UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

_____________________________

FORM 10-Q

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

       EXCHANGE ACT OF 1934

       For the quarterly period ended March 31, 2014

OR

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

       EXCHANGE ACT OF 1934

     For the transition period from _______ to _______

Commission File Number: 000-23601

PATHFINDER BANCORP, INC.

(Exact Name of Company as Specified in its Charter)

FEDERAL	16-1540137
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

214 West First Street, Oswego, NY 13126

(Address of Principal Executive Office) (Zip Code)

(315) 343-0057

(Issuer's Telephone Number including area code)

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

YES T        NO *                                

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

YES T        NO *

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

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

                      (Do not check if a smaller reporting company)

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

As of May 9, 2014, there were 2,979,969 shares issued and 2,623,182 shares outstanding of the registrant’s common stock.

PATHFINDER BANCORP, INC.

INDEX

PART I - FINANCIAL INFORMATION		PAGE NO.
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Condition		3
	Consolidated Statements of Income		4
	Consolidated Statements of Comprehensive Income (Loss)		5
	Consolidated Statements of Changes in Shareholders' Equity		6
	Consolidated Statements of Cash Flows		7
	Notes to Consolidated Financial Statements		9
Item 2.	Management's Discussion and Analysis of Financial Condition		30
	and Results of Operations (Unaudited)
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
Item 4.	Controls and Procedures		42
PART II - OTHER INFORMATION			43
Item 1.	Legal proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered sales of equity securities and use of proceeds
Item 3.	Defaults upon senior securities
Item 4.	Mine Safety Disclosures
Item 5.	Other information
Item 6.	Exhibits
SIGNATURES			44
EXHIBITS			45

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)	2014			2013
ASSETS:
Cash and due from banks	$	7,164		$	6,535
Interest earning deposits		11,769			10,040
Total cash and cash equivalents		18,933			16,575
Interest earning time deposits		500			500
Available-for-sale securities, at fair value		83,663			80,959
Held-to-maturity securities, at amortized cost (fair value of $43,359 and $34,222, respectively)		42,990			34,412
Federal Home Loan Bank stock, at cost		2,035			2,440
Loans		348,142			341,633
Less: Allowance for loan losses		4,999			5,041
Loans receivable, net		343,143			336,592
Premises and equipment, net		11,832			11,644
Accrued interest receivable		1,813			1,715
Foreclosed real estate		699			619
Intangible assets, net		184			187
Goodwill		4,367			4,367
Bank owned life insurance		10,108			8,268
Other assets		5,579			5,515
Total assets	$	525,846		$	503,793
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing	$	381,987		$	361,969
Noninterest-bearing		56,365			48,171
Total deposits		438,352			410,140
Short-term borrowings		17,000			24,000
Long-term borrowings		16,826			16,853
Junior subordinated debentures		5,155			5,155
Accrued interest payable		98			86
Other liabilities		4,613			4,489
Total liabilities		482,044			460,723
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; authorized 10,000,000 shares;
2,979,969 shares issued and 2,623,182 shares outstanding		30			30
Additional paid in capital		8,264			8,226
Retained earnings		29,201			28,788
Accumulated other comprehensive loss		(1,522	)		(1,745	)
Unearned ESOP		(798	)		(826	)
Treasury stock, at cost; 356,787 shares		(4,761	)		(4,761	)
Total Pathfinder Bancorp, Inc. shareholders' equity		43,414			42,712
Noncontrolling interest		388			358
Total equity		43,802			43,070
Total liabilities and shareholders' equity	$	525,846		$	503,793

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

-3

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, 2014		March 31, 2013
Interest and dividend income:
Loans, including fees	$	4,063	$	4,125
Debt securities:
Taxable		421		384
Tax-exempt		195		191
Dividends		33		34
Interest earning time deposits		2		6
Federal funds sold and interest earning deposits		1		1
Total interest income		4,715		4,741
Interest expense:
Interest on deposits		529		659
Interest on short-term borrowings		19		8
Interest on long-term borrowings		147		229
Total interest expense		695		896
Net interest income		4,020		3,845
Provision for loan losses		245		324
Net interest income after provision for loan losses		3,775		3,521
Noninterest income:
Service charges on deposit accounts		279		255
Earnings and gain on bank owned life insurance		60		61
Loan servicing fees		54		44
Net gains on sales and redemptions of investment securities		2		39
Net gains on sales of loans and foreclosed real estate		3		29
Debit card interchange fees		114		106
Other charges, commissions & fees		314		142
Total noninterest income		826		676
Noninterest expense:
Salaries and employee benefits		2,197		1,910
Building occupancy		407		365
Data processing		364		368
Professional and other services		175		159
Amortization of intangible assets		3		-
Advertising		133		116
FDIC assessments		95		84
Audits and exams		64		61
Other expenses		468		442
Total noninterest expenses		3,906		3,505
Income before income taxes		695		692
Provision for income taxes		176		187
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc.		519		505
Net income attributable to noncontrolling interest		30		-
Net income attributable to Pathfinder Bancorp Inc.		489		-
Preferred stock dividends		-		-
Net income available to common shareholders	$	489	$	505
Earnings per common share - basic	$	0.19	$	0.20
Earnings per common share - diluted	$	0.19	$	0.20
Dividends per common share	$	0.03	$	0.03

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

-4

Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
	For the three months ended
(In thousands)	March 31, 2014			March 31, 2013
Net Income	$	519		$	505
Other Comprehensive Income (Loss)
Retirement Plans:
Net unrealized gains on retirement plans		11			95
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		12			15
Unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		320			(374	)
Reclassification adjustment for net gains included in net income		(2	)		(39	)
Net unrealized gains (losses) on securities available-for-sale		318			(413	)
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)		30			-
Other comprehensive income (loss),  before tax		371			(303	)
Tax effect		(148	)		121
Other comprehensive income (loss), net of tax		223			(182	)
Comprehensive income	$	742		$	323
Comprehensive income attributable to noncontrolling interest	$	30		$	-
Comprehensive income attributable to Pathfinder Bancorp, Inc.	$	712		$	323
Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)
Retirement plan net losses recognized in plan expenses	$	(4	)	$	(38	)
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		(128	)		149
Reclassification adjustment for net gains included in net income		1			16
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)		(12	)		-
Income tax effect related to other comprehensive income	$	(148	)	$	121
(1) The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer 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

-5

Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Three months ended March 31, 2014 and March 31, 2013
											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, 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
Balance, January 1, 2013	$	13,000	$	30	$	8,120		$	26,685		$	(1,318	)	$	(936	)	$	(4,834	)	$	-	$	40,747
Net income		-		-		-			505			-			-			-			-		505
Other comprehensive loss, net of tax		-		-		-			-			(182	)		-			-			-		(182	)
ESOP shares earned (3,125 shares)		-		-		7			-			-			27			-			-		34
Stock based compensation		-		-		20			-			-			-			-			-		20
Stock options exercised		-		-		(6	)		-			-			-			6			-		-
Common stock dividends declared ($0.03 per share)		-		-		-			(75	)		-			-			-			-		(75	)
Balance, March 31, 2013	$	13,000	$	30	$	8,141		$	27,115		$	(1,500	)	$	(909	)	$	(4,828	)	$	-	$	41,049

