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 ending June 30, 2008





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 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. (Check
one):





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 Act).   YES *     NO
T





As of
August 12, 2008, there were 2,971,519 shares issued and 2,484,232 shares
outstanding of the Registrant’s Common Stock.




Table of Contents













PATHFINDER BANCORP, INC.


INDEX












PART
      I - FINANCIAL INFORMATION
              PAGE
      NO.Item
      1.
              Consolidated
      Financial Statements (Unaudited)Consolidated Statements of
      Condition
              3Consolidated Statements of
      Income
              4Consolidated Statements of Changes
      in Shareholders' Equity
              6Consolidated Statements of Cash
Flows
              7Notes to Consolidated Financial
    Statements
              8Item
      2.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              14Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              24Item
      4T.
              Controls and Procedures
              24PART II - OTHER INFORMATION
              25Item
      1.
              Legal
      proceedingsItem
      1A.
              Risk
      FactorsItem
      2.
              Unregistered
      sales of equity securities and use of proceedsItem
      3.
              Defaults
      upon senior securitiesItem
      4.
              Submission
      of matters to a vote of security holdersItem
      5.
              Other
      informationItem
      6.
              ExhibitsSIGNATURES
              27EXHIBITS
              28





Table of Contents


PART I FINANCIAL INFORMATION


Item
1 – Consolidated Financial Statements







PATHFINDER BANCORP,
      INC.CONSOLIDATED
      STATEMENTS OF CONDITION(Unaudited)June
      30,
              
              
              December
      31,(In
      thousands, except share data)
              
              2008
              
              
              2007ASSETS:Cash
      and due from banks
              
              $
              10,372
              
              
              $
              9,908Interest
      earning deposits
              
              
              319
              
              
              
              305Total
      cash and cash equivalents
              
              
              10,691
              
              
              
              10,213Investment
      securities, at fair value
              
              
              79,113
              
              
              
              65,010Federal
      Home Loan Bank stock, at cost
              
              
              2,387
              
              
              
              2,128Loans
              
              
              232,951
              
              
              
              222,749Less:
      Allowance for loan losses
              
              
              1,987
              
              
              
              1,703Loans
      receivable, net
              
              
              230,964
              
              
              
              221,046Premises
      and equipment, net
              
              
              7,543
              
              
              
              7,807Accrued
      interest receivable
              
              
              1,722
              
              
              
              1,673Foreclosed
      real estate
              
              
              655
              
              
              
              865Goodwill
              
              
              3,840
              
              
              
              3,840Bank
      owned life insurance
              
              
              6,560
              
              
              
              6,437Other
      assets
              
              
              2,829
              
              
              
              1,672Total
      assets
              
              $
              346,304
              
              
              $
              320,691LIABILITIES AND SHAREHOLDERS'
      EQUITY:Deposits:Interest-bearing
              
              $
              238,787
              
              
              $
              228,319Noninterest-bearing
              
              
              28,042
              
              
              
              22,766Total
      deposits
              
              
              266,829
              
              
              
              251,085Short-term
      borrowings
              
              
              7,970
              
              
              
              18,400Long-term
      borrowings
              
              
              40,400
              
              
              
              20,010Junior
      subordinated debentures
              
              
              5,155
              
              
              
              5,155Other
      liabilities
              
              
              4,803
              
              
              
              4,337Total
      liabilities
              
              
              325,157
              
              
              
              298,987Shareholders'
      equity:Preferred
      stock, authorized shares 1,000,000; no shares issued or
      outstandingCommon
      stock, par value $0.01; authorized 10,000,000 shares;2,971,019
      and  2,483,732 shares issued and outstanding,
      respectively
              
              
              30
              
              
              
              30Additional
      paid in capital
              
              
              7,900
              
              
              
              7,900Retained
      earnings
              
              
              21,970
              
              
              
              21,734Accumulated
      other comprehensive loss
              
              
              (2,251
              )
              
              
              (1,458
              )Treasury
      stock, at cost; 487,287 shares
              
              
              (6,502
              )
              
              
              (6,502
              )Total
      shareholders' equity
              
              
              21,147
              
              
              
              21,704Total
      liabilities and shareholders' equity
              
              $
              346,304
              
              
              $
              320,691


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


-
3 -
 Table of Contents








PATHFINDER BANCORP, INC.CONSOLIDATED
      STATEMENTS OF INCOME(Unaudited)For
      the three
            
            
            For
      the threemonths
      ended
            
            
            months
      ended(In
      thousands, except per share data)
            
            June
      30, 2008
            
            
            June
      30, 2007Interest
      and dividend income:Loans,
      including fees
            
            $
            3,550
            
            
            $
            3,434Debt
      securities:Taxable
            
            
            775
            
            
            
            676Tax-exempt
            
            
            59
            
            
            
            42Dividends
            
            
            112
            
            
            
            85Federal
      funds sold and interest earning deposits
            
            
            10
            
            
            
            100Total
      interest income
            
            
            4,506
            
            
            
            4,337Interest
      expense:Interest
      on deposits
            
            
            1,413
            
            
            
            1,751Interest
      on short-term borrowings
            
            
            92
            
            
            
            12Interest
      on long-term borrowings
            
            
            364
            
            
            
            451Total
      interest expense
            
            
            1,869
            
            
            
            2,214Net
      interest income
            
            
            2,637
            
            
            
            2,123Provision for loan
      losses
            
            
            135
            
            
            
            75Net
      interest income after provision for loan losses
            
            
            2,502
            
            
            
            2,048Noninterest
      income:Service
      charges on deposit accounts
            
            
            355
            
            
            
            366Earnings
      on bank owned life insurance
            
            
            56
            
            
            
            57Loan
      servicing fees
            
            
            61
            
            
            
            81Net
      losses on sales and impairment of investment securities
            
            
            (342
            )
            
            
            -Net
      gains on sales of loans and foreclosed real estate
            
            
            -
            
            
            
            7Debit
      card interchange fees
            
            
            70
            
            
            
            68Other
      charges, commissions & fees
            
            
            111
            
            
            
            103Total
      noninterest income
            
            
            311
            
            
            
            682Noninterest
      expense:Salaries
      and employee benefits
            
            
            1,242
            
            
            
            1,274Building
      occupancy
            
            
            332
            
            
            
            312Data
      processing expenses
            
            
            330
            
            
            
            352Professional
      and other services
            
            
            203
            
            
            
            226Amortization
      of intangible asset
            
            
            -
            
            
            
            55Other
      expenses
            
            
            314
            
            
            
            308Total
      noninterest expenses
            
            
            2,421
            
            
            
            2,527Income
      before income taxes
            
            
            392
            
            
            
            203Provision
      for income taxes
            
            
            92
            
            
            
            37Net
      income
            
            $
            300
            
            
            $
            166Net
      income per share - basic
            
            $
            0.12
            
            
            $
            0.07Net
      income per share - diluted
            
            $
            0.12
            
            
            $
            0.07Dividends
      per share
            
            $
            0.1025
            
            
            $
            0.1025The
      accompanying notes are an integral part of the unaudited consolidated
      financial statements.





