
(124
)
   
-
     
-
     
-
     
-
     
(124
)
 Balance, March 31, 2015
 
$
13,000
   
$
44
   
$
28,570
   
$
31,458
   
$
(1,815
)
 
$
(1,709
)
 
$
-
   
$
422
   
$
69,970
 
                                                                         
 Balance, January 1, 2014
 
$
13,000
   
$
30
   
$
8,226
   
$
28,788
   
$
(1,745
)
 
$
(826
)
 
$
(4,761
)
 
$
358
   
$
43,070
 
                                                                         
 Net income
   
-
     
-
     
-
     
489
     
-
     
-
     
-
     
30
     
519
 
                                                                         
 Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
223
     
-
     
-
     
-
     
223
 
                                                                         
 ESOP shares earned (3,125 shares)
   
-
     
-
     
17
     
-
     
-
     
28
     
-
     
-
     
45
 
                                                                         
 Stock based compensation
   
-
     
-
     
21
     
-
     
-
     
-
     
-
     
-
     
21
 
                                                                         
 Common stock dividends declared ($0.03 per share)
   
-
     
-
     
-
     
(76
)
   
-
     
-
     
-
             
(76
)
 Balance, March 31, 2014
 
$
13,000
   
$
30
   
$
8,264
   
$
29,201
   
$
(1,522
)
 
$
(798
)
 
$
(4,761
)
 
$
388
   
$
43,802
 

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

 
 
PATHFINDER BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
   
For the three months ended March 31,
 
(In thousands)
 
2015
   
2014
 
OPERATING ACTIVITIES
       
Net income attributable to Pathfinder Bancorp, Inc.
 
$
529
   
$
489
 
Adjustments to reconcile net income to net cash flows from operating activities:
               
Provision for loan losses
   
383
     
245
 
Realized gains on sales, redemptions and calls of:
               
Real estate acquired through foreclosure
   
-
     
(3
)
Available-for-sale investment securities
   
(52
)
   
(2
)
Depreciation
   
229
     
198
 
Amortization of mortgage servicing rights
   
4
     
4
 
Amortization of deferred loan costs
   
53
     
27
 
Earnings on bank owned life insurance
   
(85
)
   
(60
)
Net amortization of premiums and discounts on investment securities
   
221
     
157
 
Amortization of intangible assets
   
5
     
3
 
Stock based compensation and ESOP expense
   
81
     
66
 
Net change in accrued interest receivable
   
(215
)
   
(98
)
Net change in other assets and liabilities
   
126
     
(56
)
Net cash flows from operating activities
   
1,279
     
970
 
INVESTING ACTIVITIES
               
Purchase of investment securities available-for-sale
   
(37,017
)
   
(6,064
)
Purchase of investment securities held-to-maturity
   
(5,034
)
   
(8,767
)
Net proceeds of Federal Home Loan Bank stock
   
859
     
405
 
Proceeds from maturities and principal reductions of
               
investment securities available-for-sale
   
4,205
     
3,436
 
Proceeds from maturities and principal reductions of
               
investment securities held-to-maturity
   
628
     
185
 
Proceeds from sales, redemptions and calls of:
               
Available-for-sale investment securities
   
6,549
     
122
 
Real estate acquired through foreclosure
   
19
     
53
 
Acquisition of insurance agency
   
(225
)
   
-
 
Purchase of bank owned life insurance
   
-
     
(1,780
)
Net change in loans
   
(3,621
)
   
(6,953
)
Purchase of premises and equipment
   
(328
)
   
(386
)
Net cash flows from investing activities
   
(33,965
)
   
(19,749
)
FINANCING ACTIVITIES
               
Net change in demand deposits, NOW accounts, savings accounts,
               
money management deposit accounts, MMDA accounts and escrow deposits
   
57,885
     
32,369
 
Net change in time deposits and brokered deposits
   
9,753
     
(4,157
)
Net change in short-term borrowings
   
(23,100
)
   
(7,000
)
Payments on long-term borrowings
   
-
     
(27
)
Cash dividends paid to preferred shareholder - SBLF
   
(32
)
   
-
 
Cash dividends paid to common shareholders
   
(131
)
   
(78
)
Change in noncontrolling interest, net
   
8
     
30
 
Net cash flows from financing activities
   
44,383
     
21,137
 
Change in cash and cash equivalents
   
11,697
     
2,358
 
Cash and cash equivalents at beginning of period
   
11,356
     
16,575
 
Cash and cash equivalents at end of period
 
$
23,053
   
$
18,933
 
CASH PAID DURING THE PERIOD FOR:
               
Interest
 
$
572
   
$
683
 
Income taxes
   
2
     
1
 
NON-CASH INVESTING ACTIVITY
               
Real estate acquired in exchange for loans
   
223
     
130
 
 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
Notes to Consolidated Financial Statements (Unaudited)

Note 1:  Basis of Presentation

The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc., (the "Company"), Pathfinder Bank (the "Bank") and its other wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.  Certain amounts in the 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 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.

Note 2:   New Accounting Pronouncements

None applicable to the Company.

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 16,472 for the three months ended March 31, 2015 and March 31, 2014, respectively.  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
 
   
March 31,
 
(In thousands, except per share data)
 
2015
   
2014
 
Basic Earnings Per Common Share
       
Net income available to common shareholders
 
$
497
   
$
489
 
Weighted average common shares outstanding
   
4,114
     
4,166
 
Basic earnings per common share
 
$
0.12
   
$
0.12
 
                 
Diluted Earnings Per Common Share
               
Net income available to common shareholders
 
$
497
   
$
489
 
Weighted average common shares outstanding
   
4,114
     
4,166
 
Effect of assumed exercise of stock options
   
56
     
36
 
Diluted weighted average common shares outstanding
   
4,170
     
4,202
 
Diluted earnings per common share
 
$
0.12
   
$
0.12
 







Note 4:   Investment Securities

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

 
 
March 31, 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
 
$
39,897
   
$
48
   
$
(44
)
 
$
39,901
 
State and political subdivisions
   
8,332
     
126
     
(4
)
   
8,454
 
Corporate
   
20,429
     
152
     
(37
)
   
20,544
 
Residential mortgage-backed - US agency
   
29,397
     
490
     
(100
)
   