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

-6

Pathfinder Bancorp, Inc. Consolidated Statements of Cash Flows  (Unaudited)
	For the three months ended March 31,
(In thousands)	2014			2013
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.	$	489		$	505
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for loan losses		245			324
Proceeds from sales of loans		-			182
Originations of loans held-for-sale		-			(172	)
Realized gains on sales and redemptions of:
Real estate acquired through foreclosure		(3	)		(19	)
Loans		-			(10	)
Available-for-sale investment securities		(2	)		(39	)
Depreciation		198			176
Amortization of mortgage servicing rights		4			-
Amortization of deferred loan costs		27			34
Earnings on bank owned life insurance		(60	)		(59	)
Realized gain on proceeds from bank owned life insurance		-			(2	)
Net amortization of premiums and discounts on investment securities		157			222
Amortization of intangible assets		3			-
Stock based compensation and ESOP expense		66			54
Net change in accrued interest receivable		(98	)		(195	)
Net change in other assets and liabilities		(56	)		(505	)
Net cash flows from operating activities		970			496
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale		(6,064	)		(28,173	)
Purchase of investment securities held-to-maturity		(8,767	)		-
Net proceeds of  Federal Home Loan Bank stock		405			424
Proceeds from maturities and principal reductions of
investment securities available-for-sale		3,436			8,067
Proceeds from maturities and principal reductions of
investment securities held-to-maturity		185			-
Proceeds from sales and redemptions of:
Available-for-sale investment securities		122			1,893
Real estate acquired through foreclosure		53			55
Purchase of bank owned life insurance		(1,780	)		-
Proceeds from bank owned life insurance		-			2
Net change in loans		(6,953	)		(5,369	)
Purchase of premises and equipment		(386	)		(236	)
Net cash flows from investing activities		(19,749	)		(23,337	)
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts,
money management deposit accounts, MMDA accounts and escrow deposits		32,369			30,973
Net change in time deposits and brokered deposits		(4,157	)		5,607
Net change in short-term borrowings		(7,000	)		(9,000	)
Payments on long-term borrowings		(27	)		(28	)
Cash dividends paid to preferred shareholder - SBLF		-			(83	)
Cash dividends paid to common shareholders		(78	)		(75	)
Change in noncontrolling interest, net		30
Net cash flows from financing activities		21,137			27,394
Change in cash and cash equivalents		2,358			4,553
Cash and cash equivalents at beginning of period		16,575			8,665
Cash and cash equivalents at end of period	$	18,933		$	13,218
The accompanying notes are an integral part of the consolidated financial statements.

-7

CASH PAID DURING THE PERIOD FOR:
Interest	$	683	$	894
Income taxes		1		140
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans		130		-

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

-8

Notes to Consolidated Financial Statements (Unaudited)

(1)  Basis of Presentation

The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc. and its 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 10 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 2013 consolidated financial statements may have been reclassified to conform to the current period presentation.  These reclassifications had no effect on net income or comprehensive income as previously reported.

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.

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, 2013 and 2012 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.

Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

(2)  New Accounting Pronouncements

None applicable to the Company.

(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 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.  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.

-9

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

	Three months ended
	March 31,
(In thousands, except per share data)	2014		2013
Basic Earnings Per Common Share
Net income available to common shareholders	$	489	$	505
Weighted average common shares outstanding		2,529		2,512
Basic earnings per common share	$	0.19	$	0.20
Diluted Earnings Per Common Share
Net income available to common shareholders	$	489	$	505
Weighted average common shares outstanding		2,529		2,512
Effect of assumed exercise of stock options		22		-
Diluted weighted average common shares outstanding		2,551		2,512
Diluted earnings per common share	$	0.19	$	0.20

(4) Investment Securities

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

	March 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	$	19,910	$	3	$	(315	)	$	19,598
State and political subdivisions		6,300		154		(4	)		6,450
Corporate		11,870		190		-			12,060
Residential mortgage-backed - US agency		43,547		576		(523	)		43,600
Total		81,627		923		(842	)		81,708
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		643		4		-			647
Large cap equity fund		456		199		-			655
Other mutual funds		183		181		-			364
Common stock - financial services industry		270		19		-			289
Total		1,552		403		-			1,955
Total available-for-sale	$	83,179	$	1,326	$	(842	)	$	83,663
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	4,814	$	5	$	(19	)	$	4,800
State and political subdivisions		22,831		310		(1	)		23,140
Corporate		3,692		56		(6	)		3,742
Residential mortgage-backed - US agency		11,653		62		(38	)		11,677
Total held-to-maturity	$	42,990	$	433	$	(64	)	$	43,359

-10

	December 31, 2013
			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	$	16,935	$	2	$	(340	)	$	16,597
State and political subdivisions		6,429		164		(6	)		6,587
Corporate		13,498		198		-			13,696
Residential mortgage-backed - US agency		42,378		496		(732	)		42,142
Total		79,240		860		(1,078	)		79,022
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		643		5		-			648
Large cap equity fund		456		195		-			651
Other mutual funds		183		162		-			345
Common stock - financial services industry		271		22		-			293
Total		1,553		384		-			1,937
Total available-for-sale	$	80,793	$	1,244	$	(1,078	)	$	80,959
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	1,872	$	-	$	(25	)	$	1,847
State and political subdivisions		21,371		11		(118	)		21,264
Corporate		3,746		16		(44	)		3,718
Residential mortgage-backed - US agency		7,423		-		(30	)		7,393
Total held-to-maturity	$	34,412	$	27	$	(217	)	$	34,222

The amortized cost and estimated fair value of debt investments at March 31, 2014 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
(In thousands)
Due in one year or less	$	6,009	$	6,035	$	186	$	186
Due after one year through five years		27,436		27,602		3,943		3,940
Due after five years through ten years		4,635		4,471		13,581		13,682
Due after ten years		-		-		13,627		13,874
Sub-total		38,080		38,108		31,337		31,682
Residential mortgage-backed - US agency		43,547		43,600		11,653		11,677
Totals	$	81,627	$	81,708	$	42,990	$	43,359

-11

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, 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		11	$	(283	)	$	12,683		2	$	(32	)	$	1,974		13	$	(315	)	$	14,657
State and political subdivisions		2		(2	)		332		2		(2	)		181		4		(4	)		513
Corporate		-		-			-		-		-			-		-		-			-
Residential mortgage-backed - US agency		17		(317	)		18,471		5		(206	)		4,085		22		(523	)		22,556
Totals		30	$	(602	)	$	31,486		9	$	(240	)	$	6,240		39	$	(842	)	$	37,726
Held-to-Maturity
US Treasury, agencies and GSE's		3	$	(19	)	$	2,919		-	$	-		$	-		3	$	(19	)	$	2,919
State and political subdivisions		1		(1	)		1,472		-		-			-		1		(1	)		1,472
Corporate		1		(6	)		800		-		-			-		1		(6	)		800
Residential mortgage-backed - US agency		4		(38	)		4,282		-		-			-		4		(38	)		4,282
Totals		9	$	(64	)	$	9,473		-	$	-		$	-		9	$	(64	)	$	9,473
	December 31, 2013
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
Available-for-Sale	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
(Dollars in thousands)
US Treasury, agencies and GSE's		14	$	(340	)	$	15,573		-	$	-		$	-		14	$	(340	)	$	15,573
State and political subdivisions		1		(4	)		114		3		(2	)		397		4		(6	)		511
Corporate		-		-			-		-		-			-		-		-			-
Residential mortgage-backed - US agency		25		(682	)		23,442		1		(50	)		878		26		(732	)		24,320
Totals		40	$	(1,026	)	$	39,129		4	$	(52	)	$	1,275		44	$	(1,078	)	$	40,404
Held-to-Maturity
US Treasury, agencies and GSE's		2	$	(25	)	$	1,847		-	$	-		$	-		2	$	(25	)	$	1,847
State and political subdivisions		37		(118	)		17,814		-		-			-		37		(118	)		17,814
Corporate		4		(44	)		3,171		-		-			-		4		(44	)		3,171
Residential mortgage-backed - US agency		6		(30	)		5,526		-		-			-		6		(30	)		5,526
Totals		49	$	(217	)	$	28,358		-	$	-		$	-		49	$	(217	)	$	28,358