-
4 -
 Table of Contents


PATHFINDER BANCORP,
      INC.CONSOLIDATED
      STATEMENTS OF INCOME(unaudited)For
      the six
            
            
            For
      the sixmonths
      ended
            
            
            months
      ended(In
      thousands, except per share data)
            
            June
      30, 2008
            
            
            June
      30, 2007Interest
      and dividend income:Loans,
      including fees
            
            $
            7,188
            
            
            $
            6,847Debt
      securities:Taxable
            
            
            1,455
            
            
            
            1,314Tax-exempt
            
            
            82
            
            
            
            86Dividends
            
            
            227
            
            
            
            166Federal
      funds sold and interest earning deposits
            
            
            54
            
            
            
            193Total
      interest income
            
            
            9,006
            
            
            
            8,606Interest
      expense:Interest
      on deposits
            
            
            3,012
            
            
            
            3,481Interest
      on short-term borrowings
            
            
            226
            
            
            
            12Interest
      on long-term borrowings
            
            
            719
            
            
            
            864Total
      interest expense
            
            
            3,957
            
            
            
            4,357Net
      interest income
            
            
            5,049
            
            
            
            4,249Provision
      for loan losses
            
            
            280
            
            
            
            125Net
      interest income after provision for loan losses
            
            
            4,769
            
            
            
            4,124Noninterest
      income:Service
      charges on deposit accounts
            
            
            734
            
            
            
            694Earnings
      on bank owned life insurance
            
            
            123
            
            
            
            113Loan
      servicing fees
            
            
            151
            
            
            
            145Net
      losses on sales and impairment of investment securities
            
            
            (342
            )
            
            
            (3
            )Net
      gains on sales of loans and foreclosed real estate
            
            
            6
            
            
            
            -Debit
      card interchange fees
            
            
            136
            
            
            
            116Other
      charges, commissions & fees
            
            
            207
            
            
            
            203Total
      noninterest income
            
            
            1,015
            
            
            
            1,268Noninterest
      expense:Salaries
      and employee benefits
            
            
            2,579
            
            
            
            2,501Building
      occupancy
            
            
            678
            
            
            
            630Data
      processing expenses
            
            
            639
            
            
            
            694Professional
      and other services
            
            
            422
            
            
            
            463Amortization
      of intangible asset
            
            
            -
            
            
            
            111Other
      expenses
            
            
            628
            
            
            
            586Total
      noninterest expenses
            
            
            4,946
            
            
            
            4,985Income
      before income taxes
            
            
            838
            
            
            
            407Provision
      for income taxes
            
            
            206
            
            
            
            76Net
      income
            
            $
            632
            
            
            $
            331Net
      income per share - basic
            
            $
            0.25
            
            
            $
            0.13Net
      income per share - diluted
            
            $
            0.25
            
            
            $
            0.13Dividends
      per share
            
            $
            0.205
            
            
            $
            0.205The
      accompanying notes are an integral part of the unaudited consolidated
      financial statements.




-
5 -
 Table of Contents




PATHFINDER BANCORP, INC.CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYSIX
      MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007(Unaudited)AccumulatedCommon
              
              
              Common
              
              
              Additional
              
              
              
              
              
              Other
      Com-Stock
              
              
              Stock
              
              
              Paid
      in
              
              
              Retained
              
              
              prehensive
              
              
              Treasury(In
      thousands, except share data)
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Loss
              
              
              Stock
              
              
              TotalBalance,
      January 1, 2008
              
              
              2,971,019
              
              
              $
              30
              
              
              $
              7,900
              
              
              $
              21,734
              
              
              $
              (1,458
              )
              
              $
              (6,502
              )
              
              $
              21,704Cumulative
      effect of a change in accountingprinciple
      upon the change in definedemployee
      benefit plans' measurement dateunder
      SFAS 158 (net of $8 tax expense)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (48
              )
              
              
              13
              
              
              
              
              
              
              
              (35
              )Comprehensive
      loss:Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              632
              
              
              
              
              
              
              
              
              
              
              
              632Other
      comprehensive income (loss), net of tax:Unrealized
      holding losses on securitiesavailable
      for sale (net of $654 tax benefit)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (831
              )
              
              
              
              
              
              
              (831
              )Retirement
      plan gains and losses and pastservice
      liability not recognized in planexpenses
      (net of $17 tax expense)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              25
              
              
              
              
              
              
              
              25Total
      Comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (174
              )Dividends
      declared ($0.2050 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (348
              )
              
              
              
              
              
              
              
              
              
              
              (348
              )Balance,  June
      30, 2008
              
              
              2,971,019
              
              
              $
              30
              
              
              $
              7,900
              
              
              $
              21,970
              
              
              $
              (2,251
              )
              
              $
              (6,502
              )
              
              $
              21,147Balance,
      January 1, 2007
              
              
              2,953,619
              
              
              $
              29
              
              
              $
              7,786
              
              
              $
              21,307
              
              
              $
              (1,770
              )
              
              $
              (6,502
              )
              
              $
              20,850Comprehensive
      income:Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              331
              
              
              
              
              
              
              
              
              
              
              
              331Other
      comprehensive loss, net of tax:Unrealized
      holding losses on securitiesavailable
      for sale (net of $122  tax benefit)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (184
              )
              
              
              
              
              
              
              (184
              )Total
      Comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              147Stock
      options exercised
              
              
              17,200
              
              
              
              1
              
              
              
              113
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              114Dividends
      declared ($0.2050 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (350
              )
              
              
              
              
              
              
              
              
              
              
              (350
              )Balance,
      June 30, 2007
              
              
              2,970,819
              
              
              $
              30
              
              
              $
              7,899
              
              
              $
              21,288
              
              
              $
              (1,954
              )
              
              $
              (6,502
              )
              
              $
              20,761


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


-
6 -
 Table of Contents





PATHFINDER BANCORP, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)For
      the six
            
            
            For
      the sixmonths
      ended
            
            
            months
      endedJune
      30,
            
            
            June
      30,(In
      thousands)
            
            2008
            
            
            2007OPERATING
      ACTIVITIESNet
      income
            
            $
            632
            
            
            $
            331Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
            
            
            280
            
            
            
            125Proceeds
      from sales of loans
            
            
            -
            
            
            
            3,000Originations
      of loans held-for-sale
            
            
            -
            
            
            
            (3,006
            )Realized
      losses (gains) on sales of:Foreclosed
      real estate
            
            
            (6
            )
            
            
            (6
            )Loans
            
            
            -
            
            
            
            6Available-for-sale
      investment securities
            
            
            -
            
            
            
            3Impairment
      write-down on available-for-sale securities
            
            
            342
            
            
            
            -Depreciation
            
            
            358
            
            
            
            380Amortization
      of intangible asset
            
            
            -
            
            
            
            111Amortization
      of deferred financing costs
            
            
            -
            
            
            
            15Amortization
      of mortgage servicing rights
            
            
            17
            
            
            
            26Earnings
      on bank owned life insurance
            
            
            (123
            )
            
            
            (113
            )Net
      amortization of premiums and discounts on investment
      securities
            
            
            62
            
            
            
            49Increase
      in accrued interest receivable
            
            
            (49
            )
            
            
            (65
            )Net
      change in other assets and liabilities
            
            
            (152
            )
            
            
            (241
            )Net
      cash provided by operating activities
            
            
            1,361
            
            
            
            615INVESTING
      ACTIVITIESPurchase
      of investment securities available-for-sale
            
            
            (29,683
            )
            
            
            (13,270
            )Net
      (purchases) redemption of Federal Home Loan Bank stock
            
            
            (259
            )
            
            
            261Proceeds
      from maturities and principal reductions ofinvestment
      securities available-for-sale
            
            
            12,808
            
            
            
            5,927Proceeds
      from sale of:Available-for-sale
      investment securities
            
            
            984
            
            
            
            -Real
      estate acquired through foreclosure
            
            
            315
            
            
            
            132Premises
      and equipment
            
            
            -
            
            
            
            33Net
      increase in loans
            
            
            (10,310
            )
            
            
            (2,686
            )Purchase
      of premises and equipment
            
            
            (94
            )
            
            
            (401
            )Net
      cash used in investing activities
            
            
            (26,239
            )
            