29,787
 
Collateralized mortgage obligations - US agency
   
13,832
     
188
     
(59
)
   
13,961
 
Total
   
111,887
     
1,004
     
(244
)
   
112,647
 
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
   
643
     
4
     
-
     
647
 
Large cap equity fund
   
456
     
176
     
-
     
632
 
Other mutual funds
   
183
     
216
     
-
     
399
 
Common stock - financial services industry
   
270
     
20
     
-
     
290
 
Total
   
1,552
     
416
     
-
     
1,968
 
Total available-for-sale
 
$
113,439
   
$
1,420
   
$
(244
)
 
$
114,615
 
                                 
Held-to-Maturity Portfolio
                               
Debt investment securities:
                               
US Treasury, agencies and GSEs
 
$
7,839
   
$
142
   
$
(23
)
 
$
7,958
 
State and political subdivisions
   
22,299
     
999
     
-
     
23,298
 
Corporate
   
3,416
     
57
     
-
     
3,473
 
Residential mortgage-backed - US agency
   
8,820
     
285
     
-
     
9,105
 
Collateralized mortgage obligations - US agency
   
2,904
     
202
     
-
     
3,106
 
Total held-to-maturity
 
$
45,278
   
$
1,685
   
$
(23
)
 
$
46,940
 





 
 
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 March 31, 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
 
$
16,918
   
$
16,928
   
$
196
   
$
196
 
Due after one year through five years
   
46,124
     
46,338
     
7,752
     
7,838
 
Due after five years through ten years
   
5,616
     
5,633
     
17,184
     
17,810
 
Due after ten years
   
-
     
-
     
8,422
     
8,885
 
Sub-total
   
68,658
     
68,899
     
33,554
     
34,729
 
Residential mortgage-backed - US agency
   
29,397
     
29,787
     
8,820
     
9,105
 
Collateralized mortgage obligations - US agency
   
13,832
     
13,961
     
2,904
     
3,106
 
Totals
 
$
111,887
   
$
112,647
   
$
45,278
   
$
46,940
 
 
 

 
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:

 
March 31, 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
   
7
   
$
(3
)
 
$
12,003
     
6
   
$
(41
)
 
$
6,954
     
13
     
(44
)
 
$
18,957
 
State and political subdivisions
   
9
     
(4
)
   
1,538
     
1
     
-
     
90
     
10
     
(4
)
   
1,628
 
Corporate
   
9
     
(37
)
   
8,675
     
-
     
-
     
-
     
9
     
(37
)
   
8,675
 
Residential mortgage-backed - US agency
   
3
     
(14
)
   
4,029
     
5
     
(86
)
   
5,441
     
8
     
(100
)
   
9,470
 
Collateralized mortgage obligations - US agency
   
3
     
(7
)
   
1,656
     
3
     
(52
)
   
2,098
     
6
     
(59
)
   
3,754
 
Totals
   
31
   
$
(65
)
 
$
27,901
     
15
   
$
(179
)
 
$
14,583
     
46
   
$
(244
)
 
$
42,484
 
Held-to-Maturity
                                                                       
US Treasury, agencies and GSE's
   
2
   
$
(23
)
 
$
2,976
     
-
   
$
-
   
$
-
     
2
   
$
(23
)
 
$
2,976
 
State and political subdivisions
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Corporate
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Residential mortgage-backed - US agency
   
1
     
-
     
1,015
     
-
     
-
     
-
     
1
     
-
     
1,015
 
Collateralized mortgage obligations - US agency
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Totals
   
3
   
$
(23
)
 
$
3,991
     
-
   
$
-
   
$
-
     
3
   
$
(23
)
 
$
3,991
 
                                                                         
                                                                         
 
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.

Management does not believe any individual unrealized loss in the securities portfolio as of March 31, 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 1.3% to 0.01% of their current book values.  The unrealized losses reflected in the mortgage-backed security holdings and collateralized mortgage obligations 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 the recovery of the amortized cost.

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security's fair value has been below the carrying amount. 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 March 31, 2015.

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

   
For the three months
 
   
ended March 31, 2015
 
(In thousands)
 
2015
   
2014
 
Realized gains
 
$
57
   
$
2
 
Realized losses
   
(5
)
   
-
 
 
 
$
52
   
$
2
 

As of March 31, 2015 and December 31, 2014, securities with a fair value of $97.5 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 $18.9 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.
 

 
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
 
   
For the three months ended March 31,
 
(In thousands)
 
2015
   
2014
   
2015
   
2014
 
                 
Service cost
 
$
-
   
$
-
   
$
-
   
$
-
 
Interest cost
   
117
     
102
     
4
     
5
 
Expected return on plan assets
   
(244
)
   
(236
)
   
-
     
-
 
Amortization of transition obligation
   
-
     
-
     
-
     
-
 
Amortization of net losses
   
45
     
8
     
-
     
3
 
Net periodic benefit plan (benefit) cost
 
$
(82
)
 
$
(126
)
 
$
4
   
$
8
 

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 March 31, 2015.
 
 

 
Note 6:   Loans

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


   
March 31,
   
December 31,
 
(In thousands)
 
2015
   
2014
 
Residential mortgage loans:
       
1-4 family first-lien residential mortgages
 
$
173,576
   
$
172,159
 
Construction
   
2,714
     
3,209
 
Total residential mortgage loans
   
176,290
     
175,368
 
                 
Commercial loans:
               
Real estate
   
125,651
     
125,952
 
Lines of credit
   
17,628
     
17,407
 
Other commercial and industrial
   
35,207
     
34,660
 
Tax exempt loans
   
9,382
     
7,201
 
Total commercial loans
   
187,868
     
185,220
 
                 
Consumer loans:
               
Home equity and junior liens
   
22,308
     
22,713
 
Other consumer
   
4,107
     
4,160
 
Total consumer loans
   
26,415
     
26,873
 
 
               
Total loans
   
390,573
     
387,461
 
Net deferred loan costs
   
40
     
77
 
Less allowance for loan losses
   
(5,462
)
   
(5,349
)
Loans receivable, net
 
$
385,151
   
$
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 March 31, 2015 and December 31, 2014, residential mortgage loans with a carrying value of $123.9 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 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.  
 