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 other securities within the portfolio as of March 31, 2014 represents OTTI.    All  securities are rated A2 or better by Moody’s, with the exception of two corporate securities and all have been in unrealized loss positions for eleven months or less, with the exception of the two previously mentioned corporate holdings, two US agency securities, two municipal securities and five mortgage-backed securities.  The two GSE agency and two municipal securities have relatively insignificant unrealized loss positions.  The unrealized losses reflected in the mortgage-backed security holdings are primarily attributable to changes in interest rates. The two corporate securities are floating rate notes which adjust quarterly based on 3-month Libor.  The securities are reflecting unrealized losses due to current similar offerings being originated at higher spread to Libor, as the market currently demands a greater pricing premium for the associated risk.    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.

-12

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, 2014.

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

	For the three months
	ended March 31,
(In thousands)	2014		2013
Realized gains	$	2	$	39
Realized losses		-		-
	$	2	$	39

As of March 31, 2014 and December 31, 2013, securities with a fair value of $73.8 million and $58.6 million, respectively, were pledged to collateralize certain municipal deposit relationships.  As of the same dates, securities with a fair value of $21.0 million and $21.6 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.

(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 Pathfinder Bank, a wholly owned subsidiary of the Company, 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.

-13

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)	2014			2013			2014		2013
Service cost	$	-		$	-		$	-	$	-
Interest cost		102			95			5		4
Expected return on plan assets		(236	)		(214	)		-		-
Amortization of transition obligation		-			-			-		-
Amortization of net losses		8			90			3		5
Net periodic benefit plan (benefit) cost	$	(126	)	$	(29	)	$	8	$	9

The Company will evaluate the need for further contributions to the defined benefit pension plan during 2014.  The prepaid pension asset is recorded in other assets on the statement of condition as of March 31, 2014.

(6)  Loans

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

	March 31,			December 31,
(In thousands)	2014			2013
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	167,145		$	166,298
Construction		1,208			1,982
Total residential mortgage loans		168,353			168,280
Commercial loans:
Real estate		102,559			95,536
Lines of credit		14,883			14,444
Other commercial and industrial		33,949			32,675
Municipal		2,781			5,122
Total commercial loans		154,172			147,777
Consumer loans:
Home equity and junior liens		21,387			21,110
Other consumer		3,965			4,166
Total consumer loans		25,352			25,276
Total loans		347,877			341,333
Net deferred loan costs		265			300
Less allowance for loan losses		(4,999	)		(5,041	)
Loans receivable, net	$	343,143		$	336,592

-14

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 contracts is dependent upon the counties’ employment and economic conditions.

As of March 31, 2014 and December 31, 2013, residential mortgage loans with a carrying value of $116.6 million and $114.8 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 2013 Annual Report filed on Form 10-K on March 17, 2014, 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
	Municipal
Consumer Loans	Home equity and junior liens
	Other consumer

-15

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, 2014
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	160,143	$	1,749	$	5,240	$	13	$	167,145
Construction		1,208		-		-		-		1,208
Total residential mortgage loans		161,351		1,749		5,240		13		168,353
Commercial loans:
Real estate		95,836		1,276		5,447		-		102,559
Lines of credit		13,314		481		1,088		-		14,883
Other commercial and industrial		32,499		388		916		146		33,949
Municipal		2,781		-		-		-		2,781
Total commercial loans		144,430		2,145		7,451		146		154,172
Consumer loans:
Home equity and junior liens		19,948		401		962		76		21,387
Other consumer		3,856		18		91		-		3,965
Total consumer loans		23,804		419		1,053		76		25,352
Total loans	$	329,585	$	4,313	$	13,744	$	235	$	347,877
	As of December 31, 2013
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	160,013	$	1,649	$	4,622	$	14	$	166,298
Construction		1,982		-		-		-		1,982
Total residential mortgage loans		161,995		1,649		4,622		14		168,280
Commercial loans:
Real estate		90,162		918		4,456		-		95,536
Lines of credit		12,941		560		943		-		14,444
Other commercial and industrial		31,159		468		899		149		32,675
Municipal		5,122		-		-		-		5,122
Total commercial loans		139,384		1,946		6,298		149		147,777
Consumer loans:
Home equity and junior liens		19,567		487		976		80		21,110
Other consumer		4,040		30		74		22		4,166
Total consumer loans		23,607		517		1,050		102		25,276
Total loans	$	324,986	$	4,112	$	11,970	$	265	$	341,333

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.

-16

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, 2014 and December 31, 2013, are detailed in the following tables:

	As of March 31, 2014
	30-59 Days		60-89 Days		90 Days		Total				Total Loans
(In thousands)	Past Due		Past Due		and Over		Past Due		Current		Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	1,844	$	1,032	$	1,873	$	4,749	$	162,396	$	167,145
Construction		-		-		-		-		1,208		1,208
Total residential mortgage loans		1,844		1,032		1,873		4,749		163,604		168,353
Commercial loans:
Real estate		474		269		3,817		4,560		97,999		102,559
Lines of credit		176		-		476		652		14,231		14,883
Other commercial and industrial		672		1,106		515		2,293		31,656		33,949
Municipal		-		-		-		-		2,781		2,781
Total commercial loans		1,322		1,375		4,808		7,505		146,667		154,172
Consumer loans:
Home equity and junior liens		238		14		290		542		20,845		21,387
Other consumer		4		34		12		50		3,915		3,965
Total consumer loans		242		48		302		592		24,760		25,352
Total loans	$	3,408	$	2,455	$	6,983	$	12,846	$	335,031	$	347,877
	As of December 31, 2013
	30-59 Days		60-89 Days		90 Days		Total				Total Loans
(In thousands)	Past Due		Past Due		and Over		Past Due		Current		Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	2,213	$	1,472	$	2,194	$	5,879	$	160,419	$	166,298
Construction		-		-		-		-		1,982		1,982
Total residential mortgage loans		2,213		1,472		2,194		5,879		162,401		168,280
Commercial loans:
Real estate		1,407		1,901		1,934		5,242		90,294		95,536
Lines of credit		341		113		381		835		13,609		14,444
Other commercial and industrial		2,045		1,289		394		3,728		28,947		32,675
Municipal		-		-		-		-		5,122		5,122
Total commercial loans		3,793		3,303		2,709		9,805		137,972		147,777
Consumer loans:
Home equity and junior liens		954		281		402		1,637		19,473		21,110
Other consumer		46		51		45		142		4,024		4,166
Total consumer loans		1,000		332		447		1,779		23,497		25,276
Total loans	$	7,006	$	5,107	$	5,350	$	17,463	$	323,870	$	341,333

-17

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

	March  31,	December 31,
(In thousands)	2014	2013
Residential mortgage loans:
1-4 family first-lien residential mortgages	$             1,873	$             2,194
	1,873	2,194
Commercial loans:
Real estate	3,817	1,934
Lines of credit	476	381
Other commercial and industrial	515	394
	4,808	2,709
Consumer loans:
Home equity and junior liens	290	402
Other consumer	12	45
	302	447
Total nonaccrual loans	$             6,983	$             5,350

There were no loans past due ninety days or more and still accruing interest at March 31, 2014 or December 31, 2013.