            
            (10,004
            )FINANCING
      ACTIVITIESNet
      increase in demand deposits, NOW accounts,savings
      accounts, money market deposit accounts, MMDAaccounts
      and escrow deposits
            
            
            8,920
            
            
            
            4,322Net
      increase in time deposits
            
            
            6,824
            
            
            
            4,918Net
      (repayments on) proceeds from short-term borrowings
            
            
            (10,430
            )
            
            
            3,400Payments
      on long-term borrowings
            
            
            (3,610
            )
            
            
            (10,350
            )Proceeds
      from long-term borrowings
            
            
            24,000
            
            
            
            1,000Proceeds
      from trust preferred obligation
            
            
            -
            
            
            
            5,155Payments
      on trust preferred obligation
            
            
            -
            
            
            
            (5,155
            )Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            114Cash
      dividends paid
            
            
            (348
            )
            
            
            (350
            )Net
      cash provided by financing activities
            
            
            25,356
            
            
            
            3,054Increase
      (decrease) in cash and cash equivalents
            
            
            478
            
            
            
            (6,335
            )Cash
      and cash equivalents at beginning of period
            
            
            10,213
            
            
            
            13,723Cash
      and cash equivalents at end of period
            
            $
            10,691
            
            
            $
            7,388NON-CASH
      INVESTING ACTIVITYTransfer
      of loans to foreclosed real estate
            
            
            112
            
            
            
            109





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












-
7 -
 Table of Contents


PATHFINDER BANCORP, INC.


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 position, 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 2007 consolidated financial statements have been reclassified to conform
to the current period presentation.  These reclassifications had no
effect on net income as previously reported.




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, 2007 and for the two year period then
ended.  Therefore, only material changes in financial condition and
results of operations are discussed in the remainder of Part 1.




Operating
results for the three and six months ended June 30, 2008, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.




(2)
Earnings per Share




Basic
earnings per share have been computed by dividing net income by the weighted
average number of common shares outstanding throughout the three months and six
months ended June 30, 2008 and 2007, using 2,483,732 and 2,483,532 weighted
average common shares outstanding for the three month period and 2,483,732 and
2,482,557 for the six months ended, respectively.  Diluted earnings
per share for the three months and six months ended June 30, 2008 and 2007, have
been computed using 2,486,197 and 2,490,116 for the three month period and
2,487,562 and 2,490,085 for the six months ended,
respectively.  Diluted earnings per share gives effect to weighted
average shares that would be outstanding assuming the exercise of issued stock
options using the treasury stock method.




(3)
Pension and Postretirement Benefits





On
January 1, 2008, the Company recorded a $48,000 charge to retained earnings,
representing the cumulative effect adjustment upon adopting the measurement date
transition rule for the Company’s pension plan and post retirement benefit
plan.  In accordance with SFAS 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, measurement date
provisions, plan assets and obligations are to be measured as of the employer’s
balance sheet date.  The Company previously measured its pension and
postretirement plans as of October 1 of each year.  As a result of the
measurement date provisions, the Company decreased its retirement plan assets
with a corresponding charge to retained earnings, representing the net periodic
benefit cost for the period between the October 1, 2007 measurement date and
January 1, 2008.


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8 -
 Table of Contents


The
composition of net periodic pension plan costs for the three months and six
months ended June 30, is as follows:




For
      the three months
            
            
            For
      the six monthsended
      June 30,
            
            
            ended
      June 30,(In
      thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            54
            
            
            $
            49
            
            
            $
            107
            
            
            $
            98Interest
      cost
            
            
            79
            
            
            
            68
            
            
            
            158
            
            
            
            136Expected
      return on plan assets
            
            
            (112
            )
            
            
            (98
            )
            
            
            (223
            )
            
            
            (196
            )Amortization
      of net losses
            
            
            16
            
            
            
            22
            
            
            
            33
            
            
            
            44Net
      periodic benefit cost
            
            $
            37
            
            
            $
            41
            
            
            $
            75
            
            
            $
            82





The
composition of net periodic postretirement plan costs for the three months and
six months ended June 30, is as follows:




For
      the three months
            
            
            For
      the six monthsended
      June 30,
            
            
            ended
      June 30,(In
      thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            1
            
            
            $
            1
            
            
            $
            1
            
            
            $
            1Interest
      cost
            
            
            5
            
            
            
            5
            
            
            
            10
            
            
            
            10Amortization
      of transition obligation
            
            
            5
            
            
            
            5
            
            
            
            10
            
            
            
            10Net
      periodic benefit cost
            
            $
            11
            
            
            $
            11
            
            
            $
            21
            
            
            $
            21





The
Company previously disclosed in its consolidated financial statements for the
year ended December 31, 2007, that it expects to contribute $233,000 to its
plans in 2008.  As of June 30, 2008,  $108,000 has been
contributed to the plans.





(4)
Comprehensive Income





Accounting principles generally
accepted in the United States of America, require that recognized revenue,
expenses, gains and losses be included in net income.  Although
certain changes in assets and liabilities, such as unrealized gains and losses
on available-for-sale securities, and gains and losses, prior service costs and
transition assets or obligations for defined benefit pension and post-retirement
plans are reported as a separate component of the shareholders’ equity section
of the consolidated statements of condition, such items, along with net income,
are components of comprehensive income.





The
components of other comprehensive income (loss) and related tax effects for the
three and six months ended June 30, are as follows:




For
      the three months
              
              
              For
      the six monthsended
      June 30,
              
              
              ended
      June 30,(In
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Unrealized
      holding losses on securities available for sale:Unrealized
      holding losses arising during the year
              
              $
              (2,102
              )
              
              $
              (406
              )
              
              $
              (1,726
              )
              
              $
              (309
              )Reclassification
      adjustment for losses included in net income
              
              
              342
              
              
              
              -
              
              
              
              342
              
              
              
              3Net
      unrealized losses on securities available for sale
              
              
              (1,760
              )
              
              
              (406
              )
              
              
              (1,384
              )
              
              
              (306
              )Defined
      benefit pension and post retirement plans:Reclassification
      adjustment for amortization of benefit plans'net
      loss and prior service liability recognized in netperiodic
      expense
              
              
              42
              
              
              
              -
              
              
              
              42
              
              
              
              -Net
      change in defined benefit plan assets
              
              
              42
              
              
              
              -
              
              
              
              42
              
              
              
              -Other
      comprehensive loss before tax
              
              
              (1,718
              )
              
              
              (406
              )
              
              
              (1,342
              )
              
              
              (306
              )Tax
      effect
              
              
              686
              
              
              
              162
              
              
              
              536
              
              
              
              122Other
      comprehensive loss
              
              $
              (1,032
              )
              
              $
              (244
              )
              
              $
              (806
              )
              
              $
              (184
              )
 
 -
9 -
 Table of Contents
 The
components of accumulated other comprehensive loss and related tax effects as of
the dates indicated are as follows:
  June
      30,
                  
                  
                  December
      31,(In
      thousands)
                  
                  2008
                  
                  
                  2007Unrealized
      losses on securities available for sale (net of taxbenefit
      2008 - $995; 2007 - $441)
                  
                  $
                  (1,492
                  )
                  
                  $
                  (662
                  )Net
      pension losses and past service liability (net of taxbenefit
      2008 - $475; 2007 - $495)
                  
                  
                  (713
                  )
                  
                  
                  (742
                  )Net
      post-retirement losses and past service liability (net of
    taxbenefit
      2008 - $31; 2007 - $36)
                  
                  
                  (46
                  )
                  
                  
                  (54
                  )$
                  (2,251
                  )
                  
                  $
                  (1,458
                  )
  (5)
Guarantees





The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit.  Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.  Generally,
all letters of credit, when issued, have expiration dates within one
year.  The credit risk involved in issuing letters of credit is
essentially the same as those that are involved in extending loan facilities to
customers.  The Company generally holds collateral and/or personal
guarantees supporting these commitments.  The Company had $1.7 million
of standby letters of credit as of June 30, 2008.  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 current amount of the liability as of June 30,
2008, for guarantees under standby letters of credit issued is not
material.





(6)
Fair Value Measurements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
(“SFAS 157”) which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements that require or permit
fair value measurements. SFAS 157 establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset.   The
standard became effective for the Company January 1, 2008, including interim
periods.  In February 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 157-2, “Effective Date of FASB Statement No. 157.”  This FSP
delays the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) to January 1,
2009.  This delay relates to non-financial assets and liabilities that
are not measured at fair value on an ongoing basis, but are subject to fair
value adjustments in certain circumstances (for example, when there is evidence
of impairment).





SFAS 157
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 our market assumptions. In accordance with SFAS 157, 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.








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10 -
 Table of Contents


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





Investment
securities:  The fair values of securities available for sale are
determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1) or 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).





Impaired
loans: Impaired loans are those that are accounted for under SFAS 114, Accounting by Creditors for
Impairment of a Loan, 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 independent third party appraisals of
the properties, or discounted cash flows based upon expected
proceeds.  These assets are included as Level 3 fair values, based
upon the lowest level of input that is significant to the fair value
measurements.  The fair value consists of loan balances less their
valuation allowances as determined under SFAS 114.





Assets
and liabilities measured at fair value on a recurring basis, are summarized
below:




Fair Value Measurements,
    UsingQuoted
      Prices
            Significant
            SignificantIn
      Active Markets
            Other
      Observable
            UnobservableFor
      Identical Assets
            Inputs
            Inputs(In
      thousands)
            June
      30, 2008
            (Level
      1)
            (Level
      2)
            (Level
      3)Assets:Investment
      securities available for sale:
            $79,113
            $    -
            $79,113
            $   -








Changes
in the fair value of available-for-sale securities are recorded on the balance
sheet under accumulated-other-comprehensive loss, while gains and losses from
sales are recognized as income.





From time
to time, certain assets may be recorded at fair value on a non-recurring basis.
These non-recurring fair value adjustments typically are a result of the
application of lower of cost or market accounting or a write-down occurring
during the period.





Assets
and liabilities measured at fair value on a nonrecurring basis, are summarized
below:





Fair Value Measurements,
    UsingQuoted
      Prices
            Significant
            SignificantIn Active Markets
            Other Observable
            UnobservableFor Identical Assets
            Inputs
            Inputs(In
      thousands)
            June
      30, 2008
            (Level 1)
            (Level 2)
            (Level 3)Assets:Impaired
      loans:
            $1,983
            $    -
            $    -
            $1,983








Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $2.1 million, with a
valuation allowance of $129,000.  There was no additional provision
for loan losses resulting from this valuation during the period.








-
11 -
 (7)
New Accounting Pronouncements





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115, (SFAS 159). This standard permits an entity with an option to choose
to measure selected financial assets and liabilities at fair value. Most of the
provisions in SFAS 159 are elective; however, the amendment to SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The FASB's stated objective in
issuing this standard is as follows: "to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions."  The fair value
option established by SFAS 159 permits all entities to choose to measure
eligible items at fair value at specified election dates.  SFAS 159 is
effective for the Company as of January 1, 2008. The Company did not elect the
fair value option for any financial assets or financial liabilities as of
January 1, 2008.





In
December 2007, the FASB issued Statement No. 141 (R), Business Combinations (SFAS
141R). This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective for the Company January 1, 2009. This
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.





In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective for the Company January 1, 2009.  The
Company does not expect the adoption of SFAS No. 160 to have a material impact
on its consolidated financial statements.





Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments."  Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
adoption of SAB 109 did not have a material impact on the Company’s consolidated
financial statements.





In
February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3,
“Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions.” This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original transfers made after that date; early adoption will
not be allowed. The Company is currently evaluating the potential impact the new
pronouncement will have on its consolidated financial statements.





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(SFAS 161).  SFAS 161 requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  SFAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 has been applied, and the
impact that hedges have on an entity’s financial position, financial
performance, and cash flows.  SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged. The Company is currently evaluating the potential impact the new
pronouncement will have on its consolidated financial statements.





-
12 -
 Table of Contents
























-
13 -
 Table of Contents


Item 2 - Management'sDiscussion and Analysis of Financial
Condition and Results of Operations




General





Throughout
Management’s Discussion and Analysis (“MD&A”) the term “the Company”, refers
to the consolidated entity of Pathfinder Bancorp, Inc.  Pathfinder
Bank and Pathfinder Statutory Trust I are wholly owned subsidiaries of
Pathfinder Bancorp, Inc., however, Pathfinder Statutory Trust I is not
consolidated for reporting purposes.  Pathfinder Commercial Bank,
Pathfinder REIT, Inc. and Whispering Oaks Development Corp. represent wholly
owned subsidiaries of Pathfinder Bank.  At June 30, 2008, Pathfinder
Bancorp, M.H.C, the Company’s mutual holding company parent, whose activities
are not included in the MD&A, held 63.7% of the Company’s outstanding common
stock and the public held 36.3%.





The
following discussion reviews the Company's financial condition at June 30, 2008
and the results of operations for the three months and six months ended June 30,
2008 and June 30, 2007.





This
Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.  Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.  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 the
factors listed above 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.





The
Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.





The
Company's net income is primarily dependent on its net interest income, which is
the difference between interest income earned on its investments in mortgage
loans, investment securities and other loans, and its cost of funds consisting
of interest accrued on deposits and borrowed funds.  The Company's net
income is also affected by its provision for loan losses, as well as by the
amount of other income, including income from fees and service charges on
deposit accounts, net gains and losses on sales and the impairment of
securities, loans and foreclosed real estate, and other expenses such as
salaries and employee benefits, building occupancy and equipment costs, data
processing and income taxes.  Earnings of the Company also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the
Company.  In particular, the general level of market interest rates
which tend to be highly cyclical have a significant impact on our
earnings.





Application
of Critical Accounting Policies





The
Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America 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.










-
14 -


The most
significant accounting policies followed by the Company are presented in Note 1
to the consolidated financial statements included in the 2007 Annual Report on
Form 10-K ("the Consolidated Financial Statements").   Beginning
with its 2007 Annual Report, the Company has elected to file its Exchange Act
reports under the rules and regulations applicable to smaller reporting
companies.





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 and 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 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.




The
Company carries all of its investments at fair value with any unrealized gains
or losses reported net of tax as an adjustment to shareholders' equity, except
for security impairment losses 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
security portfolio for other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.  Based on management's assessment at June 30,
2008, the Company held a position in a mutual fund whose fair value decline was
expected to be other than temporary.  As a result of this
determination, an other-than-temporary impairment charge of $342,000, relating
to the Company’s holdings in the fund, was recorded.  The fund’s value
decline is a result of both weakness in the trading market of the underlying
securities and a deterioration in the credit quality of a portion of the funds
underlying private label mortgage-backed security holdings. The Company’s
ability to reduce its investment position in the fund is limited by the fund’s
redemption policy.  In particular, the fund currently is limiting cash
redemptions to $250,000 every 90 days, with any redemptions in excess of
$250,000 paid by transferring underlying assets held by the fund. The Company
has received its initial $250,000 cash redemption and currently expects, subject
to market conditions, to request further cash redemptions when allowed in future
quarters.  At June 30, 2008, the total carrying value of the Company’s
remaining investment in the fund is approximately $3,073,000.





Overview





Net
income was $300,000, or $0.12 per basic and diluted share, for the three months
ended June 30, 2008, as compared to $166,000, or $0.07 per basic and diluted
share, for the same period in 2007.  For the six months ended June 30,
2008, the Company reported net income of $632,000, or $0.25 per basic and
diluted share as compared to $331,000, or $0.13 per basic and diluted share for
the same period in 2007.  During the second quarter of 2008, the
Company continued its efforts toward transforming its more traditional thrift
balance sheet with mostly residential loans as earning assets, toward that of a
community bank with a more diverse mix of residential, consumer and commercial
loans. On an average balance basis, total commercial loans comprised 31.0% of
the total gross loan portfolio for the quarter ended June 30, 2008.





-
15 -
 Table of Contents


On March
22, 2007, the Company entered into a junior subordinated debenture for $5.2
million, with interest adjustable quarterly at a 1.65% spread over the 3-month
LIBOR.  The Company used the proceeds from that issuance to retire its
original junior subordinated debenture on June 27, 2007, at its first call
date.  The original obligation was for $5.2 million, adjustable
quarterly at a spread of 3.45% over the 3-month LIBOR.  The new
issuance and retirement of the original junior subordinated debenture will
result in an approximate pre-tax savings of $90,000 to the Company during
2008.





Results
of Operations





The
return on average assets and return on average shareholders' equity were 0.35%
and 5.41%, respectively, for the three months ended June 30, 2008, compared with
0.21% and 3.15%, respectively, for the three months ended June 30,
2007.  During the second quarter of 2008, when compared to the second
quarter of 2007, net interest income increased $514,000, partially offset by a
decrease in core noninterest income of $22,000.  The increase in net
interest income was further offset by an increased provision for loan losses of
$60,000 and an impairment charge of $342,000 on an available-for-sale
security.  Noninterest expenses decreased $106,000.  The
Company benefited from a steepening of the yield curve during
2008.  This was in contrast to the flat and inverted yield curve that
characterized the interest rate environment in 2006 and most of
2007.





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.





Net
interest income, on a tax-equivalent basis, increased to $2.7 million for the
three months ended June 30, 2008, from $2.1 million for the three months ended
June 30, 2007.  The Company's net interest margin for the second
quarter of 2008 increased to 3.41% from 2.99% when compared to the same quarter
in 2007.  Recent actions by the Federal Reserve to decrease short-term
interest rates have resulted in a positively sloped yield
curve.  Consequently, the Company’s cost of funds in 2008 were lower
than in 2007.  This, combined with efforts to maintain the current
levels of earning asset yields, has resulted in an expansion of the Company’s
net interest margin. The increase in net interest income reflects a decrease of
74 basis points in the average cost of interest bearing liabilities, which was
only partially offset by a decrease of 29 basis points in the average yield
earned on earning assets for the three-month period ended June 30, 2008 as
compared to the same period in 2007.  Average interest-earning assets
increased 9% to $313.3 million for the three months ended June 30, 2008, as
compared to $286.6 million for the three months ended June 30,
2007.  The increase in average earning assets is primarily
attributable to a $23.1 million increase in loans receivable, an $8.1 million
increase in average investment securities and a $4.5 million decrease in
interest earning deposits.  Average interest-bearing liabilities
increased $22.2 million to $287.6 million from $265.4 million at June 30, 2007.
The increase in the average balance of interest-bearing liabilities resulted
primarily from a $12.5 million increase in borrowings and a $9.7 million
increase in average deposits.




For the
six months ended June 30, 2008, net interest income, on a tax-equivalent basis,
increased to $5.1 million from $4.3 million for the six months ended June 30,
2007.  Net interest margin increased 31 basis points, to 3.31% at June
30, 2008 from 3.00% at June 30, 2007. Average interest-earning assets increased
8% to $309.5 million for the six months ended June 30, 2008 as compared to
$285.9 million for the six months ended June 30, 2007, and the yield on
interest-earning assets decreased 19 basis points to 5.87% from 6.06% for the
comparable period.   The increase in average interest-earning
assets was primarily attributable to a $20.9 million increase in loans
receivable and a $4.8 million increase in investment securities, partially
offset by a $2.1 million decrease in interest earning
deposits.  Average interest-bearing liabilities increased $20 million
but the cost of funds decreased 51 basis points to 2.77% for the six months
ended June 30, 2008, from 3.28% for the same period in 2007.  The
increase in the average balance of interest-bearing liabilities resulted
primarily from an $11.5 million, or 36.7%, increase in borrowings and an $8.5
million, or 3.6%, increase in average deposits.





-
16 -
 Table of Contents





Interest
Income





Total
interest income, on a tax-equivalent basis, for the quarter ended June 30, 2008,
increased $175,000, or 4%, to $4.5 million from $4.4 million for the quarter
ended June 30, 2007.





The
average balance of loans increased $23.1 million to $226.3 million, with average
yields decreasing 49 basis points to 6.29% during the second quarter of
2008.  Average residential real estate loans increased $11.7 million,
or 10%, and experienced a decrease in the average yield to 5.70% from 5.81% in
the comparable quarter of 2007.   Average commercial real estate
loans increased $3.9 million, while the average yield on those loans decreased
to 7.45% from 7.89% from the period a year earlier. Average commercial loans
increased $4.9 million and experienced a decrease in the average yield of 235
basis points, to 6.07% for the quarter ended June 30, 2008, from 8.42%, in the
quarter ended June 30, 2007. The decrease in the average yield on commercial
loans was the result of new commercial loan origination activity taking place at
lower yields, variable rate loans pricing downwards, and the reversal of
interest due on nonperforming commercial loans during the second quarter of
2008. Average consumer loans increased $3.6 million, or 16%, while the average
yield decreased by 111 basis points. The Company's municipal loan portfolio
decreased $1 million, or 35%, when comparing the second quarter of 2008 to the
same period in 2007.  The average tax equivalent yield on the
municipal loan portfolio increased to 6.83% in the second quarter of 2008 from
6.18% for the same period in 2007.





Average
investment securities (taxable and tax-exempt) for the quarter ended June 30,
2008, increased by $8.1 million, with an increase in tax-equivalent interest
income from investments of $150,000, or 18.3%, when compared to the second
quarter of 2007.  The average tax-equivalent yield of the portfolio
increased 30 basis points, to 4.62% from 4.32%. The increase in average
investment securities was primarily due to the purchase of $16.1 million of
mortgage-backed securities that were acquired with excess liquidity resulting
from retail deposit growth outpacing loan portfolio growth during the first six
months of the year. The security activity was also a result of a pre-funding
strategy whereby securities were acquired in advance of significant scheduled
maturity activity anticipated over the next 9 to 12 months. These purchases were
offset by the scheduled maturity of short-term investments that were acquired
during the first quarter of 2007 in connection with the collateralization of
increasing municipal deposit levels.  In addition, the Company entered
into a $5 million leverage transaction whereby investment securities were
purchased and used as collateral associated with a new borrowing arrangement
with a third party.  Thus, $5 million of new long-term borrowings were
used to fund the acquisition of $5 million in security purchases.





Total
interest income, on a tax-equivalent basis, for the six months ended June 30,
2008 increased $420,000, or 5%, when compared to the six months ended June 30,
2007.





Average
loans increased $20.9 million, with average yields decreasing 31 basis points to
6.42% from 6.73% for the six-month period ended June 30, 2008 when compared with
the same period in 2007.  Average residential real estate loans
increased $10.1 million, or 8.5%, and experienced a very slight decrease in the
average yield of only 1 basis point from the comparable six-month period ended
June 30, 2007.   Average commercial real estate loans increased
$4.3 million, while the average yield on those loans decreased to 7.52% from
7.75% from the period a year earlier. Average commercial loans increased $2.5
million and experienced a decrease in the average yield of 193 basis points, to
6.56% for the six months ended June 30, 2008, from 8.49%, for the six months
ended June 30, 2007. The decrease in the average yield on commercial loans was
the result of new commercial loan origination activity taking place at lower
yields, variable rate loans pricing downwards, and the reversal of interest due
on nonperforming commercial loans during the second quarter of 2008. Average
consumer loans increased $4.2 million, or 19%, while the average yield decreased
by 86 basis points. The Company's municipal loan portfolio decreased $213,000
when comparing the first two quarters of 2008 to the same period in
2007.  The average tax equivalent yield on the municipal loan
portfolio increased to 6.91%, for the first half of 2008, from 6.26% for the
same period in 2007.





For the
six months ended June 30, 2008, tax-equivalent interest income from investment
securities increased $210,000, or 13%, compared to the same period in
2007.   The average tax-equivalent yield of the portfolio
increased 27 basis points, to 4.57% from 4.30%.   Moreover, there
was a $4.8 million increase in the average balance of investment securities,
reflecting the purchase of mortgage-backed securities mentioned
above.








-
17 -
 Table of Contents


Interest
Expense





Total
interest expense decreased $345,000 for the three months ended June 30, 2008,
compared to the same quarter in 2007, as the average cost of funds decreased 74
basis points to 2.60% in 2008 from 3.34% in 2007.  Average money
management accounts decreased $521,000, combined with a 34 basis point reduction
in the cost of funds.  This decrease was an offset to the increases
noted in other deposit types.  The average balance of NOW accounts
increased $1 million and the average cost of such deposits decreased by 19 basis
points compared with the same three-month period in
2007.  Additionally, the average balance of money market demand
accounts, for the three months ended June 30, 2008, increased $3.8 million from
the three-month average at June 30, 2007.  The average cost of these
funds decreased to 1.75% for the three months ended June 30, 2008 from 4.13% for
the three months ended June 30, 2007.  Average time deposits increased
by $5.3 million while the average cost of funds decreased to 3.82% from 4.54% in
2007.  Average balances of savings deposits increased by
$92,000.





Interest
expense on borrowings decreased by 1.6%, from the prior period as a result of
the refinancing of trust preferred debt and the reduction in its average cost of
funds to 4.50% from 7.81% in 2007, which occurred with the new issuance of trust
preferred debt in March 2007 and retirement of the original subordinated
debentures during June 2007. This savings was offset by the increase in average
borrowings of $17.6 million.





Total
interest expense decreased $400,000 for the six months ended June 30, 2008,
compared to the same period in 2007, as the average cost of funds decreased 51
basis points to 2.77% in 2008 from 3.28% in 2007.  Average money
management accounts decreased $1.3 million, combined with a 26 basis point
reduction in the average cost of funds.  Average savings deposits also
decreased by $318,000 for the six-month period.  These decreases were
offset by the increases noted in other deposit types.  The average
balance of NOW accounts increased $1.2 million and the resulting increase in
interest expense was offset by a 9 basis point reduction in the average cost of
funds from the six-month period in 2007.  Additionally, the average
balance of money market demand accounts, for the six months ended June 30, 2008,
increased $5.9 million from the six-month average at June 30,
2007.  The average cost of money market demand accounts decreased to
2.23% from 4.15%.  Average time deposits increased $3 million from the
average balance for the six months ended June 30, 2007.  The average
cost of time deposits decreased to 4.00% from 4.48% in 2007.





Interest
expense on borrowings increased 8% from the prior six-month period. The
reduction in the average cost of borrowings to 4.43% from 5.61% in 2007, was
offset by an increase in average borrowings of $11.5 million.





Provision
for Loan Losses




Provision
for loan losses increased $60,000 and $155,000 for the three-month and six-month
periods ended June 30, 2008 when compared to the same periods in 2007,
respectively.  The increased provision is reflective of a growing loan
portfolio and one more heavily weighted to commercial term and commercial real
estate, which have higher inherent risk characteristics than a consumer real
estate portfolio, as well as a general weakening in economic
conditions.  The Company's ratio of allowance for loan losses to
period end loans increased to 0.85% at June 30, 2008, as compared to 0.76% at
December 31, 2007.  Nonperforming loans to period end loans increased
to 1.25% at June 30, 2008 from 0.71% at December 31, 2007. The increase in total
non-performing loans is primarily the result of $497,000 in short-term, interest
only, notes maturing during the period.  These notes are currently
awaiting permanent financing structures by the Company.  In addition,
one large commercial credit relationship, with approximately $1.1 million
outstanding, is awaiting initial production orders in connection with a contract
with a national distributor.  Management believes the financial
strength of the individual borrowers, combined with the related value of any
underlying collateral, will not result in any recorded loss beyond currently
established reserves.






-
18 -
 Table of Contents






Noninterest
Income





The
Company's noninterest income is primarily comprised of fees on deposit account
balances and transactions, loan servicing, commissions, and net gains (losses)
on securities, loans and foreclosed real estate.  The following table
sets forth certain information on noninterest income for the periods
indicated:





Three
      Months Ended June 30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            ChangeService
      charges on deposit accounts
            
            $
            355
            
            
            $
            366
            
            
            $
            (11
            )
            
            
            -3.0
            %Earnings
      on bank owned life insurance
            
            
            56
            
            
            
            57
            
            
            
            (1
            )
            
            
            -1.8
            %Loan
      servicing fees
            
            
            61
            
            
            
            81
            
            
            
            (20
            )
            
            
            -24.7
            %Debit
      card interchange fees
            
            
            70
            
            
            
            68
            
            
            
            2
            
            
            
            2.9
            %Other
      charges, commissions and fees
            
            
            111
            
            
            
            103
            
            
            
            8
            
            
            
            7.8
            %Core
      noninterest income
            
            
            653
            
            
            
            675
            
            
            
            (22
            )
            
            
            -3.3
            %Net
      losses on sales and impairment of investment securities
            
            
            (342
            )
            
            
            -
            
            
            
            (342
            )
            
            
            -100.0
            %Net
      gains on sales of loans and foreclosed real estate
            
            
            -
            
            
            
            7
            
            
            
            (7
            )
            
            
            -100.0
            %Total
      noninterest income
            
            $
            311
            
            
            $
            682
            
            
            $
            (371
            )
            
            
            -54.4
            %Six
      Months Ended June 30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            ChangeService
      charges on deposit accounts
            
            $
            734
            
            
            $
            694
            
            
            $
            40
            
            
            
            5.8
            %Earnings
      on bank owned life insurance
            
            
            123
            
            
            
            113
            
            
            
            10
            
            
            
            8.8
            %Loan
      servicing fees
            
            
            151
            
            
            
            145
            
            
            
            6
            
            
            
            4.1
            %Debit
      card interchange fees
            
            
            136
            
            
            
            116
            
            
            
            20
            
            
            
            17.2
            %Other
      charges, commissions and fees
            
            
            207
            
            
            
            203
            
            
            
            4
            
            
            
            2.0
            %Core
      noninterest income
            
            
            1,351
            
            
            
            1,271
            
            
            
            80
            
            
            
            6.3
            %Net
      losses on sales and impairment of investment securities
            
            
            (342
            )
            
            
            (3
            )
            
            
            (339
            )
            
            
            11300.0
            %Net
      gains on sales of loans and foreclosed real estate
            
            
            6
            
            
            
            -
            
            
            
            6
            
            
            
            100.0
            %Total
      noninterest income
            
            $
            1,015
            
            
            $
            1,268
            
            
            $
            (253
            )
            
            
            -20.0
            %











For the
three months ended June 30, 2008, core noninterest income decreased $22,000, or
3.3%, when compared with the three months ended June 30, 2007. The decrease in
service charges on deposit accounts was primarily attributable to a decrease in
both ATM fees and other miscellaneous fees charged to depositor accounts. The
decrease in loan servicing fees was primarily due to reductions in commercial
and installment loan late fees, combined with other loan related fee reductions
in order to remain competitive in the local market.  The increase in
other charges, commissions and fees was primarily due to an increase in fees
associated with ATM usage.  The increase in net securities losses is a
result of recording an other-than-temporary impairment charge of
$342,000.





For the
six months ended June 30, 2008, core noninterest income increased $80,000, or
6.3%, when compared with the six months ended June 30,
2007.   The majority of the increase in core noninterest income
was comprised of an increase in service charges on deposit accounts and an
increase in debit card interchange fees.  The overall increase in
service charges on deposit accounts was primarily attributable to an increase in
the number of deposit accounts. The increase in debit card interchange fees was
due to an increase in issued Visa Debit cards and an increase in their
usage.  The large change in losses on securities is attributable to
the other than temporary impairment of a security.





-
19 -
 Noninterest
Expense





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








Three
      Months Ended June 30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            ChangeSalaries
      and employee benefits
            
            $
            1,242
            
            
            $
            1,274
            
            
            $
            (32
            )
            
            
            -2.5
            %Building
      occupancy
            
            
            332
            
            
            
            312
            
            
            
            20
            
            
            
            6.4
            %Data
      processing
            
            
            330
            
            
            
            352
            
            
            
            (22
            )
            
            
            -6.3
            %Professional
      and other services
            
            
            203
            
            
            
            226
            
            
            
            (23
            )
            
            
            -10.2
            %Amortization
      of intangible assets
            
            
            -
            
            
            
            55
            
            
            
            (55
            )
            
            
            -100.0
            %Other
      operating
            
            
            314
            
            
            
            308
            
            
            
            6
            
            
            
            1.9
            %Total
      noninterest expense
            
            $
            2,421
            
            
            $
            2,527
            
            
            $
            (106
            )
            
            
            -4.2
            %Six
      Months Ended June 30,(Dollars in
      thousands)
            
            2008
            
            
            2007
            
            
            ChangeSalaries
      and employee benefits
            
            $
            2,579
            
            
            $
            2,501
            
            
            $
            78
            
            
            
            3.1
            %Building
      occupancy
            
            
            678
            
            
            
            630
            
            
            
            48
            
            
            
            7.6
            %Data
      processing
            
            
            639
            
            
            
            694
            
            
            
            (55
            )
            
            
            -7.9
            %Professional
      and other services
            
            
            422
            
            
            
            463
            
            
            
            (41
            )
            
            
            -8.9
            %Amortization
      of intangible assets
            
            
            -
            
            
            
            111
            
            
            
            (111
            )
            
            
            -100.0
            %Other
      operating
            
            
            628
            
            
            
            586
            
            
            
            42
            
            
            
            7.2
            %Total
      noninterest expense
            
            $
            4,946
            
            
            $
            4,985
            
            
            $
            (39
            )
            
            
            -0.8
            %








Total
noninterest expense decreased $106,000 for the three months ended June 30, 2008
when compared to the same period for 2007.  A decrease in salaries and
employee benefits of $32,000 was primarily due to a decrease in overtime,
incentives and a decrease in salaries as a result of management level staff
turnover that was not replaced.  Data processing expenses were $22,000
lower than the comparable quarter of 2007 as a result of decreases in both
depreciation on computer equipment and check processing
charges.  These decreases were offset by increases in data processing
maintenance and internet banking expenses.  Professional and other
services expense decreased $23,000 primarily from the elimination of consulting
fees related to the Sarbanes Oxley 404 review process, which were incurred in
2007.  Amortization expense decreased $55,000 as the core deposit
intangibles became fully amortized in October 2007.  These decreases
were partially offset by a $20,000 increase in building occupancy expenses
primarily due to increases in depreciation and machine maintenance.





Total
noninterest expense decreased $39,000 for the six months ended June 30, 2008
when compared to the same period for 2007.  The increase in salaries
and employee benefits was the result of normal merit increases paid during the
first three months of the year.  The $48,000 increase in building
occupancy expenses was primarily due to increases in property taxes,
depreciation and machine maintenance. Data processing expenses were $55,000
lower than the comparable period in 2007 as a result of decreases in both
depreciation and check processing charges.   Professional and
other services expense decreased $41,000 primarily from the elimination of
consulting fees related to the Sarbanes Oxley 404 review process, which were
incurred in 2007.  Amortization expense decreased $111,000 as the core
deposit intangibles became fully amortized in October 2007.  The
increase in other expenses was primarily the result of higher costs associated
with foreclosed real estate properties.





Income
Tax Expense





Income
taxes increased $55,000 for the quarter ended June 30, 2008, as compared to the
same period in 2007. For the six-month period ended June 30, income taxes
increased $130,000.  The effective tax rate was 24.6% and 18.7% for
the six months ended June 30, 2008 and June 30, 2007,
respectively.  The increase in income tax expense and effective tax
rate in 2008 in comparison to 2007, resulted from pretax income that was higher
than the previous year by $431,000 for the six months ended June 30,
2008.  The Company has reduced its tax rate from the statutory rate of
34% primarily through the ownership of tax-exempt investment securities, bank
owned life insurance and other tax saving strategies.







-
20 -
 Table of Contents


Changes
in Financial Condition





Assets





Total
assets increased approximately $25.6 million, or 8%, to $346.3 million at June
30, 2008, from $320.7 million at December 31, 2007.  The increase in
total assets was primarily the result of an increase of $14.1 million, or 22%,
in investment securities, a $9.9 million increase in net loans receivable and a
$478,000 increase in cash and cash equivalents.  Investment securities
portfolio growth is being accomplished by purchases of mortgage-backed
securities, corporate bonds and a $2.0 million certificate of deposit invested
with a large money center financial institution. The loan portfolio increase
primarily reflects small business commercial loan originations.  The
Company continues to transform its traditional thrift balance sheet toward that
of a community bank with a more diverse mix of residential, consumer and
commercial loans. The increase in cash and cash equivalents was primarily the
result of interest earning deposits held at the Federal Home Loan Bank and
higher end of month balances at correspondent bank accounts and in process
accounts.




Based on
management's assessment, at June 30, 2008, the Company did hold a security that
had a fair value decline that was expected to be other than
temporary.  As a result of this determination, an other-than-temporary
impairment charge of $342,000, relating to the Company’s holdings in the AMF
Ultra Short Mortgage Fund (the “fund”), was recorded.  The Company’s
ability to reduce its investment position in the fund is limited by the fund’s
redemption policy.  In particular, the fund currently is limiting cash
redemptions to $250,000 every 90 days, with any excess redemptions paid by
transferring underlying assets held by the fund. The Company has received its
initial $250,000 cash redemption and currently expects, subject to market
conditions, to request further cash redemptions when allowed in the
future.  At June 30, 2008, the total carrying value of the Company’s
remaining investment in the fund is approximately $3,073,000.It is possible that the
Company will have to recognize future losses on this investment, absent
improvement in the real estate and mortgage securities markets.





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.





Liabilities





Total
liabilities increased $26.2 million, or 9%, to $325.2 million at June 30, 2008,
from $299.0 million at December 31, 2007.  Deposits increased $15.7
million, or 6%, and long-term borrowings increased $20.4
million.  These increases were offset by a reduction in short-term
borrowings of $10.4 million, or 57%.  The increase in deposits was the
result of an increase of $3.6 million in municipal customer deposits, combined
with a $12.1 million increase in retail deposits.  The municipal
deposit increase was driven by the receipt of tax revenues by our municipal
customers.  The increase in retail deposits was primarily the result
of the sale of one commercial customer’s business where the net proceeds were
deposited into the Company.