 
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 March 31, 2015
 
       
Special
             
(In thousands)
 
Pass
   
Mention
   
Substandard
   
Doubtful
   
Total
 
Residential mortgage loans:
                   
1-4 family first-lien residential mortgages
 
$
167,953
   
$
1,326
   
$
3,255
   
$
1,042
   
$
173,576
 
Construction
   
2,714
     
-
     
-
     
-
     
2,714
 
Total residential mortgage loans
   
170,667
     
1,326
     
3,255
     
1,042
     
176,290
 
Commercial loans:
                                       
Real estate
   
119,692
     
1,163
     
4,580
     
216
     
125,651
 
Lines of credit
   
16,376
     
507
     
745
     
-
     
17,628
 
Other commercial and industrial
   
33,086
     
1,113
     
937
     
71
     
35,207
 
Tax exempt loans
   
9,382
     
-
     
-
     
-
     
9,382
 
Total commercial loans
   
178,536
     
2,783
     
6,262
     
287
     
187,868
 
Consumer loans:
                                       
Home equity and junior liens
   
21,662
     
91
     
445
     
110
     
22,308
 
Other consumer
   
4,075
     
7
     
25
     
-
     
4,107
 
Total consumer loans
   
25,737
     
98
     
470
     
110
     
26,415
 
Total loans
 
$
374,940
   
$
4,207
   
$
9,987
   
$
1,439
   
$
390,573
 



 
 
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
 

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, segregated by portfolio segment and class of loans, as of March 31, 2015 and December 31, 2014, are detailed in the following tables:

 
 
As of March 31, 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
 
$
2,076
   
$
723
   
$
1,508
   
$
4,307
   
$
169,269
   
$
173,576
 
Construction
   
-
     
-
     
-
     
-
     
2,714
     
2,714
 
Total residential mortgage loans
   
2,076
     
723
     
1,508
     
4,307
     
171,983
     
176,290
 
Commercial loans:
                                               
Real estate
   
1,651
     
608
     
3,463
     
5,722
     
119,929
     
125,651
 
Lines of credit
   
700
     
-
     
274
     
974
     
16,654
     
17,628
 
Other commercial and industrial
   
444
     
645
     
543
     
1,632
     
33,575
     
35,207
 
Tax exempt loans
   
-
     
-
     
-
     
-
     
9,382
     
9,382
 
Total commercial loans
   
2,795
     
1,253
     
4,280
     
8,328
     
179,540
     
187,868
 
Consumer loans:
                                               
Home equity and junior liens
   
199
     
74
     
270
     
543
     
21,765
     
22,308
 
Other consumer
   
26
     
9
     
9
     
44
     
4,063
     
4,107
 
Total consumer loans
   
225
     
83
     
279
     
587
     
25,828
     
26,415
 
Total loans
 
$
5,096
   
$
2,059
   
$
6,067
   
$
13,222
   
$
377,351
   
$
390,573
 
                                                 
                                                 
 
 
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
 



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

   
March 31,
   
December 31,
 
(In thousands)
 
2015
   
2014
 
Residential mortgage loans:
       
1-4 family first-lien residential mortgages
 
$
1,508
   
$
1,902
 
 
   
1,508
     
1,902
 
Commercial loans:
               
Real estate
   
3,463
     
3,547
 
Lines of credit
   
274
     
278
 
Other commercial and industrial
   
543
     
205
 
 
   
4,280
     
4,030
 
Consumer loans:
               
Home equity and junior liens
   
270
     
313
 
Other consumer
   
9
     
11
 
 
   
279
     
324
 
Total nonaccrual loans
 
$
6,067
   
$
6,256
 

There were no loans past due ninety days or more and still accruing interest at March 31, 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 single new TDR reported in the first quarter of 2015 was not material.
�
During the first quarter of 2014 there were no new TDRs.

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.



Impaired Loans

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

   
March 31, 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
 
$
788
   
$
819
   
$
-
   
$
1,138
   
$
1,163
   
$
-
 
Commercial real estate
   
2,419
     
2,531
     
-
     
2,083
     
2,154
     
-
 
Commercial lines of credit
   
382
     
397
     
-
     
185
     
197
     
-
 
Other commercial and industrial
   
506
     
532
     
-
     
335
     
356
     
-
 
Home equity and junior liens
   
-
     
-
     
-
     
21
     
21
     
-
 
Other consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
With an allowance recorded:
                                               
1-4 family first-lien residential mortgages
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial real estate
   
2,512
     
2,563
     
918
     
2,927
     
2,972
     
552
 
Commercial lines of credit
   
92
     
99
     
92
     
93
     
99
     
93
 
Other commercial and industrial
   
262
     
263
     
231
     
268
     
268
     
238
 
Home equity and junior liens
   
297
     
297
     
8
     
340
     
340
     
31
 
Other consumer
   
9
     
9
     
1
     
11
     
11
     
3
 
Total:
                                               
1-4 family first-lien residential mortgages
   
788
     
819
     
-
     
1,138
     
1,163
     
-
 
Commercial real estate
   
4,931
     
5,094
     
918
     
5,010
     
5,126
     
552
 
Commercial lines of credit
   
474
     
496
     
92
     
278
     
296
     
93
 
Other commercial and industrial
   
768
     
795
     
231
     
603
     
624
     
238
 
Home equity and junior liens
   
297
     
297
     
8
     
361
     
361
     
31
 
Other consumer
   
9
     
9
     
1
     
11
     
11
     
3
 
Totals
 
$
7,267
   
$
7,510
   
$
1,250
   
$
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
 
   
March 31,
 
(In thousands)
 
2015
   
2014
 
1-4 family first-lien residential mortgages
 
$
963
   
$
1,153
 
Commercial real estate
   
4,971
     
4,470
 
Commercial lines of credit
   
376
     
429
 
Other commercial and industrial
   
686
     
505
 
Home equity and junior liens
   
329
     
457
 
Other consumer
   
10
     
2
 
Total
 
$
7,335
   
$
7,016
 


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

   
For the three months ended
 
   
March 31,
 
(In thousands)
 
2015
   
2014
 
1-4 family first-lien residential mortgages
 
$
4
   
$
5
 
Commercial real estate
   
16
     
28
 
Commercial lines of credit
   
-
     
1
 
Other commercial and industrial
   
5
     
13
 
Home equity and junior liens
   
10
     
19
 
Other consumer
   
-
     
-
 
Total
 
$
35
   
$
66
 


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.