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

The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented.  The Company has determined that there were no new TDRs for the three month periods ending March 31, 2014 and March 31, 2013.

The Company had determined that there were no payment defaults on the sole TDR that occurred within the prior twelve months.

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.

-18

Impaired Loans

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

	March 31, 2014						December 31, 2013
			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	$	954	$	954	$	-	$	550	$	550	$	-
Commercial real estate		2,085		2,085		-		1,496		1,499		-
Commercial lines of credit		193		197		-		196		196		-
Other commercial and industrial		288		293		-		266		266		-
Home equity and junior liens		289		289		-		294		294		-
Other consumer		-		-		-		-		-		-
With an allowance recorded:
1-4 family first-lien residential mortgages		400		400		57		402		402		59
Commercial real estate		3,314		3,335		742		2,045		2,054		649
Commercial lines of credit		283		285		233		185		200		135
Other commercial and industrial		316		316		226		139		139		107
Home equity and junior liens		165		165		81		165		165		84
Other consumer		2		2		2		2		2		2
Total:
1-4 family first-lien residential mortgages		1,354		1,354		57		952		952		59
Commercial real estate		5,399		5,420		742		3,541		3,553		649
Commercial lines of credit		476		482		233		381		396		135
Other commercial and industrial		604		609		226		405		405		107
Home equity and junior liens		454		454		81		459		459		84
Other consumer		2		2		2		2		2		2
Totals	$	8,289	$	8,321	$	1,341	$	5,740	$	5,767	$	1,036

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

	For the three months ended
	March 31,
(In thousands)	2014		2013
1-4 family first-lien residential mortgages	$	1,153	$	2,261
Commercial real estate		4,470		3,294
Commercial lines of credit		429		407
Other commercial and industrial		505		859
Home equity and junior liens		457		583
Other consumer		2		4
Total	$	7,016	$	7,408

-19

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)	2014		2013
1-4 family first-lien residential mortgages	$	5	$	30
Commercial real estate		28		45
Commercial lines of credit		1		4
Other commercial and industrial		13		5
Home equity and junior liens		19		15
Other consumer		-		-
Total	$	66	$	99

-20

(7)   Allowance for Loan Losses

Summarized in the tables below are changes in the allowance for loan losses for the indicated periods and information pertaining to the allocation of the allowance for loan losses, balances of the allowance for loan losses, loans receivable based on individual, and collective impairment evaluation by loan portfolio class.  An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.

	For the three months ended 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
	Municipal			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

-21

	For the three months ended March 31, 2013
	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	$	811		$	-		$	1,748		$	440		$	750
Charge-offs		(12	)		-			-			(49	)		(10	)
Recoveries		12			-			-			-			-
Provisions		17			-			147			82			114
Ending balance	$	828		$	-		$	1,895		$	473		$	854
Ending balance: related to loans
individually evaluated for impairment	$	172		$	-		$	451		$	100		$	242
Ending balance: related to loans
collectively evaluated for impairment	$	656		$	-		$	1,444		$	373		$	612
Loans receivables:
Ending balance	$	177,411		$	778		$	84,308		$	13,461		$	32,826
Ending balance: individually
evaluated for impairment	$	2,370		$	-		$	3,852		$	456		$	836
Ending balance: collectively
evaluated for impairment	$	175,041		$	778		$	80,456		$	13,005		$	31,990
				Home equity			Other
	Municipal			and junior liens			consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	2		$	494		$	168		$	88		$	4,501
Charge-offs		-			(81	)		(28	)		-			(180	)
Recoveries		-			13			16			-			41
Provisions		-			63			(17	)		(82	)		324
Ending balance	$	2		$	489		$	139		$	6		$	4,686
Ending balance: related to loans
individually evaluated for impairment	$	-		$	93		$	3		$	-		$	1,061
Ending balance: related to loans
collectively evaluated for impairment	$	2		$	396		$	136		$	6		$	3,625
Loans receivables:
Ending balance	$	4,538		$	21,552		$	3,643					$	338,517
Ending balance: individually
evaluated for impairment	$	-		$	632		$	3					$	8,149
Ending balance: collectively
evaluated for impairment	$	4,538		$	20,920		$	3,640					$	330,368

-22

(8)  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 $4.8 million of standby letters of credit outstanding as of March 31, 2014.  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.

(9)  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.

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Impaired loans: Impaired loans are those loans in which the Company has measured impairment generally based on the fair value of the loan’s collateral.  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, 2014
								Total Fair
(In thousands)	Level 1		Level 2			Level 3		Value
Available-for-sale portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	-	$	19,598		$	-	$	19,598
State and political subdivisions		-		6,450			-		6,450
Corporate		-		12,060			-		12,060
Residential mortgage-backed - US agency		-		43,600			-		43,600
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		647		-			-		647
Large cap equity fund		655		-			-		655
Other mutual funds		-		364			-		364
Common stock - financial services industry		40		249			-		289
Total available-for-sale securities	$	1,342	$	82,321		$	-	$	83,663
Interest rate swap derivative	$	-	$	(123	)	$	-	$	(123	)

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	December 31, 2013
								Total Fair
(In thousands)	Level 1		Level 2			Level 3		Value
Available-for-sale portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	-	$	16,597		$	-	$	16,597
State and political subdivisions		-		6,587			-		6,587
Corporate		-		13,696			-		13,696
Residential mortgage-backed - US agency		-		42,142			-		42,142
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		648		-			-		648
Large cap equity fund		651		-			-		651
Other mutual funds		-		345			-		345
Common stock - financial services industry		42		251			-		293
Total available-for-sale securities	$	1,341	$	79,618		$	-	$	80,959
Interest rate swap derivative	$	-	$	(135	)	$	-	$	(135	)

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013:

	March 31, 2014
							Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value
Impaired loans	$	-	$	-	$	1,254	$	1,254
Foreclosed real estate	$	-	$	-	$	130	$	130

	December 31, 2013
							Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value
Impaired loans	$	-	$	-	$	258	$	258
Foreclosed real estate	$	-	$	-	$	69	$	69

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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, 2014
Impaired loans	Appraisal of collateral	Appraisal Adjustments		5% - 30%	(15%)
	(Sales Approach)	Costs to Sell		4% - 50%	(12%)
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, 2013
Impaired loans	Appraisal of collateral	Appraisal Adjustments		5% - 30%	(14%)
	(Sales Approach)	Costs to Sell		6% - 50%	(12%)
Foreclosed real estate	Appraisal of collateral	Appraisal Adjustments		15% - 15%	(15%)
	(Sales Approach)	Costs to Sell		6% - 7%	(6%)

There have been no transfers of assets into or out of any fair value measurement level during the quarter ended March 31, 2014.  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.