-
21 -
 Table of Contents


Loan
and Asset Quality and Allowance for Loan Losses





The
following table represents information concerning the aggregate amount of
nonperforming assets:








June
      30,
            
            
            December
      31,
            
            
            June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2007Nonaccrual
      loans:Commercial
      real estate and commercial
            
            $
            1,737
            
            
            $
            521
            
            
            $
            502Consumer
            
            
            148
            
            
            
            150
            
            
            
            74Residential
      Mortgage
            
            
            1,020
            
            
            
            920
            
            
            
            689Total
      nonaccrual loans
            
            
            2,905
            
            
            
            1,591
            
            
            
            1,265Total
      non-performing loans
            
            
            2,905
            
            
            
            1,591
            
            
            
            1,265Foreclosed
      real estate
            
            
            655
            
            
            
            865
            
            
            
            449Total
      non-performing assets
            
            $
            3,560
            
            
            $
            2,456
            
            
            $
            1,714Non-performing
      loans to total loans
            
            
            1.25
            %
            
            
            0.71
            %
            
            
            0.61
            %Non-performing
      assets to total assets
            
            
            1.03
            %
            
            
            0.77
            %
            
            
            0.56
            %








Total
nonperforming loans increased 83% at June 30, 2008, when compared to December
31, 2007.  The increase in total non-performing loans is primarily the
result of $497,000 in short-term, interest only, notes maturing during the
period.  These notes are currently awaiting permanent financing
structures by the Company.  In addition, one large commercial credit
relationship, with approximately $1.1 million outstanding, is awaiting initial
production orders in connection with a contract with a national
distributor.  Management believes that the underlying collateral and
associated guarantees, combined with the existing reserves provided, are
adequate to cover potential losses that may occur from the remediation
process.





The
allowance for loan losses at June 30, 2008 and December 31, 2007 was $2 million
and $1.7 million, or 0.85% and 0.76% of period end loans,
respectively.





Capital





Shareholders'
equity at June 30, 2008, was $21.1 million as compared to $21.7 million at
December 31, 2007.  The Company added $632,000 to retained earnings
through net income, which was offset by cash dividends declared of $348,000,
unrealized holding losses on securities of $831,000 and the $10,000
cumulative effect adjustment to reflect the change in measurement date under
SFAS 158 and the amortization of the pension plan net losses and prior service
liability and postretirement transition obligation.  The Company's
mutual holding company parent, Pathfinder Bancorp, M.H.C, waived the dividend
for the quarter ended June 30, 2008, payable in July 2008.





Risk-based
capital provides the basis for which all banks are evaluated in terms of capital
adequacy.  Capital adequacy is evaluated primarily by the use of
ratios which measure capital against total assets, as well as against total
assets that are weighted based on defined risk characteristics.  The
Company’s goal is to maintain a strong capital position, consistent with the
risk profile of its subsidiary banks, that supports growth and expansion
activities while at the same time exceeding regulatory standards.  At
June 30, 2008, Pathfinder Bank exceeded all regulatory required minimum capital
ratios and continues to meet 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%.








-
22 -
 The
Bank’s actual capital amounts and ratios as of June 30, 2008 and December 31,
2007 are presented in the following table.





MinimumTo
      Be "WellMinimum
            
            
            Capitalized"For
      Capital
            
            
            Under
      PromptActual
            
            
            Adequacy
      Purposes
            
            
            Corrective
      Provisions(Dollars
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of June 30, 2008:Total
      Core Capital (to Risk-Weighted Assets)
            
            $
            25,320
            
            
            
            11.2
            %
            
            $
            18,145
            
            
            
            8.0
            %
            
            $
            22,681
            
            
            
            10.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            23,333
            
            
            
            10.3
            %
            
            $
            9,072
            
            
            
            4.0
            %
            
            $
            13,609
            
            
            
            6.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            23,333
            
            
            
            7.0
            %
            
            $
            13,578
            
            
            
            4.0
            %
            
            $
            16,972
            
            
            
            5.0
            %As
      of December 31, 2007:Total
      Core Capital (to Risk-Weighted Assets)
            
            $
            25,447
            
            
            
            12.2
            %
            
            $
            16,648
            
            
            
            8.0
            %
            
            $
            20,810
            
            
            
            10.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            23,744
            
            
            
            11.4
            %
            
            $
            8,324
            
            
            
            4.0
            %
            
            $
            12,486
            
            
            
            6.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            23,744
            
            
            
            7.7
            %
            
            $
            12,437
            
            
            
            4.0
            %
            
            $
            15,548
            
            
            
            5.0
            %








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 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 membership in 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, trust
preferred security offerings, 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.





The
Company has a number of existing credit facilities available to
it.  The combined aggregate amount of credit available in connection
with its existing facilities is approximately $75.0 million at June 30,
2008.





The Asset
Liability Management Committee of the Company is responsible for implementing
the policies and guidelines for the maintenance of prudent levels of
liquidity.  As of June 30, 2008, management reported to the Board of
Directors that the Company is in compliance with its liquidity policy
guidelines.











-
23 -
 Table of Contents





Item 3 – Quantitativeand Qualitative Disclosures About Market
Risk





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





Item 4T- 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.


-
 -
24 -
 Table of Contents


PARTII - OTHER INFORMATION





Item
1 - Legal Proceedings





None





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 - Submission of Matters to a Vote of Security Holders





The
Company's Annual Meeting of Shareholders was held on April 30,
2008.  The following are the items voted on and the results of the
shareholder voting:





1.           The
election of Thomas W. Schneider and Chris R. Burritt to serve as directors of
the Company, each for a term of three years or until his or her successor has
been elected and qualified.





Name                                            
              For                             Withheld





Thomas W.
Schneider                                         2,393,363                          46,249


Chris R.
Burritt                                                      2,372,365                          67,247





Set forth below are the names of the
other directors of the Company and their terms of office.





Name                                           Term
Expires





Bruce E.
Manwaring                                           2009


L. William Nelson,
Jr.                                          2009


George P.
Joyce                                                   2009


Lloyd “Buddy”
Stemple                                     2009


Janette
Resnick                                                    2010


Corte J.
Spencer                                                   2010


Steven W.
Thomas                                              2010








2.           The
ratification of the appointment of Beard Miller Company LLP as auditors for the
Company for the year ending December 31, 2008.





For                           
Against                      Abstain





Number of
Votes                             2,427,704                         11,708            
           200











-
25 -
 Table of Contents





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








-
26 -





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.








August 13,
2008                                                         /s/ Thomas W.
Schneider


Date:                                                                           Thomas
W. Schneider


President
and Chief Executive Officer





August 13,
2008                                                        /s/ James A.
Dowd


Date:                                                                           James
A. Dowd


Senior Vice President and Chief Financial Officer


-
27 -
 Table of Contents




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 2002I,
      Thomas W. Schneider, President and Chief Executive Officer, 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; and5.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.August 13,
      2008
            /s/ Thomas W.
      Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive Officer





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 Table of Contents


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 2002I,
      James A. Dowd, Senior Vice President and Chief Financial Officer, 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; and5.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.August 13,
      2008
            /s/ James A.
      Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial Officer





-
29 -
 Table of Contents


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





Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002Thomas
      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 June 30, 2008 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; and2.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.August 13,
      2008
            /s/ Thomas W.
      Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive OfficerAugust 13,
      2008
            /s/ James A.
      Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial
Officer







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