 
 
March 31, 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
   
(138
)
   
-
     
(29
)
   
(10
)
   
(108
)
   Recoveries
   
-
     
-
     
-
     
11
     
2
 
   Provisions
   
127
     
-
     
393
     
(20
)
   
10
 
Ending balance
 
$
498
   
$
-
   
$
3,165
   
$
441
   
$
938
 
Ending balance: related to loans
                                       
individually evaluated for impairment
 
$
-
   
$
-
   
$
918
   
$
92
   
$
231
 
Ending balance: related to loans
                                       
collectively evaluated for impairment
 
$
498
   
$
-
   
$
2,247
   
$
349
   
$
707
 
                                         
Loans receivables:
                                       
Ending balance
 
$
173,576
   
$
2,714
   
$
125,651
   
$
17,628
   
$
35,207
 
Ending balance: individually
                                       
evaluated for impairment
 
$
788
   
$
-
   
$
4,931
   
$
474
   
$
768
 
Ending balance: collectively
                                       
evaluated for impairment
 
$
172,788
   
$
2,714
   
$
120,720
   
$
17,154
   
$
34,439
 
                                         
                                         
           
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
   
-
     
-
     
(20
)
   
-
     
(305
)
   Recoveries
   
-
     
7
     
15
     
-
     
35
 
   Provisions
   
1
     
(66
)
   
(6
)
   
(56
)
   
383
 
Ending balance
 
$
4
   
$
329
   
$
87
   
$
-
   
$
5,462
 
Ending balance: related to loans
                                       
individually evaluated for impairment
 
$
-
   
$
8
   
$
1
   
$
-
   
$
1,250
 
Ending balance: related to loans
                                       
collectively evaluated for impairment
 
$
4
   
$
321
   
$
86
   
$
-
   
$
4,212
 
                                         
Loans receivables:
                                       
Ending balance
 
$
9,382
   
$
22,308
   
$
4,107
           
$
390,573
 
Ending balance: individually
                                       
evaluated for impairment
 
$
-
   
$
297
   
$
9
           
$
7,267
 
Ending balance: collectively
                                       
evaluated for impairment
 
$
9,382
   
$
22,011
   
$
4,098
           
$
383,306
 



 
 
March 31, 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
   
(12
)
   
-
     
(47
)
   
(85
)
   
(58
)
   Recoveries
   
-
     
-
     
-
     
2
     
1
 
   Provisions
   
(33
)
   
-
     
181
     
209
     
197
 
Ending balance
 
$
604
   
$
-
   
$
2,436
   
$
523
   
$
974
 
Ending balance: related to loans
                                       
individually evaluated for impairment
 
$
57
   
$
-
   
$
742
   
$
233
   
$
226
 
Ending balance: related to loans
                                       
collectively evaluated for impairment
 
$
547
   
$
-
   
$
1,694
   
$
290
   
$
748
 
                                         
Loans receivables:
                                       
Ending balance
 
$
167,145
   
$
1,208
   
$
102,559
   
$
14,883
   
$
33,949
 
Ending balance: individually
                                       
evaluated for impairment
 
$
1,354
   
$
-
   
$
5,399
   
$
476
   
$
604
 
Ending balance: collectively
                                       
evaluated for impairment
 
$
165,791
   
$
1,208
   
$
97,160
   
$
14,407
   
$
33,345
 
                                         
                                         
           
Home equity
   
Other
                 
 
 
Tax exempt
   
and junior liens
   
consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                                       
Beginning Balance
 
$
2
   
$
433
   
$
136
   
$
288
   
$
5,041
 
   Charge-offs
   
-
     
(50
)
   
(51
)
   
-
     
(303
)
   Recoveries
   
-
     
-
     
13
     
-
     
16
 
   Provisions
   
(1
)
   
49
     
4
     
(361
)
   
245
 
Ending balance
 
$
1
   
$
432
   
$
102
   
$
(73
)
 
$
4,999
 
Ending balance: related to loans
                                       
individually evaluated for impairment
 
$
-
   
$
81
   
$
2
   
$
-
   
$
1,341
 
Ending balance: related to loans
                                       
collectively evaluated for impairment
 
$
1
   
$
351
   
$
100
   
$
(73
)
 
$
3,658
 
                                         
Loans receivables:
                                       
Ending balance
 
$
2,781
   
$
21,387
   
$
3,965
           
$
347,877
 
Ending balance: individually
                                       
evaluated for impairment
 
$
-
   
$
454
   
$
2
           
$
8,289
 
Ending balance: collectively
                                       
evaluated for impairment
 
$
2,781
   
$
20,933
   
$
3,963
           
$
339,588
 





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.


   
Number of
       
Number of
     
(Dollars in thousands)
 
Properties
   
March 31, 2015
   
Properties
   
December 31, 2014
 
Foreclosed real estate
               
Foreclosed residential real estate
   
6
   
$
465
     
4
   
$
261
 

At March 31, 2015, the Company reported $372,000 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 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 of issuance.  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 $4.6 million of standby letters of credit outstanding as of March 31, 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:

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.
 

 
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:

   
March 31, 2015
 
               
Total Fair
 
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Value
 
Available-for-sale portfolio
               
Debt investment securities:
               
US Treasury, agencies and GSEs
 
$
-
   
$
39,901
   
$
-
   
$
39,901
 
State and political subdivisions
   
-
     
8,454
     
-
     
8,454
 
Corporate
   
-
     
20,544
     
-
     
20,544
 
Residential mortgage-backed - US agency
   
-
     
29,787
     
-
     
29,787
 
Collateralized mortgage obligations - US agency
   
-
     
13,961
     
-
     
13,961
 
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
   
647
     
-
     
-
     
647
 
Large cap equity fund
   
632
     
-
     
-
     
632
 
Other mutual funds
   
-
     
399
     
-
     
399
 
Common stock - financial services industry
   
41
     
249
     
-
     
290
 
Total available-for-sale securities
 
$
1,320
   
$
113,295
   
$
-
   
$
114,615
 
                                 
Interest rate swap derivative
 
$
-
   
$
(67
)
 
$
-
   
$
(67
)
                                 
                                 
   
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
)





Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014:
   
March 31, 2015
 
               
Total Fair
 
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Value
 
 Impaired loans
 
$
-
   
$
-
   
$
796
   
$
796
 
 Foreclosed real estate
 
$
-
   
$
-
   
$
223
   
$
223
 
                                 
                                 
   
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 March 31,2015
 
 
Impaired loans
Appraisal of collateral
Appraisal Adjustments
5% - 30% (10%)
 
(Sales Approach)
Costs to Sell
6% - 15% (13%)
 
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 March 31, 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.
 