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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.

Interest earning time deposits – 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.

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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, 2014				December 31, 2013
	Fair Value		Carrying		Estimated		Carrying		Estimated
(Dollars In thousands)	Hierarchy		Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and cash equivalents		1	$	18,933	$	18,933	$	16,575	$	16,575
Interest earning time deposits		1		500		500		500		500
Investment securities - available-for-sale		1		1,342		1,342		1,341		1,341
Investment securities - available-for-sale		2		82,321		82,321		79,618		79,618
Investment securities - held-to-maturity		2		42,990		43,359		34,412		34,222
Federal Home Loan Bank stock		2		2,035		2,035		2,440		2,440
Net loans		3		343,143		349,472		336,592		343,660
Accrued interest receivable		1		1,813		1,813		1,715		1,715
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA		1	$	282,620	$	282,620	$	250,248	$	250,248
Time Deposits		2		155,732		155,914		159,892		160,201
Borrowings		2		33,826		34,205		40,853		41,255
Junior subordinated debentures		2		5,155		5,152		5,155		4,825
Accrued interest payable		1		98		98		86		86
Interest rate swap derivative		2		123		123		135		135

(10)  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 9 for further discussion of the fair value of the interest rate derivative.

The Company has $5 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)		2014		2013
Cash flow hedge:
	Other liabilities	$	123	$	135

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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)	2014			2013
Balance as of January 1:	$	(135	)	$	(195	)
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:	$	(123	)	$	(180	)

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

The Company posted cash of $200,000 under arrangements to satisfy collateral requirements associated with the interest rate swap contract.

(11)  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, 2014
(In thousands)	Retirement Plans			Unrealized Gains and Losses on Financial Derivative			Unrealized Gains and Losses on Available-for-Sale Securities			Securities reclassified from AFS to HTM			Total
Beginning balance	$	(982	)	$	(81	)	$	99		$	(781	)	$	(1,745	)
Other comprehensive income (loss) before reclassifications		-			(2	)		192			18			208
Amounts reclassified from AOCI		7			9			(1	)		-			15
Ending balance	$	(975	)	$	(74	)	$	290		$	(763	)	$	(1,522	)

	For the three months ended March 31, 2013
(In thousands)	Retirement Plans			Unrealized Gains and Losses on Financial derivative			Unrealized Gains and Losses on Available-for-Sale Securities			Securities reclassified from AFS to HTM		Total
Beginning balance	$	(2,765	)	$	(117	)	$	1,564		$	-	$	(1,318	)
Other comprehensive income (loss) before reclassifications		-			-			(225	)		-		(225	)
Amounts reclassified from AOCI		57			9			(23	)		-		43
Ending balance	$	(2,708	)	$	(108	)	$	1,316		$	-	$	(1,500	)

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

(In thousands)	For the three months ended
Details about AOCI1 components	March 31, 2014			March 31, 2013			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 expenses2	$	(11	)	$	(95	)	Salaries and employee benefits
		4			38		Provision for income taxes
	$	(7	)	$	(57	)	Net Income
Realized gain on sale of securities	$	2		$	39		Net gains on sales and redemptions of  investment securities
		(1	)		(16	)	Provision for income taxes
	$	1		$	23		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.

(12)  Subsequent Event

On April 9, 2014, the Company, together with the Boards of Directors of Pathfinder Bancorp, MHC, the majority owner of the Company, and Pathfinder Bank, have unanimously adopted a Plan of Conversion and Reorganization (the “Plan of Conversion”).

Pursuant to the Plan of Conversion, Pathfinder Bancorp, MHC will sell its majority ownership in the Company in a “second-step” stock offering.  Simultaneously, the Company, which is currently in the mutual holding company structure, will reorganize to a fully public stock holding company.

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

General

Pathfinder Bancorp, Inc. (the "Company") is a federally chartered mid-tier holding company headquartered in Oswego, New York.  The primary business of the Company is its investment in Pathfinder Bank.  The Company is majority owned by Pathfinder Bancorp, MHC, a federally-chartered mutual holding company (the "Mutual Holding Company").   At March 31, 2014, the Mutual Holding Company held 60.4% of the Company’s common stock and the public and the Employee Stock Ownership Plan (“ESOP”), collectively, held the remaining 39.6% of the outstanding common stock.  At March 31, 2014, Pathfinder Bancorp, Inc. and subsidiaries had total assets of $525.8 million, total liabilities of $482.0 million and shareholders' equity of $43.4 million plus noncontrolling interest of $388,000, which represents the 49% not owned by the Company as a result of the acquisition detailed in Note 23 within the 2013 Audited Consolidated Financial Statements filed on Form 10-K on March 17, 2014.

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The following discussion reviews the Company's financial condition at March 31, 2014 and the results of operations for the three months ended March 31, 2014 and 2013.

Statement Regarding Forward-Looking Statements

When used in this quarterly report the words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, ”project”, or similar expression are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties. By identifying these forward-looking statements for you in this manner, the Company is alerting you to the possibility that its actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  The Company wishes to advise readers that various factors could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.  Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future 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 2013 Annual Report filed with the Securities and Exchange Commission on form 10-K on March 17, 2014, as amended March 25, 2014, (“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, 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.  The measurement of impaired loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral, less costs to sell.  The majority of the Company’s impaired loans are collateral-dependent.  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 is included in this report.

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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, 2014, 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.

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 other-than-temporary impairment (“OTTI”) is present.  The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover.  The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

The estimation of fair value is significant to several of our assets; including investment securities available-for-sale, the interest rate derivative, intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans.  These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available.  Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the 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.

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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

In a press release filed on Form 8-K dated April 9, 2014, the Company, together with the Boards of Directors of Pathfinder Bancorp, MHC and Pathfinder Bank, unanimously adopted a Plan of Conversion and Reorganization (the “Plan of Conversion”).

Pursuant to the Plan of Conversion, Pathfinder Bancorp, MHC will sell its majority ownership in the Company in a “second-step” stock offering.  Simultaneously, the Company, which is currently in the mutual holding company structure, will reorganize to a fully public stock holding company.

As part of the conversion and reorganization, Pathfinder Bank will become a wholly owned subsidiary of a new holding company, which also will be named Pathfinder Bancorp, Inc.  Shares of common stock of the Company held by persons other than Pathfinder Bancorp, MHC (the shares of which will be canceled) will be converted into shares of common stock of the new holding company pursuant to an exchange ratio intended to generally preserve the percentage ownership interests of such persons, as adjusted for the assets of Pathfinder Bancorp, MHC.  In the stock offering, depositors of Pathfinder Bank with qualifying deposits as of March 31, 2013 will have first priority to purchase the shares of common stock.

In another matter, the Company announced on March 27, 2014 that its Board of Directors declared a quarterly dividend of $0.03 per common share payable on May 5, 2014 to shareholders of record on April 15, 2014.

Overview and Results of Operations

Net income for the first quarter of 2014 was $489,000 as compared to $505,000 for the comparable prior year period.  The decrease in net income was principally due to the $287,000 increase in personnel expenses, primarily salaries and deferred compensation expenses.  Also included are personnel expenses related to the Company’s acquisition of the Fitzgibbons Agency, LLC (the “Agency”) in the fourth quarter of 2013.  Partially offsetting this increase was a $150,000 year over year first quarter improvement in noninterest income due largely to insurance commissions from the Agency.  Net interest income recorded a $175,000, or 4.6%, improvement between year over year first quarter periods due largely to lower interest expense.  Basic and diluted earnings per share were $0.19 for the first quarter of 2014 as compared to basic and diluted earnings per share of $0.20 for the first quarter of 2013.

Return on average assets was 0.38% for the three month period ended March 31, 2014 compared to 0.41% for the corresponding period in 2013.  The decrease reflects lower net income and an increase in average assets, due principally to increased levels of commercial real estate loans, between the year over year first quarter periods.

Average assets for the first quarter of 2014 were $509.7 million, or 2.7% greater than the comparable prior year period.  The increase was principally attributable to increases in commercial real estate loans where average balances increased $17.1 million or 20.8% between these same periods as a direct result of the Company’s initiative to diversify its portfolio and increase its penetration within the commercial segments.  In contrast, average balances of real estate residential loans decreased $9.2 million between these two time periods due to the sale of a large block of long-term, low yielding, fixed rate residential loans in the second quarter of 2013.  Net interest margin improved 8 basis points to 3.48% through the first quarter of 2014 as compared to the same prior year period.

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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 yields and rates thereon for the periods indicated. Interest income and resultant yield information in the table is on a fully tax-equivalent basis using marginal federal income tax rates of 34%. 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,
	2014								2013
						Average								Average
	Average					Yield /			Average					Yield /
(Dollars in thousands)	Balance			Interest		Cost			Balance			Interest		Cost
Interest-earning assets:
Real estate loans residential	$	168,739		$	1,884		4.47	%	$	177,934		$	2,059		4.63	%
Real estate loans commercial		99,034			1,224		4.94	%		81,951			1,109		5.41	%
Commercial loans		52,626			617		4.69	%		51,144			608		4.76	%
Consumer loans		25,290			350		5.54	%		25,339			359		5.67	%
Taxable investment securities		96,500			454		1.88	%		93,820			418		1.78	%
Tax-exempt investment securities		27,148			295		4.35	%		25,979			289		4.45	%
Interest-earning time deposits		500			2		1.60	%		2,000			6		1.20	%
Interest-earning deposits		5,669			1		0.07	%		7,117			1		0.06	%
Total interest-earning assets		475,506			4,827		4.06	%		465,284			4,849		4.17	%
Noninterest-earning assets:
Other assets		38,819								32,845
Allowance for loan losses		(5,086	)							(4,551	)
Net unrealized gains
on available-for sale-securities		455								2,525
Total assets	$	509,694							$	496,103
Interest-bearing liabilities:
NOW accounts	$	40,848		$	17		0.17	%	$	39,355		$	19		0.19	%
Money management accounts		13,312			5		0.15	%		14,444			9		0.25	%
MMDA accounts		90,462			94		0.42	%		81,206			96		0.47	%
Savings and club accounts		74,937			15		0.08	%		67,870			14		0.08	%
Time deposits		151,864			398		1.05	%		164,150			521		1.27	%
Junior subordinated debentures		5,155			40		3.10	%		5,155			40		3.10	%
Borrowings		34,259			126		1.47	%		32,437			197		2.43	%
Total interest-bearing liabilities		410,837			695		0.68	%		404,617			896		0.89	%
Noninterest-bearing liabilities:
Demand deposits		52,054								46,765
Other liabilities		3,525								3,632
Total liabilities		466,416								455,014
Shareholders' equity		43,278								41,089
Total liabilities & shareholders' equity	$	509,694							$	496,103
Net interest income				$	4,132							$	3,953
Net interest rate spread							3.38	%							3.28	%
Net interest margin							3.48	%							3.40	%
Ratio of average interest-earning assets
to average interest-bearing liabilities							115.74	%							114.99	%

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Net interest income, on a tax-equivalent basis, increased nominally to $4.1 million for the three months ended March 31, 2014, from $4.0 million for the three months ended March 31, 2013.  This was principally due to a decrease in interest expense on time deposits and borrowings as higher yielding liabilities in both segments saw their maturities replaced by lower balances and lower rates on time deposits and significantly lower rates on borrowings (Federal Home Loan Bank, or “FHLBNY” advances as the major component), despite higher balances.  Generally, deposit products paid lower rates in 2014 than in 2013 and borrowings had a lower cost in 2014 as compared to 2013. Net interest margin improved to 3.48% through the first quarter of 2014 as compared to 3.40% in the first quarter of 2013.

As indicated in the average balance sheet table above and in the rate/volume analysis below, total interest income on a tax-equivalent basis decreased $22,000 due to the decrease in average balances of residential mortgage loans.  This decrease was the result of the residential mortgage loan sale that occurred in the second quarter of 2013.  Partially offsetting this decrease was an increase in interest income from higher average balances of commercial real estate loans despite yields on this product declining 47 basis points between these two time periods, reflecting new loans at current market prices which are lower than amortizing and maturing commercial real estate loans.  Taxable investment securities recorded increases in average balances as well as yields, as this was the only significant interest-earning asset among the loan and investment securities products that reported a yield increase.

Interest expense decreased $201,000 as indicated in the above three month table, and for reasons indicated above.  Additionally, Money Market Deposit Accounts (“MMDA”) recorded an increase in average balances as customers elected to reinvest their maturing certificate of deposits into this short term instrument to improve their liquidity in advance of potentially rising rates in the future.  The Company was able to attract this increase despite a decrease in rates paid to 5 basis points less than rates paid in the first quarter of 2013.

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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,
	2014 vs. 2013
	Increase/(Decrease) Due to
							Total
							Increase
(In thousands)	Volume			Rate			(Decrease)
Interest Income:
Real estate loans residential	$	(104	)	$	(71	)	$	(175	)
Real estate loans commercial		624			(509	)		115
Commercial loans		51			(42	)		9
Consumer loans		-			(9	)		(9	)
Taxable investment securities		12			24			36
Tax-exempt investment securities		39			(33	)		6
Interest-earning time deposits		(14	)		10			(4	)
Interest-earning deposits		(1	)		1			-
Total interest income		607			(629	)		(22	)
Interest Expense:
NOW accounts		4			(6	)		(2	)
Money management accounts		(1	)		(3	)		(4	)
MMDA accounts		44			(46	)		(2	)
Savings and club accounts		3			(2	)		1
Time deposits		(37	)		(86	)		(123	)
Junior subordinated debentures		-			-			-
Borrowings		69			(140	)		(71	)
Total interest expense		82			(283	)		(201	)
Net change in net interest income	$	525		$	(346	)	$	179

Provision for Loan Losses

The provision for loan losses represents management’s estimate of the amount necessary to maintain the allowance for loan losses at an adequate level.  The Company recorded $245,000 in provision for loan losses for the three-month period ended March 31, 2014, as compared to $324,000 for the three-month period ended March 31, 2013.  The Company required a larger provision in the first quarter of 2013 due to the specific reserve required from the addition of a large commercial relationship categorized as impaired during the first quarter of 2013.  Despite the decrease in provision from the prior year’s first quarter, the Company’s provision for the first quarter of 2014 accommodated, in part, the specific reserves in the amount of $339,000 related to two newly impaired commercial relationships, whose aggregate recorded investment was $2.6 million.  Management continues to closely monitor the two newly impaired commercial lending relationships.  Management anticipates that significant improvements will be made in these relationships prior to year end, thus reducing the amount of specific reserves needed over time.  Additionally, net loan charge-offs were $287,000 for the first quarter of 2014 as compared to $139,000 for the same prior year period.  Two thirds of the net loan charge-offs in the first quarter of 2014 resided in the commercial loans, lines, and real estate product classes.  A portion of the increase in net loan charge offs was a result of certain 2014 non-recurring portfolio charge-offs recorded in order to conform more closely to FDIC guidance.  These charge-offs, when annualized, are higher than any amount recorded by the Company over the prior five fiscal years.  In order to accommodate the increase in specific reserves and the level of net loan charge-offs for the first quarter of 2014, the unallocated surplus of $288,000 in the allowance for loan losses recorded at December 31, 2013 was completely utilized to fund these needs.