 
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.
 

 
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:

       
March 31, 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
   
$
23,053
   
$
23,053
   
$
11,356
   
$
11,356
 
Investment securities - available-for-sale
   
1
     
1,320
     
1,320
     
1,340
     
1,340
 
Investment securities - available-for-sale
   
2
     
113,295
     
113,295
     
86,733
     
86,733
 
Investment securities - held-to-maturity
   
2
     
45,278
     
46,940
     
40,875
     
42,139
 
Federal Home Loan Bank stock
   
2
     
2,595
     
2,595
     
3,454
     
3,454
 
Net loans
   
3
     
385,151
     
391,910
     
382,189
     
388,151
 
Accrued interest receivable
   
1
     
2,064
     
2,064
     
1,849
     
1,849
 
                                         
Financial liabilities:
                                       
Demand Deposits, Savings, NOW and MMDA
   
1
   
$
320,887
   
$
320,887
   
$
263,004
   
$
263,004
 
Time Deposits
   
2
     
162,319
     
162,493
     
152,564
     
152,457
 
Borrowings
   
2
     
43,000
     
43,204
     
66,100
     
66,282
 
Junior subordinated debentures
   
2
     
5,155
     
4,681
     
5,155
     
4,799
 
Accrued interest payable
   
1
     
74
     
74
     
63
     
63
 
Interest rate swap derivative
   
2
     
67
     
67
     
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.

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:
   
March 31,
   
December 31,
 
 (In thousands)
 
2015
   
2014
 
 Cash flow hedge:
       
 Other liabilities
 
$
67
   
$
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 March 31,
 
(In thousands)
 
2015
   
2014
 
Balance as of January 1:
 
$
(82
)
 
$
(135
)
Amount of  losses recognized in other comprehensive income
   
-
     
(3
)
Amount of loss reclassified from other comprehensive income
               
     and recognized as interest expense
   
15
     
15
 
Balance as of March 31:
 
$
(67
)
 
$
(123
)

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.
 

 
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 March 31, 2015
 
   
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
   
-
     
-
     
279
     
20
     
299
 
Amounts reclassified from AOCI
   
27
     
9
     
(31
)
   
-
     
5
 
Ending balance
 
$
(1,767
)
 
$
(40
)
 
$
705
   
$
(713
)
 
$
(1,815
)

   
For the three months ended March 31, 2014
 
   
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
 
$
(982
)
 
$
(81
)
 
$
99
   
$
(781
)
 
$
(1,745
)
Other comprehensive income (loss) before reclassifications
   
-
     
(2
)
   
192
     
18
   
$
208
 
Amounts reclassified from AOCI
   
7
     
9
     
(1
)
   
-
     
15
 
Ending balance
 
$
(975
)
 
$
(74
)
 
$
290
   
$
(763
)
 
$
(1,522
)

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

   
Amount Reclassified
   
   
from AOCI 1
   
(In thousands)
 
For the three months ended
   
Details about AOCI 1 components
 
March 31, 2015
   
March 31, 2014
 
Affected Line Item in the Statement  of Income
   
   
 
    
Unrealized holding gain on financial derivative:
           
Reclassification adjustment for
           
   interest expense included in net income
 
$
(15
)
 
$
(15
)
 Interest on long term borrowings
     
6
     
6
 
 Provision for income taxes
   
$
(9
)
 
$
(9
)
 Net Income
Retirement plan items
                   
Retirement plan net losses
                   
   recognized in plan expenses 2
 
$
(45
)
 
$
(11
)
 Salaries and employee benefits
     
18
     
4
 
 Provision for income taxes
   
$
(27
)
 
$
(7
)
 Net Income
                      
Available-for-sale securities
                   
Realized gain on sale of securities
 
$
52
   
$
2
 
Net gains on sales and redemptions of investment securities
     
(21
)
   
(1
)
 Provision for income taxes
   
$
31
   
$
1
 
 Net Income
                      
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.
                   
 

 
Note 13:  Insurance Agency Acquisition

In the first quarter of 2015, the FitzGibbons Agency, LLC acquired the Huntington Agency, an Onondaga County based company with annual revenues approximating $150,000.  The purchase price was $225,000 in cash and allocated between Goodwill and Intangibles, of $169,000 and $56,000, respectively.

This acquisition allows the Agency, and in turn the Company, to generate more value based noninterest income in the Company's target geographic market.  Acquisition costs related to this transaction were nominal.

The transaction did not permit the Agency to assume any liabilities of the Huntington Agency.  The Intangibles reflected the transaction date estimated fair value of the customer list.

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") which is 100% owned by the Company and the Company is 100% owned by public shareholders.  At March 31, 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 March 31, 2015, the Company and subsidiaries had total assets of $606.8 million, total liabilities of $536.8 million and shareholders' equity of $69.5 million plus noncontrolling interest of $422,000, which represents the 49% not owned by the Company.

The following discussion reviews the Company's financial condition at March 31, 2015 and the results of operations for the three month periods ended March 31, 2015 and 2014. Operating results for the three months ended March 31, 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 Part I.

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

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.

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 March 31, 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.

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.
- 34 -

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 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

On March 26, 2015, the Company announced that its Board of Directors declared a quarterly dividend of $.03 per common share.  The dividend is payable on May 4, 2015 to shareholders of record on April 15, 2015.

Overview and Results of Operations

The following represents the significant highlights of the Company's operating results and changes in financial condition.  Unless otherwise stated, the results of operation reflect changes between the first quarter of 2015 and the first quarter of 2014, and the changes in financial condition reflect the changes between the statements of condition between December 31, 2014 and March 31, 2015.