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Delinquency trends improved overall when comparing total past due loans as a percent of total loans at March 31, 2014 as compared to December 31, 2013.  Within the over 90 day category, however, the proportion of past due loans to total loans increased and is centered within the commercial product segment. Within this product segment, loans past due 90 days increased $2.1 million between March 31, 2014 and December 31, 2013 and principally due to the previously mentioned newly impaired commercial relationships.  In contrast, within the residential loan and consumer loan product segments, all past due categories recorded an improvement in the proportion of past due loans to total loans between these same two time periods.  The ratio of the allowance for loan losses to period end loans decreased modestly from 1.48% at December 31, 2013 to 1.44% at March 31, 2014.  Management reviews trends in historical loss rates and environmental factors on a quarterly basis, in addition to assessing the specific allowance needs on impaired loans, and judges the current level of allowance for loan losses to be adequate to absorb the estimable and probable losses inherent in the loan portfolio.

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 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)	2014		2013		Change
Service charges on deposit accounts	$	279	$	255	$	24		9.4	%
Earnings and gain on bank owned life insurance		60		61		(1	)	(1.6	%)
Loan servicing fees		54		44		10		22.7	%
Debit card interchange fees		114		106		8		7.5	%
Other charges, commissions and fees		314		142		172		121.1	%
Noninterest income before gains		821		608		213		35.0	%
Net gains on sales and redemptions of investment securities		2		39		(37	)	(94.9	%)
Net gains on sales of loans and foreclosed real estate		3		29		(26	)	(89.7	%)
Total noninterest income	$	826	$	676	$	150		22.2	%

As indicated above, noninterest income for the first quarter of 2014 increased over the prior year’s first quarter due principally to the commissions from Pathfinder Risk Management Company, Inc. which owns 51% of the membership interest in Fitzgibbons Agency, LLC (“Agency”).  Service charges on deposit accounts increased due to pricing and activity on extended overdraft fees and ATM fees.  First quarter year over year reductions in net gains on sales and redemptions of investment securities and net gains on sales of loans and foreclosed real estate reflects the nominal activity seen in the current year quarter.

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Noninterest Expense

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

	Three Months Ended March 31,
(Dollars in thousands)	2014		2013		Change
Salaries and employee benefits	$	2,197	$	1,910	$	287			15.0	%
Building occupancy		407		365		42			11.5	%
Data processing		364		368		(4	)		(1.1	%)
Professional and other services		175		159		16			10.1	%
Amortization of intangible assets		3		-		3		NM
Advertising		133		116		17			14.7	%
FDIC assessments		95		84		11			13.1	%
Audits and exams		64		61		3			4.9	%
Other expenses		468		442		26			5.9	%
Total noninterest expenses	$	3,906	$	3,505	$	401			11.4	%

As indicated above, noninterest expense for the year over year first quarter period increased due largely to an increase in the salaries component of the above total personnel expenses.  The total salaries of the Agency comprised $65,000 of this increase as the Agency’s interest was acquired in the fourth quarter of 2013.  The remaining increase in the salary expense reflected $57,000 in reduced salary deferrals related to loan volume, $39,000 in additional commissions and incentive expense, and wage increases. When viewing the employee benefit component of salaries and employee benefits, exclusive of the employee benefit costs of the Agency, total employee benefit costs increased slightly as the reduction in pension expense of $97,000 between year over year first quarter periods was available to largely offset increases in payroll related employee benefits expenses and deferred compensation costs.  Additionally occupancy expenses increased due, in part, to the periodic costs related to the maintenance and upkeep of the three properties purchased from the Company’s Mutual Holding Company in the fourth quarter of 2013.

Income Tax Expense

Income tax expense decreased by $11,000 for the quarter ended March 31, 2014 as compared to the same period in 2013 primarily due to a decrease in pretax income but offset by an increase in the effective tax rate from 27.0% through the first quarter of 2013 to 27.8% for the first quarter of 2014.  The effective tax rate increased to 27.8% from 27.0%, principally reflecting a smaller proportion of tax-exempt items as a proportion of our taxable income in the first quarter of 2014.  The Company has reduced its effective tax rate from the combined federal and state statutory rate of 38.7% primarily through the ownership of tax-exempt investment securities, bank owned life insurance, and other tax saving strategies.

Earnings per Share

Basic and diluted earnings per share were $0.19 in the first quarter of 2014 as compared to basic and diluted earnings per share of $0.20 in the first quarter of 2013.

Changes in Financial Condition

Assets

Total assets increased to $525.8 million at March 31, 2014 as compared to $503.8 million at December 31, 2013.  This increase of approximately $22.0 million, or 4.4%, was primarily due to an increase in investment securities, combined with additional increases in loans, cash and equivalents, and bank owned life insurance.  Investment securities increased to $126.7 million at March 31, 2014 from $115.4 million at year end 2013 with the majority of the increase within the held-to-maturity portfolio.  Total loans increased $6.5 million, or 1.9%, primarily due to increases in commercial real estate loans.  The increase in bank owned life insurance is primarily the result of additional purchases of single premium life insurance policies on selected participants.  These purchases will assist in the funding of the company’s benefits under optional deferred compensation and supplemental executive retirement plans.

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Liabilities

Total liabilities increased to $482.0 million at March 31, 2014, from $460.7 million at December 31, 2013.  Deposits increased $28.2 million with a $24.8 million increase within the municipal deposit portfolio due to seasonal tax collection activities.  The remaining increase was the result of the Company’s organic growth efforts within the retail and business market segments.  This increase in deposits allowed the paydown of $7.0 million in short term borrowings at the Federal Home Loan Bank of New York.

Capital

Shareholders’ equity increased $702,000 to $43.4 million at March 31, 2014.  This increase stemmed largely from a $413,000 increase in retained earnings, resulting from the first quarter net income less dividends declared, and a reduction of $223,000 in accumulated other comprehensive loss as the Company recorded an increase in market value of its available-for-sale investment portfolio.

The Company was not required to declare any dividends in the first quarter of 2014 on its Preferred Stock in connection with the U.S. Treasury’s Small Business Lending Fund (“SBLF”) as positive updated lending information provided to the U.S. Treasury resulted in a credit against the dividend rate for the current quarter.  The Company expects this credit to end in the second quarter of 2014 with the resumption of a 1% dividend rate in the third quarter of 2014 and subsequent quarters.  If the SBLF remains outstanding for more than four and one-half years since issuance, or March 2016, the dividend rate will be fixed at 9%.

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, 2014, 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 6%, and a total risk-based capital ratio exceeding 10%.