�
Net income improved by 8.2% to $529,000.
�
Basic and diluted earnings per share remained unchanged at $0.12.  While earnings between year over year quarters increased, the Company declared a dividend on its Small Business Lending Fund ("SBLF") preferred Stock in the first quarter of 2015.  In the first quarter of 2014, the Company utilized a credit from the US Treasury which did not require a dividend declaration on the SBLF preferred stock for the first quarter of 2014.
�
Return on average assets decreased 2 basis points to 0.36%.
�
Net interest income increased 12.0% to $4.5 million.  Net interest margin decreased 10 basis points to 3.28%, 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.
�
Total assets increased 8.2% to $606.8 million.  This was funded largely by the seasonal increase in municipal deposits and the increase in business deposits.
 
 

 
�
Gross loans reported an increase of 0.8% to $390.6 million.
�
The ratio of nonperforming loans to period end loans decreased by 6 basis points to 1.55%.
�
The FitzGibbons Agency completed its acquisition of the Baldwinsville, New York-based Huntington Agency, a provider of auto, home, business and recreational insurance products to the greater Syracuse market.

We had net income of $529,000 for the three months ended March 31, 2015 compared to net income of $489,000 for the three months ended March 31, 2014.  The increase in net income of $40,000, or 8.2%, was due primarily to an 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 first quarter periods.  Offsetting these improvements to net income was a $138,000 increase in provision for loan losses and a $317,000 increase in noninterest expenses.

Return on average assets decreased 2 basis points to 0.36% between the year over year first 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 first quarter of 2015 as compared to the first quarter of 2014.  Additionally, the first quarter opened with a greater amount of assets due to the influx of funds received as a result of the Conversion and Offering on October 16, 2014.

Asset quality remained essentially unchanged between December 31, 2014 and March 31, 2015.  We reported a slight decrease in the ratio of nonperforming loans to period end loans, a slight decrease in the level of impaired loans, and no change in the level of potential problem loans.  In contrast, we recorded a small increase in the ratio of net charge-offs (annualized) to average loans, and a small increase in total delinquencies.  Further details regarding asset quality can be found in subsequent sections within the Management Discussion and Analysis on this Form 10-Q.

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 table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.  Interest income and resultant yield information in the table 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.

   
For the three months Ended March 31,
 
   
2015
   
2014
 
           
Average
           
Average
 
   
Average
       
Yield /
   
Average
       
Yield /
 
(Dollars in thousands)
 
Balance
   
Interest
   
Cost
   
Balance
   
Interest
   
Cost
 
Interest-earning assets:
                       
Loans
 
$
389,301
   
$
4,399
     
4.52
%
 
$
345,689
   
$
4,063
     
4.70
%
Taxable investment securities
   
121,420
     
488
     
1.61
%
   
96,500
     
454
     
1.88
%
Tax-exempt investment securities
   
28,795
     
197
     
2.74
%
   
27,148
     
195
     
2.87
%
Interest-earning time deposit
   
-
     
-
     
0.00
%
   
500
     
2
     
1.60
%
Fed funds sold and Interest-earning deposits
   
9,377
     
2
     
0.09
%
   
5,669
     
1
     
0.07
%
Total interest-earning assets
   
548,893
     
5,086
     
3.71
%
   
475,506
     
4,715
     
3.97
%
Noninterest-earning assets:
                                               
Other assets
   
39,234
                     
38,819
                 
Allowance for loan losses
   
(5,374
)
                   
(5,086
)
               
Net unrealized gains
                                               
on available-for sale-securities
   
877
                     
455
                 
Total assets
 
$
583,630
                   
$
509,694
                 
Interest-bearing liabilities:
                                               
NOW accounts
 
$
44,770
   
$
18
     
0.16
%
 
$
40,848
   
$
17
     
0.17
%
Money management accounts
   
12,946
     
5
     
0.15
%
   
13,312
     
5
     
0.15
%
MMDA accounts
   
101,539
     
110
     
0.43
%
   
90,462
     
94
     
0.42
%
Savings and club accounts
   
74,598
     
15
     
0.08
%
   
74,937
     
15
     
0.08
%
Time deposits
   
163,826
     
297
     
0.73
%
   
151,864
     
398
     
1.05
%
Junior subordinated debentures
   
5,155
     
40
     
3.10
%
   
5,155
     
40
     
3.10
%
Borrowings
   
47,578
     
98
     
0.82
%
   
34,259
     
126
     
1.47
%
Total interest-bearing liabilities
   
450,412
     
583
     
0.52
%
   
410,837
     
695
     
0.68
%
Noninterest-bearing liabilities:
                                               
Demand deposits
   
61,154
                     
52,054
                 
Other liabilities
   
2,249
                     
3,525
                 
Total liabilities
   
513,815
                     
466,416
                 
Shareholders' equity
   
69,815
                     
43,278
                 
Total liabilities & shareholders' equity
 
$
583,630
                   
$
509,694
                 
Net interest income
         
$
4,503
                   
$
4,020
         
Net interest rate spread
                   
3.19
%
                   
3.29
%
Net interest margin
                   
3.28
%
                   
3.38
%
Ratio of average interest-earning assets
                                               
to average interest-bearing liabilities
                   
121.86
%
                   
115.74
%

As indicated in the above table, net interest income increased $483,000, or 12.0%, to $4.5 million for the three months ended March 31, 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 decreased by 10 basis points to 3.28% 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 $371,000, or 7.9%, to $5.1 million for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.  The increase in interest income was due principally to the increase in average balances of loans and taxable investment securities which increased 12.6% and 25.8%, respectively, between the year over year first quarter periods.  The increase in the average balances of loans reflects the Company's continued success in its penetration 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 18 basis points and the yield on taxable investment securities decreased 27 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 first quarter of 2014.

Interest expense for the three months ended March 31, 2015 decreased $112,000, or 16.1%, to $583,000 when compared to the same prior year period.  This decrease was primarily due to the rates paid on time deposits as maturing certificates of deposits at higher rates were replaced with certificates of deposits at the current lower market rates.  In addition, the average balances of time deposits, which includes brokered deposits, increased $12.0 million between the year over year first quarter periods.  Also contributing to the $112,000 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.

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.