Pathfinder Bank’s actual 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, 20143:
Total Core Capital (to Risk-Weighted Assets)	$	48,582		13.8	%	$	28,100		8.0	%	$	35,125		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	44,011		12.5	%	$	14,050		4.0	%	$	21,075		6.0	%
Tier 1 Capital (to Assets)	$	44,011		8.7	%	$	20,165		4.0	%	$	25,207		5.0	%
As of December 31, 2013:
Total Core Capital (to Risk-Weighted Assets)	$	47,862		14.1	%	$	27,106		8.0	%	$	33,883		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	43,454		12.8	%	$	13,553		4.0	%	$	20,330		6.0	%
Tier 1 Capital (to Assets)	$	43,454		8.7	%	$	19,928		4.0	%	$	24,910		5.0	%
As of December 31, 2012:
Total Core Capital (to Risk-Weighted Assets)	$	45,763		14.2	%	$	25,808		8.0	%	$	32,259		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	41,574		12.9	%	$	12,904		4.0	%	$	19,356		6.0	%
Tier 1 Capital (to Assets)	$	41,574		8.8	%	$	18,831		4.0	%	$	23,539		5.0	%

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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)	2014	2013	2013
Nonaccrual loans:
Commercial real estate and commercial loans	$           4,808	$           2,709	$           3,996
Consumer	302	447	382
Residential real estate loans	1,873	2,194	1,605
Total nonaccrual loans	6,983	5,350	5,983
Total nonperforming loans	6,983	5,350	5,983
Foreclosed real estate	699	619	372
Total nonperforming assets	$           7,682	$           5,969	$           6,355
Troubled debt restructurings not included above	$           1,966	$           2,459	$           1,371
Nonperforming loans to total loans	2.01%	1.57%	1.77%
Nonperforming assets to total assets	1.46%	1.18%	1.26%

Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate. 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 above table, total non-performing loans increased at March 31, 2014, when compared to December 31, 2013, due to the addition of two newly impaired commercial relationships previously mentioned.  In contrast, total past due loans as a percentage of total loans decreased to 3.7% at March 31, 2014 from 5.1% at December 31, 2013. Within the commercial loan categories, three of the four commercial loan product classes reported decreases in total past due loans between these same two time periods.  In each of these commercial loan product classes, however, loans 90 days and over increased $2.1 million, with $1.9 million of this increase within the commercial real estate product class.  More than offsetting this increase, commercial loans 30-89 days past due decreased $4.4 million, and occurred in all three product classes, indicating more commercial loans migrated to current status than those migrating to 90 days and over.  There were no past due loans in the municipal loan product class.  Improvement was seen in all past due categories within the residential real estate and consumer loan product segments.  See Note 6 of the consolidated financial statements for further details on ageing of loan receivables.  Management continues to monitor and react to national and local economic trends as well as general portfolio conditions, which may impact the quality of the portfolio.  Management believes that the current level of the allowance for loan losses, at $5.0 million, adequately addresses the current level of risk within the loan portfolio.

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.  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.  The Company uses the fair value of collateral to measure impairment on commercial loans.  A specific reserve is established for an impaired loan if its carrying value exceeds its estimated fair value.  The estimated fair values of substantially all 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.  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 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.

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At March 31, 2014 and December 31, 2013, the Company had $8.3 million and $5.7 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $1.3 million and $1.0 million, respectively, on these loans.  The increase between these two time periods was centered on commercial real estate, with a smaller portion of the increase within the 1-4 family first lien residential mortgages, commercial lines of credit, and commercial loans product classes.  This increase was due to the previously mentioned addition of two newly impaired commercial relationships.

Management has identified potential problem loans totaling $9.8 million as of March 31, 2014 as compared to $10.3 million as of December 31, 2013.  These loans have been internally classified as special mention or substandard, yet are not currently considered impaired or in non-accrual status.  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.  The modest reduction in potential problem loans between these two time periods resulted from the conversion of loans from potential problem loans to impaired loans.  Management judges the current level of allowance for loan losses to be adequate to cover probable credit losses in the current loan portfolio.  As a result, the ratio of the allowance to loan and lease losses to period-end loans at March 31, 2014 was 1.44% as compared to 1.48% at December 31, 2013.  All product classes of loans recorded a decrease in potential problem loans with the exception of 1-4 family first lien residential mortgages and, to a much lesser extent, other consumer loans.  The $316,000 increase in the former is also evidenced by the increased balances of these loans rated substandard and driven principally by the addition of certain loans within one of the previously mentioned newly impaired relationships. Within the 1-4 family first lien residential mortgages rated as substandard, 38% are current and 64% of these loans are within 90 days of past due status.  The Company’s risk rating policy requires 6 months of on-time payment performance prior to the loan being upgraded from the substandard risk rating.

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.

As indicated in the non-performing asset table above and the detailed table below, foreclosed real estate (“FRE”) balances increased at March 31, 2014 from December 31, 2013 and nearly doubled from the year ago first quarter period.  The number of properties within each foreclosed real estate category increasing nominally at March 31, 2014 from the year ago period, but recorded higher average balances between these same two periods.

		March 31,			December 31,			March 31,
(Dollars in thousands)	#		2014	#		2013	#		2013
Foreclosed real estate
Foreclosed residential mortgage loans	7	$	415	5	$	341	5	$	206
Foreclosed commercial real estate	3		284	3		278	2		167
Total	10	$	699	8	$	619	7	$	373

Fair values for FRE 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 normal course of business, Pathfinder Bank has 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.

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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 three months of 2014, as indicated in the Consolidated Statement of Cash Flows, the Company reported net cash flows from financing activities of $21.1 million generated by increased balances of demand, savings and money market deposit accounts.  This was invested in purchases of investment securities of $11.1 million, net of proceeds from maturities, sales and redemptions, and loan generation of $7.0 million.  As a recurring source of liquidity, the Company’s investment securities provided $3.6 million in proceeds from maturities and principal reductions through the first three months of 2014.  Net cash provided by operating activities for this same period was $971,000.

The Company has a number of existing credit facilities available to it.  At March 31, 2014, total credit available to the Company under the existing lines of credit was approximately $151.0 million.  At March 31, 2014, the Company had $31.0 million outstanding on its existing lines of credit with $120.0 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, 2014, 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.

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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

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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.

May 14, 2014                                         /s/ Thomas W. Schneider

Thomas W. Schneider

President and Chief Executive Officer

May 14, 2014                                        /s/ James A. Dowd

James A. Dowd

Senior Vice President and Chief Financial Officer

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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, 2014		/s/ Thomas W. Schneider Thomas W. Schneider President and Chief Executive Officer

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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, 2014		/s/ James A. Dowd James A. Dowd Senior Vice President and Chief Financial Officer

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

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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd, Senior Vice President and Chief Financial Officer of Pathfinder Bancorp, Inc. (the "Company"), each certify in his capacity as an officer of the Company that he has reviewed the Quarterly Report of the Company on Form 10-Q for the quarter ended March 31, 2014 and that to the best of his knowledge:
1.The report fully complies with the requirements of Sections 13(a) 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.
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, 2014	/s/ Thomas W. Schneider Thomas W. Schneider President and Chief Executive Officer
May 14, 2014	/s/ James A. Dowd James A. Dowd Senior Vice President and Chief Financial Officer