   
Three Months Ended March 31,
 
   
2015 vs. 2014
 
   
Increase/(Decrease) Due to
 
           
Total
 
           
Increase
 
(In thousands)
 
Volume
   
Rate
   
(Decrease)
 
Interest Income:
           
Loans
 
$
1,218
   
$
(882
)
 
$
336
 
Taxable investment securities
   
360
     
(326
)
   
34
 
Tax-exempt investment securities
   
43
     
(41
)
   
2
 
Interest-earning time deposits
   
(1
)
   
(1
)
   
(2
)
Interest-earning deposits
   
1
     
-
     
1
 
Total interest income
   
1,621
     
(1,250
)
   
371
 
Interest Expense:
                       
NOW accounts
   
4
     
(3
)
   
1
 
Money management accounts
   
(1
)
   
1
     
-
 
MMDA accounts
   
12
     
4
     
16
 
Savings and club accounts
   
-
     
-
     
-
 
Time deposits
   
179
     
(280
)
   
(101
)
Borrowings
   
195
     
(223
)
   
(28
)
Total interest expense
   
389
     
(501
)
   
(112
)
Net change in net interest income
 
$
1,232
   
$
(749
)
 
$
483
 


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 $383,000 in provision for loan losses for the three month period ended March 31, 2015, as compared to $245,000 for the three month period ended March 31, 2014.  The increase in the provision for loan losses was a direct result of the need for approximately $400,000 in additional specific reserves, between December 31, 2014 and March 31, 2015,  related to one large commercial borrower in connection with updated appraisal information.  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.

We measure delinquency based on the amount of past due loans as a percentage of total loans.  Delinquency trends worsened slightly to 3.4% at March 31, 2015 as compared to 3.0% at December 31, 2014 and was centered in the 30-59 day past due categories for residential mortgage loans and commercial real estate loans.

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 March 31,
 
(Dollars in thousands)
 
2015
   
2014
   
Change
 
Service charges on deposit accounts
 
$
266
   
$
279
   
$
(13
)
   
-4.7
%
Earnings and gain on bank owned life insurance
   
85
     
60
     
25
     
41.7
%
Loan servicing fees
   
52
     
54
     
(2
)
   
-3.7
%
Debit card interchange fees
   
123
     
114
     
9
     
7.9
%
Other charges, commissions and fees
   
287
     
314
     
(27
)
   
-8.6
%
Noninterest income before gains
   
813
     
821
     
(8
)
   
-1.0
%
Net gains on sales and redemptions of investment securities
   
52
     
2
     
50
   
>100.0%
 
Net gains on sales of loans and foreclosed real estate
   
-
     
3
     
(3
)
   
-100.0
%
Total noninterest income
 
$
865
   
$
826
   
$
39
     
4.7
%

The increase in total noninterest income between year over year first quarter periods was due largely to the increase of net gains on sales and redemptions of investment securities.  Management has taken advantage of a pricing opportunity while expanding spread and reducing duration of the investment portfolio in anticipation of rising future interest rates.  Additionally, higher average balances of bank owned life insurance increased the related earnings by $25,000 between the year over year first quarter periods but was more than offset by lower levels of other charges, commissions and fees of $27,000 due principally to lower levels of commission income by the FitzGibbons Agency and lower levels of Investment Services revenue.
 

 
Noninterest Expense

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

   
Three Months Ended March 31,
 
(Dollars in thousands)
 
2015
   
2014
   
Change
 
Salaries and employee benefits
 
$
2,381
   
$
2,197
   
$
184
     
8.4
%
Building occupancy
   
502
     
407
     
95
     
23.3
%
Data processing
   
388
     
364
     
24
     
6.6
%
Professional and other services
   
202
     
175
     
27
     
15.4
%
Advertising
   
140
     
133
     
7
     
5.3
%
FDIC assessments
   
95
     
95
     
-
     
0.0
%
Audits and exams
   
62
     
64
     
(2
)
   
-3.1
%
Other expenses
   
453
     
471
     
(18
)
   
-3.8
%
Total noninterest expenses
 
$
4,223
   
$
3,906
   
$
317
     
8.1
%

The increase in noninterest expenses between year over year first quarter periods was due principally to salaries and employee benefits and building occupancy expenses.

The increase in salaries and employee benefits was due to wage increases and the first quarter operation of the new Syracuse business banking office together totaling $163,000, a $42,000 increase in deferred compensation expense, and a $23,000 increase in stock-based compensation due to the expansion of the Employee Stock Ownership Plan in connection with the second step Conversion and Offering that occurred on October 16, 2014.  Partially offsetting these increases was a $50,000 increase in the credit due to deferred payroll expense between year over year first quarter periods, and in accordance with ASC 310-20-30.

The increase in building occupancy expenses was principally due to $45,000 in additional building and equipment maintenance, $32,000 in additional property taxes, and $14,000 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 consulting fees.

Data processing expenses increased due principally to the additional amortization expense associated with a newly installed software solution within the lending operations group.

Income Tax Expense

Income tax expense increased by $49,000 for the quarter ended March 31, 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 quarter to accommodate the year to date effective tax rate estimate of 30.0%, exclusive of the net income attributable to our controlling interest in the Insurance Agency.  For the three-month period ended March 31, 2014, the effective tax rate was 27.8%.  The increase in the effective tax rate between the year over year first quarter periods reflected a smaller proportion of tax-exempt items as a proportion of our taxable income in the first quarter of 2015.

Earnings per Share

Basic and diluted earnings per share were $0.12 for the first quarter of 2015 and unchanged from the first quarter of 2014.  While the level of net income was higher between year over year first quarter periods, the company was required to declare a first quarter dividend of $32,000 on its SBLF preferred stock.  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 these unaudited consolidated financial statements.
 

 
Changes in Financial Condition

Assets

Total assets increased $45.8 million, or 8.2%, to $606.8 million at March 31, 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 $30.9 million, or 24.0%, to $159.9 million at March 31, 2015 due principally to the need to collateralize the increase in municipal deposits between these same two time periods. Of the total increase in investment securities, $26.5 million, or 85.8%, was classified within the available-for-sale portfolio, due to the need to acquire short term collateral for the inflow of municipal deposits which typically occurs in the first and third quarter of the year.  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 $3.1 million, or 0.8%, to $390.6 million at March 31, 2015 from December 31, 2014.

Liabilities

Total liabilities increased to $536.8 million at March 31, 2015 from $491.8 million at December 31, 2014.  Deposits increased $67.6 million, or 16.3%, to $483.2 million at March 31, 2015 from $415.6 million at December 31, 2014.  The increase was due largely to the $32.4 million increase in municipal deposits and the $22.9 million increase in business deposits between these two dates.  The increase in municipal deposits represents the addition of three new customer relationships and the seasonal first quarter municipal deposit increase with the draw down of these deposits occurring beginning in the second quarter of 2015 to satisfy funding needs of the municipalities.  The increase in business deposits resulted from organic growth and new customer relationships due, in part, to the new Syracuse business banking office.  These increases allowed short term borrowings from the FHLB to be paid down by $23.1 million.

Stockholders' Equity

The Company's shareholders' equity, exclusive of the noncontrolling interest, increased $758,000 to $69.5 million at March 31, 2015 from $68.8 million at December 31, 2014.  This increase was principally due to a $373,000 increase in retained earnings and a $304,000 reduction in accumulated comprehensive loss.  The increase in retained earnings resulted from $529,000 in net income offset by $124,000 in dividends declared on our common stock and $32,000 in dividends declared on our SBLF preferred stock.  The reduction in accumulated comprehensive loss was the result of the improvement in fair market value of our available for sale investment securities.

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 March 31, 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%.
 

 

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 March 31, 2015
                       
Total Core Capital (to Risk-Weighted Assets)
 
$
64,549
     
16.11
%
 
$
32,058
     
8.00
%
 
$
40,072
     
10.00
%
Tier 1 Capital (to Risk-Weighted Assets)
 
$
59,357
     
14.81
%
 
$
24,043
     
6.00
%
 
$
32,058
     
8.00
%
Tier 1 Common Equity (to Risk-Weighted Assets)
 
$
59,357
     
14.81
%
 
$
18,032
     
4.50
%
 
$
26,047
     
6.50
%
Tier 1 Capital (to Assets)
 
$
59,357
     
10.25
%
 
$
23,156
     
4.00
%
 
$
28,945
     
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:

 
 
March 31,
   
December 31,
   
March 31,
 
(Dollars In thousands)
 
2015
   
2014
   
2014
 
Nonaccrual loans:
           
Commercial loans
 
$
4,280
   
$
4,030
   
$
4,808
 
Consumer
   
279
     
324
     
302
 
Residential mortgage loans
   
1,508
     
1,902
     
1,873
 
Total nonaccrual loans
   
6,067
     
6,256
     
6,983
 
Total nonperforming loans
   
6,067
     
6,256
     
6,983
 
Foreclosed real estate
   
465
     
261
     
699
 
Total nonperforming assets
 
$
6,532
   
$
6,517
   
$
7,682
 
                         
Troubled debt restructurings not included above
 
$
2,244
   
$
2,219
   
$
1,966
 
                         
Nonperforming loans to total loans
   
1.55
%
   
1.61
%
   
2.01
%
Nonperforming assets to total assets
   
1.08
%
   
1.16
%
   
1.46
%

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 March 31, 2015 were $6.5 million and relatively unchanged from December 31, 2014.  Improvement between these same time periods was seen within the residential mortgage loan product segment as both the number and dollar amount of nonperforming residential mortgages decreased.  This was partially offset by an increase in nonperforming other commercial and industrial loans within the commercial loan product segment.

As indicated in the nonperforming asset table above, foreclosed real estate ("FRE") balances increased at March 31, 2015 from December 31, 2014 due to the addition of two residential mortgage properties.  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 these unaudited consolidated financial statements.

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 $5.5 million and $5.3 million at March 31, 2015 and December 31, 2014, respectively.  The Company reported a small increase in the ratio of the allowance for loan losses to gross loans to 1.40% at March 31, 2015 as compared to 1.38% at December 31, 2014.  Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of March 31, 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 March 31, 2015 and December 31, 2014, the Company had $7.3 million and $7.4 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $1.3 million and $917,000, respectively, on these loans.  The increase between these two dates was due largely to the increase in the specific reserve of approximately $400,000 on one large commercial relationship as updated collateral appraisal information became available.

Management has identified potential problem loans totaling $8.4 million as of March 31, 2015 and unchanged from December 31, 2014. 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 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.  Although total potential problem loans remain unchanged between these two dates, the Company reported a $713,000 decrease in loans risk rated as substandard which was offset by an $438,000 increase in loans rated special mention, a less severe risk rating category, and an increase of $133,000 in loans rated doubtful, a more severe risk rating category.
 

 
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 quarter of 2015, as indicated in the Consolidated Statement of Cash Flows, the Company reported net cash flows from financing activities of $44.4 million generated by increased balances of demand, savings and money market deposit accounts as well as increased balances of time deposits and brokered deposits.  Included in this increase was a $32.4 million increase in municipal deposits and a $22.9 million increase in business deposits, both resulting from organic growth and new customer acquisition.  This was invested in purchases of investment securities of $30.7 million, net of proceeds from maturities, sales and redemptions.  In addition, $3.6 million was invested in new loan generation.  Net cash flows from operating activities provided an additional $1.3 million through the first three months of 2015 resulting in an increase in cash and equivalents of $11.7 million through this time period.  As a recurring source of liquidity, the Company's investment securities provided $4.8 million in proceeds from maturities and principal reductions through the first quarter of 2015.

The Company has a number of existing credit facilities available to it.  At March 31, 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 March 31, 2015, the Company had $43.0 million outstanding on its existing lines of credit with $114.0 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 March 31, 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.


 

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.
 
 
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 March 31, 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


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)

May 14, 2015                  /s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer

May 14, 2015                / s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
 
 
EXHIBIT 31.1: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
Certification of Chief Executive Officer
 
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
I, Thomas W. Schneider, certify that:
 
 
1. I have reviewed this Quarterly Report on Form 10-Q of Pathfinder Bancorp, Inc.;
 
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
 
 
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
May 14, 2015
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
EXHIBIT 31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer

Certification of Chief Financial Officer
 
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, James A. Dowd, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of Pathfinder Bancorp, Inc.;
 
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
 
 
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
May 14, 2015
/s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
EXHIBIT 32 Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer

Certification pursuant to 18 U.S.C. �1350, as adopted pursuant to �906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of Pathfinder Bancorp, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange Commission (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. �1350, as adopted pursuant to �906 of the Sarbanes-Oxley Act of 2002, that:
 
 
1. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report..
 
The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002.
 
May 14, 2015
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
 
May 14, 2015
/s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer