10-Q 1 pbhc-10q_20200331.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

(Exact Name of Company as Specified in its Charter)

Maryland (State of Other Jurisdiction of Incorporation) | 001-36695 (Commission File No.) | 38-3941859 (I.R.S. Employer Identification No.)

214 West First Street, Oswego, NY 13126

(Address of Principal Executive Office) (Zip Code)

(315) 343-0057

(Issuer's Telephone Number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, $0.01 par value | PBHC | The NASDAQ Stock Market LLC

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

| YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

| YES ☒ NO ☐

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

Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ | Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 28, 2020, there were 4,753,883 shares outstanding of the registrant’s common stock.

Table of Contents

PATHFINDER B ANCORP, INC.

INDEX

PART I - FINANCIAL INFORMATION |  | PAGE NO.
Item 1. | Consolidated Financial Statements (Unaudited) |  | 3
| Consolidated Statements of Condition |  | 3
| Consolidated Statements of Income |  | 4
| Consolidated Statements of Comprehensive Income |  | 5
| Consolidated Statements of Changes in Shareholders' Equity |  | 6
| Consolidated Statements of Cash Flows |  | 7
| Notes to Consolidated Financial Statements |  | 9
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) |  | 50
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |  | 70
Item 4. | Controls and Procedures |  | 70
PART II - OTHER INFORMATION |  |
Item 1. | Legal Proceedings |  | 71
Item 1A. | Risk Factors |  | 71
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |  | 71
Item 3. | Defaults upon Senior Securities |  | 71
Item 4. | Mine Safety Disclosures |  | 71
Item 5. | Other information |  | 71
Item 6. | Exhibits |  | 71
SIGNATURES |  | 72

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

(Unaudited)

|  | March 31, |  |  | December 31, |
(In thousands, except share and per share data) |  | 2020 |  |  | 2019 |
ASSETS: |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 48,671 |  |  | $ | 8,284 |
Interest-earning deposits (including restricted balances of $1,300 and $0, respectively) |  |  | 8,908 |  |  |  | 11,876 |
Total cash and cash equivalents |  |  | 57,579 |  |  |  | 20,160 |
Available-for-sale securities, at fair value |  |  | 121,458 |  |  |  | 111,134 |
Held-to-maturity securities, at amortized cost (fair value of $117,088 and $124,148, respectively) |  |  | 120,549 |  |  |  | 122,988 |
Marketable equity securities, at fair value |  |  | 340 |  |  |  | 534 |
Federal Home Loan Bank stock, at cost |  |  | 4,758 |  |  |  | 4,834 |
Loans |  |  | 750,372 |  |  |  | 745,516 |
Loans held-for-sale (1) |  |  | 150 |  |  |  | 35,935 |
Less: Allowance for loan losses |  |  | 9,606 |  |  |  | 8,669 |
Loans receivable, net |  |  | 740,916 |  |  |  | 772,782 |
Premises and equipment, net |  |  | 22,304 |  |  |  | 22,699 |
Operating lease right-of-use assets |  |  | 2,349 |  |  |  | 2,386 |
Accrued interest receivable |  |  | 3,700 |  |  |  | 3,712 |
Foreclosed real estate |  |  | 58 |  |  |  | 88 |
Intangible assets, net |  |  | 145 |  |  |  | 149 |
Goodwill |  |  | 4,536 |  |  |  | 4,536 |
Bank owned life insurance |  |  | 17,519 |  |  |  | 17,403 |
Other assets |  |  | 11,432 |  |  |  | 10,402 |
Total assets |  | $ | 1,107,643 |  |  | $ | 1,093,807 |
LIABILITIES AND SHAREHOLDERS' EQUITY: |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Interest-bearing |  | $ | 786,316 |  |  | $ | 774,392 |
Noninterest-bearing |  |  | 113,544 |  |  |  | 107,501 |
Total deposits |  |  | 899,860 |  |  |  | 881,893 |
Short-term borrowings |  |  | 8,138 |  |  |  | 25,138 |
Long-term borrowings |  |  | 83,299 |  |  |  | 67,987 |
Subordinated loans |  |  | 15,136 |  |  |  | 15,128 |
Accrued interest payable |  |  | 407 |  |  |  | 396 |
Operating lease liabilities |  |  | 2,618 |  |  |  | 2,650 |
Other liabilities |  |  | 9,874 |  |  |  | 9,946 |
Total liabilities |  |  | 1,019,332 |  |  |  | 1,003,138 |
Shareholders' equity: |  |  |  |  |  |  |  |
Preferred stock, par value $0.01 per share; no liquidation preference; 10,000,000 and 10,000,000 shares authorized, respectively; 1,155,283 and 1,155,283 shares issued and outstanding, respectively |  |  | 12 |  |  |  | 12 |
Common stock, par value $0.01; 25,000,000 authorized shares; 4,740,446 and 4,709,238 shares issued and outstanding, respectively |  |  | 47 |  |  |  | 47 |
Additional paid in capital |  |  | 49,659 |  |  |  | 49,362 |
Retained earnings |  |  | 46,174 |  |  |  | 44,839 |
Accumulated other comprehensive loss |  |  | (7,077 | ) |  |  | (2,971 | )
Unearned ESOP |  |  | (809 | ) |  |  | (855 | )
Total Pathfinder Bancorp, Inc. shareholders' equity |  |  | 88,006 |  |  |  | 90,434 |
Noncontrolling interest |  |  | 305 |  |  |  | 235 |
Total equity |  |  | 88,311 |  |  |  | 90,669 |
Total liabilities and shareholders' equity |  | $ | 1,107,643 |  |  | $ | 1,093,807 |

(1) | Based on ASC 948, Mortgage Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the held-for-sale category at lower of cost or fair value. At March 31, 2020, the loans under contract to be sold had a principal balance of $151,000 and net deferred fees of $76. These loans were transferred at their fair value of $150,000 as of March 31, 2020 as the fair value of these loans was less than the amortized cost. During the three months ended March 31, 2020, the loss recorded on the write-down of the loan held-for-sale was immaterial. At December 31, 2019, the loans under contract to be sold had a principal balance of $35.8 million and net deferred fees of $146,000. These loans were transferred at their amortized cost of $35.9 million as of December 31, 2019, as the fair value of these loans was greater than the amortized cost.

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

|  | For the three months ended, |  |
(In thousands, except per share data) |  | March 31, 2020 |  |  | March 31, 2019 |  |
Interest and dividend income: |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 9,242 |  |  | $ | 7,575 |  |
Debt securities: |  |  |  |  |  |  |  |  |
Taxable |  |  | 1,692 |  |  |  | 1,799 |  |
Tax-exempt |  |  | 7 |  |  |  | 108 |  |
Dividends |  |  | 70 |  |  |  | 77 |  |
Federal funds sold and interest earning deposits |  |  | 32 |  |  |  | 110 |  |
Total interest and dividend income |  |  | 11,043 |  |  |  | 9,669 |  |
Interest expense: |  |  |  |  |  |  |  |  |
Interest on deposits |  |  | 2,556 |  |  |  | 2,345 |  |
Interest on short-term borrowings |  |  | 57 |  |  |  | 167 |  |
Interest on long-term borrowings |  |  | 445 |  |  |  | 393 |  |
Interest on subordinated loans |  |  | 206 |  |  |  | 217 |  |
Total interest expense |  |  | 3,264 |  |  |  | 3,122 |  |
Net interest income |  |  | 7,779 |  |  |  | 6,547 |  |
Provision for loan losses |  |  | 1,067 |  |  |  | 144 |  |
Net interest income after provision for loan losses |  |  | 6,712 |  |  |  | 6,403 |  |
Noninterest income: |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 356 |  |  |  | 282 |  |
Earnings and gain on bank owned life insurance |  |  | 116 |  |  |  | 121 |  |
Loan servicing fees |  |  | 49 |  |  |  | 27 |  |
Net gains on sales and redemptions of investment securities |  |  | 26 |  |  |  | 79 |  |
(Losses) gains on marketable equity securities |  |  | (194 | ) |  |  | 41 |  |
Net gains (losses) on sales of loans and foreclosed real estate |  |  | 672 |  |  |  | (8 | ) |
Debit card interchange fees |  |  | 163 |  |  |  | 144 |  |
Insurance agency revenue |  |  | 337 |  |  |  | 243 |  |
Other charges, commissions & fees |  |  | 223 |  |  |  | 164 |  |
Total noninterest income |  |  | 1,748 |  |  |  | 1,093 |  |
Noninterest expense: |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 3,247 |  |  |  | 3,650 |  |
Building and occupancy |  |  | 754 |  |  |  | 655 |  |
Data processing |  |  | 600 |  |  |  | 574 |  |
Professional and other services |  |  | 316 |  |  |  | 336 |  |
Advertising |  |  | 176 |  |  |  | 239 |  |
FDIC assessments |  |  | 189 |  |  |  | 111 |  |
Audits and exams |  |  | 125 |  |  |  | 100 |  |
Insurance agency expense |  |  | 192 |  |  |  | 199 |  |
Community service activities |  |  | 107 |  |  |  | 138 |  |
Foreclosed real estate expenses |  |  | 30 |  |  |  | 237 |  |
Other expenses |  |  | 509 |  |  |  | 472 |  |
Total noninterest expense |  |  | 6,245 |  |  |  | 6,711 |  |
Income before income taxes |  |  | 2,215 |  |  |  | 785 |  |
Provision for income taxes |  |  | 455 |  |  |  | 251 |  |
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc. |  |  | 1,760 |  |  |  | 534 |  |
Net income attributable to noncontrolling interest |  |  | 70 |  |  |  | 20 |  |
Net income attributable to Pathfinder Bancorp Inc. |  | $ | 1,690 |  |  | $ | 514 |  |
Convertible preferred stock dividends |  |  | 69 |  |  |  | - |  |
Warrant dividends |  |  | 8 |  |  |  | - |  |
Undistributed earnings allocated to participating securities |  |  | 290 |  |  |  | - |  |
Net income available to common shareholders |  | $ | 1,323 |  |  | $ | 514 |  |
Earnings per common share - basic |  | $ | 0.29 |  |  | $ | 0.12 |  |
Earnings per common share - diluted |  | $ | 0.29 |  |  | $ | 0.12 |  |
Dividends per common share |  | $ | 0.06 |  |  | $ | 0.06 |  |

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

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Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

|  | For the three months ended |  |
(In thousands) |  | March 31, 2020 |  |  | March 31, 2019 |  |
Net Income |  | $ | 1,760 |  |  | $ | 534 |  |
Other Comprehensive (Loss) Income |  |  |  |  |  |  |  |  |
Retirement Plans: |  |  |  |  |  |  |  |  |
Retirement plan net losses recognized in plan expenses |  |  | 58 |  |  |  | 84 |  |
Unrealized holding (losses) gains on available-for-sale securities: |  |  |  |  |  |  |  |  |
Unrealized holding (losses) gains arising during the period |  |  | (3,633 | ) |  |  | 1,988 |  |
Reclassification adjustment for net gains included in net income |  |  | (26 | ) |  |  | (79 | ) |
Net unrealized (losses) gains on available-for-sale securities |  |  | (3,659 | ) |  |  | 1,909 |  |
Derivatives and hedging activities: |  |  |  |  |  |  |  |  |
Unrealized holding losses arising during the period |  |  | (1,344 | ) |  |  | - |  |
Net unrealized losses on derivatives and hedging activities |  |  | (1,344 | ) |  |  | - |  |
Accretion of net unrealized loss on securities transferred to held-to- maturity(1) |  |  | 8 |  |  |  | 6 |  |
Other comprehensive (loss) income, before tax |  |  | (4,937 | ) |  |  | 1,999 |  |
Tax effect |  |  | 1,037 |  |  |  | (419 | ) |
Other comprehensive (loss) income, net of tax |  |  | (3,900 | ) |  |  | 1,580 |  |
Comprehensive (loss) income |  | $ | (2,140 | ) |  | $ | 2,114 |  |
Comprehensive income, attributable to noncontrolling interest |  | $ | 70 |  |  | $ | 20 |  |
Comprehensive (loss) income attributable to Pathfinder Bancorp, Inc. |  | $ | (2,210 | ) |  | $ | 2,094 |  |
Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income |  |  |  |  |  |  |  |  |
Retirement plan net losses recognized in plan expenses |  | $ | (12 | ) |  | $ | (19 | ) |
Unrealized holding (losses) gains on available-for-sale securities arising during the period |  |  | 764 |  |  |  | (416 | ) |
Reclassification adjustment for net gains included in net income |  |  | 5 |  |  |  | 17 |  |
Unrealized losses on derivatives and hedging arising during the period |  |  | 282 |  |  |  | - |  |
Accretion of net unrealized loss on securities transferred to held-to- maturity(1) |  |  | (2 | ) |  |  | (1 | ) |
Income tax effect related to other comprehensive (loss) income |  | $ | 1,037 |  |  | $ | (419 | ) |

(1) | The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30, 2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31, 2020 and March 31, 2019

(Unaudited)

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  | Other Com- |  |  |  |  |  |  | Non- |  |  |  |  |
|  | Preferred |  |  | Common |  |  | Paid in |  |  | Retained |  |  | prehensive |  |  | Unearned |  |  | controlling |  |  |  |  |
(In thousands, except share and per share data) |  | Stock |  |  | Stock |  |  | Capital |  |  | Earnings |  |  | Loss |  |  | ESOP |  |  | Interest |  |  | Total |
Balance, January 1, 2020 |  | $ | 12 |  |  | $ | 47 |  |  | $ | 49,362 |  |  | $ | 44,839 |  |  | $ | (2,971 | ) |  | $ | (855 | ) |  | $ | 235 |  |  | $ | 90,669 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,690 |  |  |  | - |  |  |  | - |  |  |  | 70 |  |  |  | 1,760 |
Reevaluation of deferred tax asset valuation allowance (1) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (206 | ) |  |  | - |  |  |  | - |  |  |  | (206 | )
Other comprehensive loss, net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,900 | ) |  |  | - |  |  |  | - |  |  |  | (3,900 | )
ESOP shares earned (6,111 shares) |  |  | - |  |  |  | - |  |  |  | 37 |  |  |  | - |  |  |  | - |  |  |  | 46 |  |  |  | - |  |  |  | 83 |
Stock based compensation |  |  | - |  |  |  | - |  |  |  | 66 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 66 |
Stock options exercised |  |  | - |  |  |  | - |  |  |  | 194 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 194 |
Common stock dividends declared ($0.06 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (278 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (278 | )
Preferred stock dividends declared ($0.06 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (69 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (69 | )
Warrant dividends declared ($0.06 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (8 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (8 | )
Balance, March 31, 2020 |  | $ | 12 |  |  | $ | 47 |  |  | $ | 49,659 |  |  | $ | 46,174 |  |  | $ | (7,077 | ) |  | $ | (809 | ) |  | $ | 305 |  |  | $ | 88,311 |
Balance, January 1, 2019 |  | $ | - |  |  | $ | 44 |  |  | $ | 29,139 |  |  | $ | 42,114 |  |  | $ | (6,042 | ) |  | $ | (1,034 | ) |  | $ | 238 |  |  | $ | 64,459 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 514 |  |  |  | - |  |  |  | - |  |  |  | 20 |  |  |  | 534 |
Other comprehensive income, net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,580 |  |  |  | - |  |  |  | - |  |  |  | 1,580 |
ESOP shares earned (6,111 shares) |  |  | - |  |  |  | - |  |  |  | 42 |  |  |  | - |  |  |  | - |  |  |  | 45 |  |  |  | - |  |  |  | 87 |
Stock based compensation |  |  | - |  |  |  | - |  |  |  | 73 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 73 |
Stock options exercised |  |  | - |  |  |  | - |  |  |  | 200 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 200 |
Cumulative effect of change in measurement of operating leases (2) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (239 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (239 | )
Common stock dividends declared ($0.06 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (256 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (256 | )
Balance, March 31, 2019 |  | $ | - |  |  | $ | 44 |  |  | $ | 29,454 |  |  | $ | 42,133 |  |  | $ | (4,462 | ) |  | $ | (989 | ) |  | $ | 258 |  |  | $ | 66,438 |

(1) | Management determined that the Company, under the current New York State (“NYS”) tax code, was highly unlikely to incur a material NYS tax liability in the foreseeable future. As a result, certain net current and deferred tax assets, related to GAAP vs. tax timing differences under previous NYS tax law were no longer going to provide any future tax benefit. The substantial majority of these net deferred tax assets were offset by a related valuation allowance established in prior periods. Therefore, the Company eliminated its remaining NYS net deferred tax asset balances and the related valuation allowance on January 1, 2020. The effect of these eliminations required an adjustment to other comprehensive income balances and had no effect on 2020 reported earnings.

(2) | Cumulative effect of the adoption of ASU 2016-02, Leases (Topic 842), based on the difference in the right-of-use asset and lease liability as of January 1, 2019.

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

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Pathfinder Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

|  | For the three months ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
OPERATING ACTIVITIES |  |  |  |  |  |  |  |
Net income attributable to Pathfinder Bancorp, Inc. |  | $ | 1,690 |  |  | $ | 514 |
Adjustments to reconcile net income to net cash flows from operating activities: |  |  |  |  |  |  |  |
Provision for loan losses |  |  | 1,067 |  |  |  | 144 |
Amortization of operating leases |  |  | 5 |  |  |  | 11 |
Proceeds from sales of loans |  |  | 36,614 |  |  |  | - |
Originations of loans held-for-sale |  |  | (150 | ) |  |  | - |
Realized losses (gains) on sales, redemptions and calls of: |  |  |  |  |  |  |  |
Real estate acquired through foreclosure |  |  | 7 |  |  |  | 8 |
Loans |  |  | (679 | ) |  |  | - |
Available-for-sale investment securities |  |  | - |  |  |  | (86 | )
Held-to-maturity investment securities |  |  | (26 | ) |  |  | 7 |
Marketable equity securities |  |  | 194 |  |  |  | (41 | )
Depreciation |  |  | 414 |  |  |  | 360 |
Amortization of mortgage servicing rights |  |  | (279 | ) |  |  | 3 |
Amortization of deferred loan costs |  |  | 75 |  |  |  | 66 |
Amortization of deferred financing from subordinated debt |  |  | 8 |  |  |  | 8 |
Earnings and gain on bank owned life insurance |  |  | (116 | ) |  |  | (121 | )
Net amortization of premiums and discounts on investment securities |  |  | 268 |  |  |  | 228 |
Amortization of intangible assets |  |  | 4 |  |  |  | 4 |
Stock based compensation and ESOP expense |  |  | 149 |  |  |  | 160 |
Net change in accrued interest receivable |  |  | 12 |  |  |  | (296 | )
Net change in other assets and liabilities |  |  | (1,262 | ) |  |  | (2,532 | )
Net cash flows from operating activities |  |  | 37,995 |  |  |  | (1,563 | )
INVESTING ACTIVITIES |  |  |  |  |  |  |  |
Purchase of investment securities available-for-sale |  |  | (38,422 | ) |  |  | (5,081 | )
Purchase of investment securities held-to-maturity |  |  | (7,492 | ) |  |  | (26,835 | )
Purchase of Federal Home Loan Bank stock |  |  | (1,121 | ) |  |  | (1,346 | )
Proceeds from redemption of Federal Home Loan Bank stock |  |  | 1,197 |  |  |  | 3,195 |
Proceeds from maturities and principal reductions of investment securities available-for-sale |  |  | 24,244 |  |  |  | 6,879 |
Proceeds from maturities and principal reductions of investment securities held-to-maturity |  |  | 8,824 |  |  |  | 1,906 |
Proceeds from sales, redemptions and calls of: |  |  |  |  |  |  |  |
Available-for-sale investment securities |  |  | - |  |  |  | 22,277 |
Held-to-maturity investment securities |  |  | 1,068 |  |  |  | 30 |
Real estate acquired through foreclosure |  |  | 81 |  |  |  | 1,020 |
Net change in loans |  |  | (5,119 | ) |  |  | (38,031 | )
Purchase of premises and equipment |  |  | (19 | ) |  |  | (1,276 | )
Net cash flows from investing activities |  |  | (16,759 | ) |  |  | (37,262 | )

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FINANCING ACTIVITIES |  |  |  |  |  |  |  |
Net change in demand deposits, NOW accounts, savings accounts, money management deposit accounts, MMDA accounts and escrow deposits |  |  | 35,546 |  |  |  | 960 |
Net change in time deposits |  |  | 2,137 |  |  |  | 43,477 |
Net change in brokered deposits |  |  | (19,716 | ) |  |  | 34,031 |
Net change in short-term borrowings |  |  | (17,000 | ) |  |  | (26,000 | )
Payments on long-term borrowings |  |  | - |  |  |  | (15,100 | )
Proceeds from long-term borrowings |  |  | 15,312 |  |  |  | - |
Proceeds from exercise of stock options |  |  | 194 |  |  |  | 200 |
Cash dividends paid to common shareholders |  |  | (283 | ) |  |  | (263 | )
Cash dividends paid to preferred shareholders |  |  | (69 | ) |  |  | - |
Cash dividends paid on warrants |  |  | (8 | ) |  |  | - |
Change in noncontrolling interest, net |  |  | 70 |  |  |  | 20 |
Net cash flows from financing activities |  |  | 16,183 |  |  |  | 37,325 |
Change in cash and cash equivalents |  |  | 37,419 |  |  |  | (1,500 | )
Cash and cash equivalents at beginning of period |  |  | 20,160 |  |  |  | 26,316 |
Cash and cash equivalents at end of period |  | $ | 57,579 |  |  | $ | 24,816 |
CASH PAID DURING THE PERIOD FOR: |  |  |  |  |  |  |  |
Interest |  | $ | 3,253 |  |  | $ | 2,955 |
Income taxes |  |  | 200 |  |  |  | - |
NON-CASH INVESTING ACTIVITY |  |  |  |  |  |  |  |
Real estate acquired in exchange for loans |  |  | 58 |  |  |  | 479 |
RESTRICTED CASH |  |  |  |  |  |  |  |
Federal Reserve Bank Reserve Requirements included in interest earning deposits |  |  | - |  |  |  | 4,632 |
Collateral deposits for hedge position included in interest earning deposits |  |  | 1,300 |  |  |  | - |

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

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Notes to Consolidated Finan cial Statements (Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc., (the “Company”), Pathfinder Bank (the “Bank”) and its other wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. Certain amounts in the 2019 consolidated financial statements may have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income or comprehensive income as previously reported. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020 or any other interim period.

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting 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 unaffiliated third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.

Although the Company owns, through its subsidiary Pathfinder Risk Management Company, Inc., 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of the Agency within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.

Note 2: New Accounting Pronouncements

The Financial Accounting Standards FASB (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies, promulgate generally accepted accounting principles (“GAAP”) to regulate the standards of accounting in the United States. From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements. The following presentation provides a description of standards adopted in the first quarter of 2020 as well as standards that are not currently effective, but could have an impact on the Company's consolidated financial statements upon adoption.

Standards Adopted in 2020

Standard: Fair Value Measurement (ASU 2018-13: Fair Value Measurement [Topic 820]: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement

Description: The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to

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users of each entity’s financial statements. The amendments in this ASU modify the disclosure requirements for entities such as the Company on fair value measurements in To pic 820, Fair Value Measurement.

The following disclosure requirements were removed from Topic 820:

| 1. | The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.

| 2. | The policy for timing of transfers between levels.

| 3. | The valuation processes for Level 3 fair value measurements.

The following disclosure requirements were modified in Topic 820:

| 1. | For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

| 2. | The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

The following disclosure requirements were added to Topic 820:

| 1. | The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period.

| 2. | The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

Required Date of Implementation: The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.

Effect on Consolidated Financial Statements: The adoption of this ASU had no material impact to its consolidated statements of condition or income.

____

Standard: Leases (ASU 2019-01: Leases [Topic 842] Codification Improvements)

Description: On February 25, 2016, the FASB issued Accounting Standards ASU No. 2016-02, Leases [Topic 842], to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions. ASU 2019-01 addresses three Issues: (1) Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) Presentation on the statement of cash flows for sales-type and direct financing leases; and (3) Transition disclosures related to Topic 250, Accounting Changes and Error Corrections.

The amendments in this ASU address Issue 1, described above, and reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies). Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820.

Topic 840 does not provide guidance on how cash received from leases by lessors from sales-type and direct financing leases should be presented in the cash flow statement. The amendments in this ASU address Issue 2, described above, as

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to the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities in the Statement of Cash Flows.

Required Date of Implementation: The amendments in this ASU amend Topic 842. The effective date of those amendments for public business entities, such as the Company, is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Effect on Consolidated Financial Statements: The adoption of this ASU had no material impact to its consolidated statements of condition or income.

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Standard: Various Codification Improvements (ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments)

Description: Since 2016, the FASB has issued the following Updates related to financial instruments:

| 1. | Accounting Standards Update No. 2016-01, Financial Instruments—Overall [Subtopic 825-10]: Recognition and Measurement of Financial Assets and Financial Liabilities;

| 2. | Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments; and

| 3. | Accounting Standards Update No. 2017-12, Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities.

The FASB has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this ASU are similar to those items and are summarized below.

For Codification Improvements specific to ASU 2016-01, the following topics were covered within ASU 2019-04:

| • | Scope Clarifications

| • | Held-to-Maturity Debt Securities Fair Value Disclosures

| • | Applicability of Topic 820 to the Measurement Alternative

| • | Remeasurement of Equity Securities at Historical Exchange Rates

The amendments to Topic 326 and other Topics in this Update include items related to the amendments in Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses Transition Resource Group (“TRG”) meetings. The amendments clarify or address stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 on a number of different topics, including the following:

| • | Accrued Interest

| • | Transfers between Classifications or Categories for Loans and Debt Securities

| • | Recoveries

| • | Consideration of Prepayments in Determining the Effective Interest Rate

| • | Consideration of Estimated Costs to Sell When Foreclosure Is Probable |

| • | Vintage Disclosures— Line-of-Credit Arrangements Converted to Term Loans |

| • | Contractual Extensions and Renewals |

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The ASU also covered a number of issues that related to hedge accounting (A SU-2017-12) including:

| • | Partial-Term Fair Value Hedges of Interest Rate Risk |

| • | Amortization of Fair Value Hedge Basis Adjustments |

| • | Disclosure of Fair Value Hedge Basis Adjustments |

| • | Consideration of the Hedged Contractually Specified Interest Rate under the Hypothetical Derivative Method |

| • | Scoping for Not-for-Profit Entities |

| • | Hedge Accounting Provisions Applicable to Certain Private Companies and Not-for- Profit Entities |

| • | Application of a First- Payments-Received Cash Flow Hedging Technique to Overall Cash Flows on a Group of Variable Interest Payments |

| • | Transition Guidance |

Required Dates of Implementation: This ASU 2019-04 has various implementation dates dependent on a number of factors as it pertains to the above items. The Company has adopted ASU 2016-01.

Effect on Consolidated Financial Statements: The adoption of this ASU had no material impact to its consolidated statements of condition or income.

____

Standards Not Yet Adopted as of March 31, 2020

Standard: Measurement of Credit Losses on Financial Instruments (ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments)

Description: The amended guidance replaces the current incurred loss model for determining the allowance for credit losses. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-for-sale securities will be similar to how it is determined under existing guidance.

Required Date of Implementation: January 1, 2023 (early adoption permitted as of January 1, 2019).

Effect on Consolidated Financial Statements: The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a

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cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.

_____

Standard: Transition Relief for the Implementation of ASU-2016-13 (ASU 2019-5: Financial Instruments—Credit Losses [Topic 326]: Targeted Transition Relief)

Description: The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10. General guidance for the use of the fair value option is contained in Subtopic 825-10. The irrevocable election of the fair value option must be applied on an instrument-by-instrument basis for eligible instruments, whose characteristics are within the scope of Subtopic 326-20. Upon adoption of Topic 326, for items measured at fair value in accordance with paragraph 326-10-65-1(i), the difference between the carrying amount and the fair value shall be recorded by means of a cumulative-effect adjustment to the opening retained earnings balance as of the beginning of the first reporting period that an entity has adopted ASU 2016-13. Those differences may include, but are not limited to: (1) unamortized deferred costs, fees, premiums, and discounts (2) valuation allowances (for example, allowance for loan losses), or (3) accrued interest.

Required Date of Implementation: See comments above related to ASU 2016-13.

Effect on Consolidated Financial Statements: See comments above related to ASU 2016-13.

_____

Standard: Simplifying the Test for Goodwill Impairment (ASU 2017-04: Intangibles—Goodwill and Other [Topic 350]: Simplifying the Test for Goodwill Impairment)

Description: Current guidance requires a two-step approach to determining if recorded goodwill is impaired. In Step 1, reporting entities must first evaluate whether or not the carrying value of a reporting unit is greater than its fair value. In Step 2, if a reporting unit’s carrying value is greater than its fair value, then the entity should calculate the implied fair value of goodwill. If the carrying value of goodwill is more than the implied fair value, an impairment charge for the difference must be recorded. The amended guidance eliminates Step 2 from the goodwill impairment test. Therefore, under the new guidance, if the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of the recorded goodwill).

Required Date of Implementation: January 1, 2020 (early adoption permitted).

Effect on Consolidated Financial Statements: The amendments should be applied using a prospective transition method. The Company does not expect the guidance will have a material impact on its consolidated financial statements, unless at some point in the future one of its reporting units were to fail Step 1 of the goodwill impairment test.

_____

Standard: Compensation (ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General [Subtopic 715 – 20]: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans)

Description: The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

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The following disclosure requirements are removed from Subtopic 715-20:

| 1. | The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.

| 2. | The amount and timing of plan assets expected to be returned to the employer.

| 3. | Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.

| 4. | The effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

The following disclosure requirements are added to Subtopic 715-20:

| 1. | The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.

| 2. | An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this ASU also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:

| 1. | The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.

| 2. | The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

Required Date of Implementation: The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.

Effect on Consolidated Financial Statements: The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.

____

Standard: Investments (ASU 2020-01- Equity Securities [Topic 321], Investments—Equity Method and Joint Ventures [Topic 323], and Derivatives and Hedging [Topic 815]—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)

Description: The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.

Required Date of Implementation: The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.

Effect on Consolidated Financial Statements: The amendments in this Update should be applied prospectively. The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.

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Standard: Income Taxes (ASU 2019-12- Simplifying the Accounting for Income Taxes)

Description: The FASB Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this Update were submitted by stakeholders as part of the Simplification Initiative.

The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:

| 1. | Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)

| 2. | Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment

| 3. | Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary

| 4. | Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The amendments in this Update also simplify the accounting for income taxes by doing the following:

| 1. | Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.

| 2. | Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.

| 3. | Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.

| 4. | Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

| 5. | Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

Required Date of Implementation: The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period.

Effect on Consolidated Financial Statements: The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.

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Standard: Financial Instruments—Credit Losses (ASU 2019-11- Codification Improvements to Topic 326)

Description: On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those assets. Through the amendments in that Update, the Board added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2016-13 to increase stakeholder awareness of those amendments and to expedite the improvement process. The amendments include items brought to the Board's attention by stakeholders.

The amendments in this Update clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13 as described below:

| 1. | Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCDs): The amendments clarify that the allowance for credit losses for PCD assets should include in the allowance for credit losses expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition.

| 2. | Transition Relief for Troubled Debt Restructurings (TDRs): The amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring.

| 3. | Disclosures Related to Accrued Interest Receivables: The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis.

| 4. | Financial Assets Secured by Collateral Maintenance Provisions: The amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero.

| 5. | Conforming Amendment to Subtopic 805-20: The amendment to Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, clarifies the guidance by removing the cross-reference to Subtopic 310-30 in paragraph 805-20-50-1 and replacing it with a cross-reference to the guidance on PCD assets in Subtopic 326-20.

Required Date of Implementation: January 1, 2023 (early adoption permitted as of January 1, 2019). The effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in Update 2016-13.

Effect on Consolidated Financial Statements: The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the

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projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, mo re likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospect ive basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.

____

Standard: Reference Rate Reform (ASU 2020-04- Facilitation of the Effects of Reference Rate Reform on Financial Reporting)

Description: The amendments provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.

Required Date of Implementation: The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022.

Effect on Consolidated Financial Statements: The amendments for contract modifications can be elected to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. The amendments for existing hedging relationships can be elected to be applied as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is evaluating the impact that the guidance will have on its consolidated financial statements.

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Note 3: Earnings per Common Share

The Company entered into a securities purchase agreement with Castle Creek Capital Partners VII, L.P. on May 8, 2019, pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share; (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share; and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of common stock of the Company at an exercise price equal to $14.25 per share, in a private placement transaction (the “Private Placement”) for gross proceeds of approximately $17.0 million. As a result of the securities purchase agreement, the Company has common stock, preferred stock and a warrant that are all eligible to participate in dividends equal to the common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s preferred stock and warrant, are considered “participating securities.” The Company calculates net income available to common shareholders using the two-class method required for capital structures that include participating securities.

In applying the two-class method for the three months ended March 31, 2020, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.

Basic earnings per share for the three months ended March 31, 2019 was calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders is net income to Pathfinder Bancorp, Inc. less the total of preferred dividends declared, if any. Diluted earnings per share include the potential dilutive effect that could occur upon the assumed exercise of issued stock options using the Treasury Stock method. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.

Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented. Anti-dilutive stock options, not included in the computation below, were -0- for both the three months ended March 31, 2020 and March 31, 2019.

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

|  | Three months ended |
|  | March 31, |
(In thousands, except per share data) |  | 2020 |  |  | 2019 |
Net income attributable to Pathfinder Bancorp, Inc. |  | $ | 1,690 |  |  | $ | 514 |
Convertible preferred stock dividends |  |  | 69 |  |  |  | - |
Warrant dividends |  |  | 8 |  |  |  | - |
Undistributed earnings allocated to participating securities |  |  | 290 |  |  |  | - |
Net income available to common shareholders |  | $ | 1,323 |  |  | $ | 514 |
Basic weighted average common shares outstanding |  |  | 4,607 |  |  |  | 4,244 |
Effect of assumed exercise of stock options and unvested restricted stock units |  |  | - |  |  |  | 64 |
Diluted weighted average common shares outstanding |  |  | 4,607 |  |  |  | 4,308 |
Basic earnings per common share |  | $ | 0.29 |  |  | $ | 0.12 |
Diluted earnings per common share |  | $ | 0.29 |  |  | $ | 0.12 |

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Note 4: Investment Securities

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

|  | March 31, 2020 |
|  |  |  |  |  | Gross |  |  | Gross |  |  | Estimated |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
(In thousands) |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Available-for-Sale Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSEs |  | $ | 19,645 |  |  | $ | 25 |  |  | $ | (25 | ) |  | $ | 19,645 |
State and political subdivisions |  |  | 7,395 |  |  |  | - |  |  |  | (515 | ) |  |  | 6,880 |
Corporate |  |  | 12,303 |  |  |  | 244 |  |  |  | (337 | ) |  |  | 12,210 |
Asset backed securities |  |  | 14,227 |  |  |  | - |  |  |  | (1,811 | ) |  |  | 12,416 |
Residential mortgage-backed - US agency |  |  | 20,112 |  |  |  | 173 |  |  |  | (139 | ) |  |  | 20,146 |
Collateralized mortgage obligations - US agency |  |  | 35,843 |  |  |  | 62 |  |  |  | (805 | ) |  |  | 35,100 |
Collateralized mortgage obligations - Private label |  |  | 15,680 |  |  |  | 7 |  |  |  | (832 | ) |  |  | 14,855 |
Total |  |  | 125,205 |  |  |  | 511 |  |  |  | (4,464 | ) |  |  | 121,252 |
Equity investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common stock - financial services industry |  |  | 206 |  |  |  | - |  |  |  | - |  |  |  | 206 |
Total |  |  | 206 |  |  |  | - |  |  |  | - |  |  |  | 206 |
Total available-for-sale |  | $ | 125,411 |  |  | $ | 511 |  |  | $ | (4,464 | ) |  | $ | 121,458 |
Held-to-Maturity Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSEs |  | $ | 1,999 |  |  | $ | 13 |  |  | $ | - |  |  | $ | 2,012 |
State and political subdivisions |  |  | 8,484 |  |  |  | 75 |  |  |  | (81 | ) |  |  | 8,478 |
Corporate |  |  | 24,780 |  |  |  | 210 |  |  |  | (1,012 | ) |  |  | 23,978 |
Asset backed securities |  |  | 26,016 |  |  |  | - |  |  |  | (1,992 | ) |  |  | 24,024 |
Residential mortgage-backed - US agency |  |  | 13,157 |  |  |  | 320 |  |  |  | (66 | ) |  |  | 13,411 |
Collateralized mortgage obligations - US agency |  |  | 22,950 |  |  |  | 378 |  |  |  | (177 | ) |  |  | 23,151 |
Collateralized mortgage obligations - Private label |  |  | 23,163 |  |  |  | - |  |  |  | (1,129 | ) |  |  | 22,034 |
Total held-to-maturity |  | $ | 120,549 |  |  | $ | 996 |  |  | $ | (4,457 | ) |  | $ | 117,088 |

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|  | December 31, 2019 |
|  |  |  |  |  | Gross |  |  | Gross |  |  | Estimated |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
(In thousands) |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Available-for-Sale Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSEs |  | $ | 16,850 |  |  | $ | - |  |  | $ | (30 | ) |  | $ | 16,820 |
State and political subdivisions |  |  | 1,735 |  |  |  | 1 |  |  |  | - |  |  |  | 1,736 |
Corporate |  |  | 12,347 |  |  |  | 230 |  |  |  | (23 | ) |  |  | 12,554 |
Asset backed securities |  |  | 13,190 |  |  |  | 61 |  |  |  | (19 | ) |  |  | 13,232 |
Residential mortgage-backed - US agency |  |  | 19,012 |  |  |  | 56 |  |  |  | (88 | ) |  |  | 18,980 |
Collateralized mortgage obligations - US agency |  |  | 31,320 |  |  |  | 35 |  |  |  | (570 | ) |  |  | 30,785 |
Collateralized mortgage obligations - Private label |  |  | 16,767 |  |  |  | 97 |  |  |  | (43 | ) |  |  | 16,821 |
Total |  |  | 111,221 |  |  |  | 480 |  |  |  | (773 | ) |  |  | 110,928 |
Equity investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common stock - financial services industry |  |  | 206 |  |  |  | - |  |  |  | - |  |  |  | 206 |
Total |  |  | 206 |  |  |  | - |  |  |  | - |  |  |  | 206 |
Total available-for-sale |  | $ | 111,427 |  |  | $ | 480 |  |  | $ | (773 | ) |  | $ | 111,134 |
Held-to-Maturity Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSEs |  | $ | 1,998 |  |  | $ | 2 |  |  | $ | - |  |  | $ | 2,000 |
State and political subdivisions |  |  | 8,534 |  |  |  | 124 |  |  |  | (4 | ) |  |  | 8,654 |
Corporate |  |  | 25,779 |  |  |  | 584 |  |  |  | (29 | ) |  |  | 26,334 |
Asset backed securities |  |  | 23,099 |  |  |  | 101 |  |  |  | (115 | ) |  |  | 23,085 |
Residential mortgage-backed - US agency |  |  | 13,715 |  |  |  | 247 |  |  |  | (3 | ) |  |  | 13,959 |
Collateralized mortgage obligations - US agency |  |  | 19,607 |  |  |  | 300 |  |  |  | (29 | ) |  |  | 19,878 |
Collateralized mortgage obligations - Private label |  |  | 30,256 |  |  |  | 35 |  |  |  | (53 | ) |  |  | 30,238 |
Total held-to-maturity |  | $ | 122,988 |  |  | $ | 1,393 |  |  | $ | (233 | ) |  | $ | 124,148 |

The amortized cost and estimated fair value of debt investments at March 31, 2020 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

|  | Available-for-Sale |  |  | Held-to-Maturity |
|  | Amortized |  |  | Estimated |  |  | Amortized |  |  | Estimated |
(In thousands) |  | Cost |  |  | Fair Value |  |  | Cost |  |  | Fair Value |
Due in one year or less |  | $ | 13,259 |  |  | $ | 13,276 |  |  | $ | 2,812 |  |  | $ | 2,818 |
Due after one year through five years |  |  | 12,485 |  |  |  | 12,359 |  |  |  | 20,137 |  |  |  | 19,536 |
Due after five years through ten years |  |  | 13,858 |  |  |  | 13,201 |  |  |  | 20,762 |  |  |  | 20,032 |
Due after ten years |  |  | 13,968 |  |  |  | 12,315 |  |  |  | 17,568 |  |  |  | 16,106 |
Sub-total |  |  | 53,570 |  |  |  | 51,151 |  |  |  | 61,279 |  |  |  | 58,492 |
Residential mortgage-backed - US agency |  |  | 20,112 |  |  |  | 20,146 |  |  |  | 13,157 |  |  |  | 13,411 |
Collateralized mortgage obligations - US agency |  |  | 35,843 |  |  |  | 35,100 |  |  |  | 22,950 |  |  |  | 23,151 |
Collateralized mortgage obligations - Private label |  |  | 15,680 |  |  |  | 14,855 |  |  |  | 23,163 |  |  |  | 22,034 |
Totals |  | $ | 125,205 |  |  | $ | 121,252 |  |  | $ | 120,549 |  |  | $ | 117,088 |

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The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

|  | March 31, 2020 |
|  | Less than Twelve Months |  |  | Twelve Months or More |  |  | Total |
|  | Number of |  |  |  |  |  |  |  |  |  |  | Number of |  |  |  |  |  |  |  |  |  |  | Number of |  |  |  |  |  |  |  |  |
|  | Individual |  |  | Unrealized |  |  | Fair |  |  | Individual |  |  | Unrealized |  |  | Fair |  |  | Individual |  |  | Unrealized |  |  | Fair |
(Dollars in thousands) |  | Securities |  |  | Losses |  |  | Value |  |  | Securities |  |  | Losses |  |  | Value |  |  | Securities |  |  | Losses |  |  | Value |
Available-for-Sale Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSE's |  |  | 1 |  |  | $ | (25 | ) |  | $ | 4,952 |  |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 1 |  |  | $ | (25 | ) |  | $ | 4,952 |
State and political subdivisions |  |  | 5 |  |  |  | (515 | ) |  |  | 5,390 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5 |  |  |  | (515 | ) |  |  | 5,390 |
Corporate |  |  | 8 |  |  |  | (337 | ) |  |  | 5,143 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8 |  |  |  | (337 | ) |  |  | 5,143 |
Asset backed securities |  |  | 11 |  |  |  | (1,797 | ) |  |  | 12,027 |  |  |  | 1 |  |  |  | (14 | ) |  |  | 367 |  |  |  | 12 |  |  |  | (1,811 | ) |  |  | 12,394 |
Residential mortgage-backed - US agency |  |  | 7 |  |  |  | (133 | ) |  |  | 7,989 |  |  |  | 1 |  |  |  | (6 | ) |  |  | 1,483 |  |  |  | 8 |  |  |  | (139 | ) |  |  | 9,472 |
Collateralized mortgage obligations - US agency |  |  | 11 |  |  |  | (212 | ) |  |  | 18,524 |  |  |  | 8 |  |  |  | (593 | ) |  |  | 7,132 |  |  |  | 19 |  |  |  | (805 | ) |  |  | 25,656 |
Collateralized mortgage obligations - Private label |  |  | 9 |  |  |  | (477 | ) |  |  | 9,434 |  |  |  | 4 |  |  |  | (355 | ) |  |  | 4,339 |  |  |  | 13 |  |  |  | (832 | ) |  |  | 13,773 |
Totals |  |  | 52 |  |  | $ | (3,496 | ) |  | $ | 63,459 |  |  |  | 14 |  |  | $ | (968 | ) |  | $ | 13,321 |  |  |  | 66 |  |  | $ | (4,464 | ) |  | $ | 76,780 |
Held-to-Maturity Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and political subdivisions |  |  | 2 |  |  | $ | (81 | ) |  | $ | 3,046 |  |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 2 |  |  | $ | (81 | ) |  | $ | 3,046 |
Corporate |  |  | 12 |  |  |  | (1,012 | ) |  |  | 12,236 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | (1,012 | ) |  |  | 12,236 |
Asset backed securities |  |  | 12 |  |  |  | (1,992 | ) |  |  | 22,048 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | (1,992 | ) |  |  | 22,048 |
Residential mortgage-backed - US agency |  |  | 3 |  |  |  | (66 | ) |  |  | 4,021 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | (66 | ) |  |  | 4,021 |
Collateralized mortgage obligations - US agency |  |  | 3 |  |  |  | (177 | ) |  |  | 5,623 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | (177 | ) |  |  | 5,623 |
Collateralized mortgage obligations - Private label |  |  | 11 |  |  |  | (1,089 | ) |  |  | 14,214 |  |  |  | 2 |  |  |  | (40 | ) |  |  | 811 |  |  |  | 13 |  |  |  | (1,129 | ) |  |  | 15,025 |
Totals |  |  | 43 |  |  | $ | (4,417 | ) |  | $ | 61,188 |  |  |  | 2 |  |  | $ | (40 | ) |  | $ | 811 |  |  |  | 45 |  |  | $ | (4,457 | ) |  | $ | 61,999 |

|  | December 31, 2019 |
|  | Less than Twelve Months |  |  | Twelve Months or More |  |  | Total |
|  | Number of |  |  |  |  |  |  |  |  |  |  | Number of |  |  |  |  |  |  |  |  |  |  | Number of |  |  |  |  |  |  |  |  |
|  | Individual |  |  | Unrealized |  |  | Fair |  |  | Individual |  |  | Unrealized |  |  | Fair |  |  | Individual |  |  | Unrealized |  |  | Fair |
(Dollars in thousands) |  | Securities |  |  | Losses |  |  | Value |  |  | Securities |  |  | Losses |  |  | Value |  |  | Securities |  |  | Losses |  |  | Value |
Available-for-Sale Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSE's |  |  | 4 |  |  | $ | (30 | ) |  | $ | 16,820 |  |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 4 |  |  | $ | (30 | ) |  | $ | 16,820 |
Corporate |  |  | 1 |  |  |  | (23 | ) |  |  | 786 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (23 | ) |  |  | 786 |
Asset backed securities |  |  | 3 |  |  |  | (7 | ) |  |  | 5,211 |  |  |  | 1 |  |  |  | (12 | ) |  |  | 594 |  |  |  | 4 |  |  |  | (19 | ) |  |  | 5,805 |
Residential mortgage-backed - US agency |  |  | 10 |  |  |  | (77 | ) |  |  | 10,709 |  |  |  | 4 |  |  |  | (11 | ) |  |  | 2,543 |  |  |  | 14 |  |  |  | (88 | ) |  |  | 13,252 |
Collateralized mortgage obligations - US agency |  |  | 10 |  |  |  | (67 | ) |  |  | 15,791 |  |  |  | 10 |  |  |  | (503 | ) |  |  | 10,034 |  |  |  | 20 |  |  |  | (570 | ) |  |  | 25,825 |
Collateralized mortgage obligations - Private label |  |  | 2 |  |  |  | (7 | ) |  |  | 3,818 |  |  |  | 5 |  |  |  | (36 | ) |  |  | 3,959 |  |  |  | 7 |  |  |  | (43 | ) |  |  | 7,777 |
Totals |  |  | 30 |  |  | $ | (211 | ) |  | $ | 53,135 |  |  |  | 20 |  |  | $ | (562 | ) |  | $ | 17,130 |  |  |  | 50 |  |  | $ | (773 | ) |  | $ | 70,265 |
Held-to-Maturity Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and political subdivisions |  |  | 1 |  |  | $ | (4 | ) |  | $ | 3,027 |  |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 1 |  |  | $ | (4 | ) |  | $ | 3,027 |
Corporate |  |  | 2 |  |  |  | (29 | ) |  |  | 2,974 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | (29 | ) |  |  | 2,974 |
Asset backed securities |  |  | 6 |  |  |  | (115 | ) |  |  | 11,091 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6 |  |  |  | (115 | ) |  |  | 11,091 |
Residential mortgage-backed - US agency |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (3 | ) |  |  | 198 |  |  |  | 1 |  |  |  | (3 | ) |  |  | 198 |
Collateralized mortgage obligations - US agency |  |  | 2 |  |  |  | (29 | ) |  |  | 4,907 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | (29 | ) |  |  | 4,907 |
Collateralized mortgage obligations - Private label |  |  | 6 |  |  |  | (49 | ) |  |  | 9,396 |  |  |  | 2 |  |  |  | (4 | ) |  |  | 1,132 |  |  |  | 8 |  |  |  | (53 | ) |  |  | 10,528 |
Totals |  |  | 17 |  |  | $ | (226 | ) |  | $ | 31,395 |  |  |  | 3 |  |  | $ | (7 | ) |  | $ | 1,330 |  |  |  | 20 |  |  | $ | (233 | ) |  | $ | 32,725 |

Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to other-than-temporary impairment (“OTTI”), as described below, the fair market value of a debt security as of a particular measurement date is highly dependent upon prevailing market and economic environmental factors at the measurement date relative to the prevailing market and economic environmental factors present at the time the debt security was acquired. The most significant market and environmental factors include, but are not limited to (1) the general level of interest rates, (2) the relationship between shorter-term interest rates and longer-term interest rates (referred to as the “slope” of the interest rate yield curve), (3) general bond market liquidity, (4) the recent and expected near-term volume of new issuances of similar debt securities, and (5) changes in the market values of individual loan collateral underlying mortgage-backed debt securities. Changes in interest rates affect the fair market values of debt securities by influencing the discount rate applied to the securities’ future expected cash flows. The higher the discount rate, the lower the resultant security price. Conversely, the lower the discount rate, the higher the resultant security price. In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may be also affected by changes in interest rates. For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the

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duration of the security, (2) imbedded optionality contractually granted to the issuer of the security with respect to principal prepayments, and (3) changes in the level of market premiums demanded by investors for securities with imbedded credit risk (where applicable).

The Company conducts a formal review of investment securities on a quarterly basis for the presence of OTTI. The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

Management does not believe any individual unrealized loss in the securities portfolio as of March 31, 2020 represented OTTI. At March 31, 2020, the Bank had the following securities, in a loss position for 12 months or more relative to their amortized historical cost, which were deemed to have no credit impairment, thus, the disclosed unrealized losses related directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

| • | One privately-issued asset-backed security, categorized as available-for-sale, with an amortized historical cost of $381,000 and an aggregate market value of $367,000 (unrealized loss of $14,000 or 3.8%). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related OTTI is deemed to be present.

| • | Four privately-issued collateralized mortgage obligation securities, categorized as available-for-sale, with an aggregate amortized historical cost of $4.7 million and an aggregate market value of $4.3 million (unrealized aggregate loss of $355,000 or 8.2%). These securities were not rated at the time of their issuances by any NRSRO but each security remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.

| • | Two privately-issued collateralized mortgage obligation securities, categorized as held-to-maturity, with an aggregate amortized historical cost of $851,000 and an aggregate market value of $811,000 (aggregate unrealized loss of $40,000 or 4.9%). These securities were not rated at the time of their issuance by any NRSRO but each security remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.

All other securities with market values less than their amortized historical costs are issued by United States agencies or government sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in US government agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses related directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. The Company had no equity securities that were impaired at March 31, 2020 or December 31, 2019.

The comprehensive loss recorded in the quarter ended March 31, 2020 was primarily the result of the unrealized depreciation in the fair market value of the available-for-sale investment securities portfolio during the three months ended March 31, 2020. This depreciation was primarily due to the effects of the COVID-19 pandemic on global fixed income markets at the end of March 2020, as trading activity in those markets was substantially halted and normal market-based price discovery mechanisms were temporarily, but substantially, incapacitated. As a result, available market

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price quotations for many of the securities within the Company’s investment securities portfolio were not reflective of the fair values that would be obtainable in normally fun ctioning markets.

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

|  | For the three months |
|  | ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Realized gains on investments |  | $ | 33 |  |  | $ | 222 |
Realized losses on investments |  |  | (7 | ) |  |  | (143 | )
|  | $ | 26 |  |  | $ | 79 |

As of March 31, 2020 and December 31, 2019, securities with a fair value of $113.5 million and $92.4 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $25.6 million and $21.3 million, respectively, were pledged against certain borrowing arrangements.

Management has reviewed its mortgage-backed securities portfolios and determined that, to the best of its knowledge, little exposure exists to sub-prime or other high-risk residential mortgages. With limited exceptions in the Company’s investment portfolio involving the most senior tranches of securitized bonds, the Company is not in the practice of investing in, or originating, these types of investments or loans.

Note 5: Pension and Postretirement Benefits

The Company has a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there are no future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In addition, the Company provides certain health and life insurance benefits for a limited number of eligible retired employees. The healthcare plan is contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory. Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.

The composition of net periodic pension plan and postretirement plan costs for the indicated periods is as follows:

|  | Pension Benefits |  |  | Postretirement Benefits |
|  | For the three months ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Service cost |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Interest cost |  |  | 116 |  |  |  | 124 |  |  |  | 4 |  |  |  | 5 |
Expected return on plan assets |  |  | (273 | ) |  |  | (234 | ) |  |  | - |  |  |  | - |
Amortization of prior service credits |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | (1 | )
Amortization of net losses |  |  | 57 |  |  |  | 82 |  |  |  | 2 |  |  |  | 3 |
Net periodic benefit plan (benefit) cost |  | $ | (100 | ) |  | $ | (28 | ) |  | $ | 5 |  |  | $ | 7 |

The Company will evaluate the need for further contributions to the defined benefit pension plan during 2020. The prepaid pension asset is recorded in other assets on the statement of condition as of March 31, 2020 and December 31, 2019.

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Note 6: Loans

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

|  | March 31, |  |  | December 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Residential mortgage loans: |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 212,149 |  |  | $ | 209,559 |
Construction |  |  | 2,338 |  |  |  | 3,963 |
Loans held-for-sale (1) |  |  | 150 |  |  |  | 35,790 |
Total residential mortgage loans |  |  | 214,637 |  |  |  | 249,312 |
Commercial loans: |  |  |  |  |  |  |  |
Real estate |  |  | 261,929 |  |  |  | 254,257 |
Lines of credit |  |  | 59,354 |  |  |  | 58,617 |
Other commercial and industrial |  |  | 84,774 |  |  |  | 82,092 |
Tax exempt loans |  |  | 7,937 |  |  |  | 8,067 |
Total commercial loans |  |  | 413,994 |  |  |  | 403,033 |
Consumer loans: |  |  |  |  |  |  |  |
Home equity and junior liens |  |  | 44,732 |  |  |  | 46,389 |
Other consumer |  |  | 76,839 |  |  |  | 82,607 |
Total consumer loans |  |  | 121,571 |  |  |  | 128,996 |
Total loans |  |  | 750,202 |  |  |  | 781,341 |
Net deferred loan fees |  |  | 320 |  |  |  | 110 |
Less allowance for loan losses |  |  | (9,606 | ) |  |  | (8,669 | )
Loans receivable, net |  | $ | 740,916 |  |  | $ | 772,782 |

(1) | Based on ASC 948, Mortgage Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the held-for-sale category at lower of cost or fair value. At March 31, 2020, the loans under contract to be sold had a principal balance of $151,000 and net deferred fees of $76. These loans were transferred at their fair value of $150,000 as of March 31, 2020 as the fair value of these loans was less than the amortized cost. During the three months ended March 31, 2020, the loss recorded on the write-down of the loan held-for-sale was immaterial. At December 31, 2019 the loans under contract to be sold had a principal balance of $35.8 million and net deferred fees of $146,000. These loans were transferred at their amortized cost of $35.9 million as of December 31, 2019, as the fair value of these loans was greater than the amortized cost.

Although the Bank may sometimes purchase or fund loan participation interests outside of its primary market areas, the Bank generally originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions.

As part of the Company’s overall balance sheet management strategies and the management’s ongoing efforts to profitably deploy its increased capital position following the equity sales transactions completed in May 2019, the Bank acquired seven diverse pools of loans, originated by unrelated third parties, in six separate transactions during 2019. The purchase of participations in loans that are originated by third parties only occurs after the completion of thorough pre-acquisition due diligence. Loans in which the Company acquires a participating interest are determined to meet, in all material respects, the Company’s internal underwriting policies, including credit and collateral suitability thresholds, prior to acquisition. In addition, the financial condition of the originating entity, which are generally retained as the ongoing loan servicing provider for participations acquired by the Bank, are analyzed prior to the acquisition of the participating interests and monitored on a regular basis thereafter for the life of those interests.

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The Bank acquired $15.6 million, $10.2 million, and $24.6 million of loans originated by an unrelated financial institution, located outside of the Bank’s market area, in January 2017, April 2017, and March 2019, respectively. The acquired loan pools represented a 90% participating interest in a total of 2,283 loans secured by liens on automobiles with maturities ranging primar ily from two to six years. These loans will be serviced through their respective maturities by the originating financial institution. At March 31, 20 20 and December 31, 201 9, there were 1,573 loans outstanding with a remaining outstanding carrying value of $2 4.9 million and 1,657 loans outstan ding with a remaining outstanding carrying value of $27.2 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $833,000 and $930,000, respectively. Since the acquisition of these loan pools, a total of 32 loans had cumulative net charge-offs totaling $204,000, with $8,000 in net-charge-offs for the t hree months ended March 31, 2020 and $37,000 in net charge-offs for the three months ended March 31, 2019.

The Bank acquired a $5.0 million pool of consumer loans and a $5.0 million pool of commercial and industrial loans originated by an unrelated financial institution, located outside of the Bank’s market area, in June 2019. In December 2019, the Bank acquired an additional $1.8 million in commercial and industrial loans and $392,000 of consumer loans from the same institution. The acquired loan pools represented a 100% interest in a total of 89 unsecured consumer loans and a total of 43 commercial and industrial loans. These loans have maturities ranging primarily from four to ten years. At March 31, 2020, there were 85 unsecured consumer loans outstanding with a remaining outstanding carrying value of $4.7 million and 43 commercial and industrial loans outstanding with a remaining outstanding carrying value of $6.4 million. At December 31, 2019, there were 87 unsecured consumer loans outstanding with a remaining outstanding carrying value of $5.0 million and 43 commercial and industrial loans outstanding with a remaining outstanding carrying value of $6.6 million. These loans have no unamortized premium or discount included in the carrying value. No charge-offs have occurred since the acquisition of these loan pools.

The Bank acquired a $21.9 million pool of home equity lines of credit originated by an unrelated financial technology company, located outside of the Bank’s market area, in August 2019. The acquired loan pool represented a 100% interest in a total of 395 secured home equity lines of credit. These lines of credit have maturities ranging primarily from four to thirty years. These lines of credit will be serviced through their respective maturities by the originating financial technology company. At March 31, 2020 and December 31, 2019, there were 355 secured home equity lines of credit outstanding with a remaining outstanding carrying value of $18.8 million and there were 376 secured home equity lines of credit outstanding with a remaining outstanding carrying value of $20.1 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $368,000 and $390,000, respectively. No charge-offs have occurred since the acquisition of these loan pools.

The Bank acquired a $26.6 million pool of unsecured consumer loans originated by an unrelated financial technology company, located outside of the Bank’s market area, in November 2019. The acquired loan pool represents a 59.2% interest in a total of 2,787 unsecured consumer loans. These loans have maturities ranging primarily from three to five years. These loans will be serviced through their respective maturities by the originating unrelated financial technology company. At March 31, 2020 and December 31, 2019, there were 2,754 unsecured consumer loans outstanding with a remaining outstanding carrying value of $23.7 million and 2,768 unsecured consumer loans outstanding with a remaining outstanding carrying value of $25.8 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $100,000 and $114,000, respectively. Since the acquisition of theses loan pools, a total of one loan had a cumulative net charge-off totaling $19,000, with $19,000 in net charge-offs for the three months ended March 31, 2020.

The Bank acquired a $10.3 million pool of unsecured consumer loans originated by an unrelated financial technology company, located outside of the Bank’s market area, in December 2019. The acquired loan pool represents a 100% interest in a total of 4,259 unsecured consumer loans. These loans have maturities ranging primarily from less than one year to seven years. These loans will be serviced through their respective maturities by the originating unrelated financial technology company. At March 31, 2020 and December 31, 2019, there were 3,936 unsecured consumer loans outstanding with a remaining outstanding carrying value of $8.8 million and 4,259 unsecured consumer loans outstanding with a remaining outstanding carrying value of $10.3 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $213,000 and $245,000, respectively. No charge-offs have occurred since the acquisition of these loan pools.

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The Bank acquired a $2.1 million pool of secured first lien r esidential mortgage loan s originated by an unrelated non-profit housing and community development organization, located within the Bank’s market area, in December 2019. The acquired loan pool represents a 100% interest in a total of 25 secured first lien residential mortgage loan s. These loans have maturities ranging primarily from 22 to 24 years. These loans will be serviced through their respective maturities by the unrelated non-profit housing and community development organization. At March 31, 2020 and December 31, 2019, there were 25 residential mortgage loans outstanding with a remaining outstanding carrying value of $2.0 million and 25 residential mortgage loans outstanding with a remaining outstanding carrying value of $2.1 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019, was $13 3,000 and $135,000, respectively. No charge-offs have occurred since the acquisition of these loan pools.

As of March 31, 2020 and December 31, 2019, residential mortgage loans with a carrying value of $110.3 million and $136.9 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.

Loan Origination / Risk Management

The Company’s lending policies and procedures are presented in Note 5 to the audited consolidated financial statements included in the 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2020 and have not changed.

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics but with similar methodologies for assessing risk. Each portfolio segment is broken down into loan classes where appropriate. Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class.

The following table illustrates the portfolio segments and classes for the Company’s loan portfolio:

Portfolio Segment | Class
Residential Mortgage Loans | 1-4 family first-lien residential mortgages
| Construction
Commercial Loans | Real estate
| Lines of credit
| Other commercial and industrial
| Tax exempt loans
Consumer Loans | Home equity and junior liens
| Other consumer

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The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:

|  | As of March 31, 2020 |
|  |  |  |  |  | Special |  |  |  |  |  |  |  |  |  |  |  |  |
(In thousands) |  | Pass |  |  | Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Residential mortgage loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 208,451 |  |  | $ | 1,037 |  |  | $ | 1,473 |  |  | $ | 1,188 |  |  | $ | 212,149 |
Construction |  |  | 2,338 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,338 |
Loans held-for-sale |  |  | 150 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 150 |
Total residential mortgage loans |  |  | 210,939 |  |  |  | 1,037 |  |  |  | 1,473 |  |  |  | 1,188 |  |  |  | 214,637 |
Commercial loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate |  |  | 245,927 |  |  |  | 12,523 |  |  |  | 2,771 |  |  |  | 708 |  |  |  | 261,929 |
Lines of credit |  |  | 51,845 |  |  |  | 7,207 |  |  |  | 302 |  |  |  | - |  |  |  | 59,354 |
Other commercial and industrial |  |  | 75,475 |  |  |  | 8,367 |  |  |  | 891 |  |  |  | 41 |  |  |  | 84,774 |
Tax exempt loans |  |  | 7,937 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7,937 |
Total commercial loans |  |  | 381,184 |  |  |  | 28,097 |  |  |  | 3,964 |  |  |  | 749 |  |  |  | 413,994 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity and junior liens |  |  | 43,844 |  |  |  | 159 |  |  |  | 454 |  |  |  | 275 |  |  |  | 44,732 |
Other consumer |  |  | 76,489 |  |  |  | 174 |  |  |  | 176 |  |  |  | - |  |  |  | 76,839 |
Total consumer loans |  |  | 120,333 |  |  |  | 333 |  |  |  | 630 |  |  |  | 275 |  |  |  | 121,571 |
Total loans |  | $ | 712,456 |  |  | $ | 29,467 |  |  | $ | 6,067 |  |  | $ | 2,212 |  |  | $ | 750,202 |
|  | As of December 31, 2019 |
|  |  |  |  |  | Special |  |  |  |  |  |  |  |  |  |  |  |  |
(In thousands) |  | Pass |  |  | Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Residential mortgage loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 205,554 |  |  | $ | 1,093 |  |  | $ | 1,731 |  |  | $ | 1,181 |  |  | $ | 209,559 |
Construction |  |  | 3,963 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,963 |
Loans held-for-sale |  |  | 35,790 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 35,790 |
Total residential mortgage loans |  |  | 245,307 |  |  |  | 1,093 |  |  |  | 1,731 |  |  |  | 1,181 |  |  |  | 249,312 |
Commercial loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate |  |  | 238,288 |  |  |  | 12,473 |  |  |  | 3,194 |  |  |  | 302 |  |  |  | 254,257 |
Lines of credit |  |  | 50,396 |  |  |  | 7,945 |  |  |  | 276 |  |  |  | - |  |  |  | 58,617 |
Other commercial and industrial |  |  | 72,653 |  |  |  | 8,473 |  |  |  | 923 |  |  |  | 43 |  |  |  | 82,092 |
Tax exempt loans |  |  | 8,067 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8,067 |
Total commercial loans |  |  | 369,404 |  |  |  | 28,891 |  |  |  | 4,393 |  |  |  | 345 |  |  |  | 403,033 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity and junior liens |  |  | 45,414 |  |  |  | 191 |  |  |  | 477 |  |  |  | 307 |  |  |  | 46,389 |
Other consumer |  |  | 82,252 |  |  |  | 167 |  |  |  | 188 |  |  |  | - |  |  |  | 82,607 |
Total consumer loans |  |  | 127,666 |  |  |  | 358 |  |  |  | 665 |  |  |  | 307 |  |  |  | 128,996 |
Total loans |  | $ | 742,377 |  |  | $ | 30,342 |  |  | $ | 6,789 |  |  | $ | 1,833 |  |  | $ | 781,341 |

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

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Nonaccrual and Past Due Loans

Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.

An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of March 31, 2020 and December 31, 2019, are detailed in the following tables:

|  | As of March 31, 2020 |
|  | 30-59 Days |  |  | 60-89 Days |  |  | 90 Days |  |  | Total |  |  |  |  |  |  | Total Loans |
(In thousands) |  | Past Due |  |  | Past Due |  |  | and Over |  |  | Past Due |  |  | Current |  |  | Receivable |
Residential mortgage loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 1,569 |  |  | $ | 600 |  |  | $ | 1,040 |  |  | $ | 3,209 |  |  | $ | 208,940 |  |  | $ | 212,149 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,338 |  |  |  | 2,338 |
Loans held-for-sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 150 |  |  |  | 150 |
Total residential mortgage loans |  |  | 1,569 |  |  |  | 600 |  |  |  | 1,040 |  |  |  | 3,209 |  |  |  | 211,428 |  |  |  | 214,637 |
Commercial loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate |  |  | 5,829 |  |  |  | - |  |  |  | 2,268 |  |  |  | 8,097 |  |  |  | 253,832 |  |  |  | 261,929 |
Lines of credit |  |  | 2,838 |  |  |  | 1,967 |  |  |  | 111 |  |  |  | 4,916 |  |  |  | 54,438 |  |  |  | 59,354 |
Other commercial and industrial |  |  | 1,388 |  |  |  | 3,738 |  |  |  | 232 |  |  |  | 5,358 |  |  |  | 79,416 |  |  |  | 84,774 |
Tax exempt loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7,937 |  |  |  | 7,937 |
Total commercial loans |  |  | 10,055 |  |  |  | 5,705 |  |  |  | 2,611 |  |  |  | 18,371 |  |  |  | 395,623 |  |  |  | 413,994 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity and junior liens |  |  | 147 |  |  |  | 72 |  |  |  | 429 |  |  |  | 648 |  |  |  | 44,084 |  |  |  | 44,732 |
Other consumer |  |  | 243 |  |  |  | 164 |  |  |  | 228 |  |  |  | 635 |  |  |  | 76,204 |  |  |  | 76,839 |
Total consumer loans |  |  | 390 |  |  |  | 236 |  |  |  | 657 |  |  |  | 1,283 |  |  |  | 120,288 |  |  |  | 121,571 |
Total loans |  | $ | 12,014 |  |  | $ | 6,541 |  |  | $ | 4,308 |  |  | $ | 22,863 |  |  | $ | 727,339 |  |  | $ | 750,202 |
|  | As of December 31, 2019 |
|  | 30-59 Days |  |  | 60-89 Days |  |  | 90 Days |  |  | Total |  |  |  |  |  |  | Total Loans |
(In thousands) |  | Past Due |  |  | Past Due |  |  | and Over |  |  | Past Due |  |  | Current |  |  | Receivable |
Residential mortgage loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 947 |  |  | $ | 744 |  |  | $ | 1,613 |  |  | $ | 3,304 |  |  | $ | 206,255 |  |  | $ | 209,559 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,963 |  |  |  | 3,963 |
Loans held-for-sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 35,790 |  |  |  | 35,790 |
Total residential mortgage loans |  |  | 947 |  |  |  | 744 |  |  |  | 1,613 |  |  |  | 3,304 |  |  |  | 246,008 |  |  |  | 249,312 |
Commercial loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate |  |  | 953 |  |  |  | 100 |  |  |  | 2,271 |  |  |  | 3,324 |  |  |  | 250,933 |  |  |  | 254,257 |
Lines of credit |  |  | 4,464 |  |  |  | 25 |  |  |  | 68 |  |  |  | 4,557 |  |  |  | 54,060 |  |  |  | 58,617 |
Other commercial and industrial |  |  | 2,747 |  |  |  | 315 |  |  |  | 591 |  |  |  | 3,653 |  |  |  | 78,439 |  |  |  | 82,092 |
Tax exempt loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8,067 |  |  |  | 8,067 |
Total commercial loans |  |  | 8,164 |  |  |  | 440 |  |  |  | 2,930 |  |  |  | 11,534 |  |  |  | 391,499 |  |  |  | 403,033 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity and junior liens |  |  | 315 |  |  |  | 130 |  |  |  | 480 |  |  |  | 925 |  |  |  | 45,464 |  |  |  | 46,389 |
Other consumer |  |  | 335 |  |  |  | 50 |  |  |  | 151 |  |  |  | 536 |  |  |  | 82,071 |  |  |  | 82,607 |
Total consumer loans |  |  | 650 |  |  |  | 180 |  |  |  | 631 |  |  |  | 1,461 |  |  |  | 127,535 |  |  |  | 128,996 |
Total loans |  | $ | 9,761 |  |  | $ | 1,364 |  |  | $ | 5,174 |  |  | $ | 16,299 |  |  | $ | 765,042 |  |  | $ | 781,341 |

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

|  | March 31, |  |  | December 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Residential mortgage loans: |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 1,040 |  |  | $ | 1,613 |
|  |  | 1,040 |  |  |  | 1,613 |
Commercial loans: |  |  |  |  |  |  |  |
Real estate |  |  | 2,336 |  |  |  | 2,343 |
Lines of credit |  |  | 111 |  |  |  | 68 |
Other commercial and industrial |  |  | 522 |  |  |  | 591 |
|  |  | 2,969 |  |  |  | 3,002 |
Consumer loans: |  |  |  |  |  |  |  |
Home equity and junior liens |  |  | 429 |  |  |  | 480 |
Other consumer |  |  | 228 |  |  |  | 151 |
|  |  | 657 |  |  |  | 631 |
Total nonaccrual loans |  | $ | 4,666 |  |  | $ | 5,246 |

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

The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented. The pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR. The post-modification outstanding recorded investment is the principal balance less the provision for loan losses after the loan was modified as a TDR. Additional provision for loan losses is the change in the allowance for loan losses between the pre-modification outstanding recorded investment and post-modification outstanding recorded investment.

The Company had no loans that have been modified as TDRs for the three months ended March 31, 2020.

The Company had no loans that have been modified as TDRs for the three months ended March 31, 2019.

The Company is required to disclose loans that have been modified as TDRs within the previous 12 months in which there was payment default after the restructuring. The Company defines payment default as any loans 90 days past due on contractual payments.

The Company had no loans that had been modified as TDRs during the twelve months prior to March 31, 2020, which had subsequently defaulted during the three months ended March 31, 2020.

The Company had no loans that had been modified as TDRs during the twelve months prior to March 31, 2019, which had subsequently defaulted during the three months ended March 31, 2019.

The United States has been operating under a state of emergency related to the Coronavirus Disease 2019 (“COVID-19”) pandemic since March 13, 2020. The direct and indirect effects of the COVID-19 pandemic have resulted in a dramatic reduction in economic activity that has severely hampered the ability for businesses and consumers to meet their current repayment obligations. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, in addition to providing financial assistance to both businesses and consumers, creates a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The banking regulatory agencies have likewise issued guidance encouraging financial

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institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with c oncurrence of the Financial Accounting Standards Board, and provisions of the CARES Act allow modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments prior to any relief, to not be treate d as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. The Company has begun working with its customers affected by COVID-19 and expects a significant amount of modifications across many of its loan portfolios in the near term. T hrough May 15, 2020, the Bank granted payment deferral requests primarily for 90 days, on 540 loans representing approximately $142.9 million of existing loan balances. To the extent that such modifications meet the criteria previously described, such modifications are not expected to be classified as troubled debt restructurings.

When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for loan losses, an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period.

Impaired Loans

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

|  | March 31, 2020 |  |  | December 31, 2019 |
|  |  |  |  |  | Unpaid |  |  |  |  |  |  |  |  |  |  | Unpaid |  |  |  |  |
|  | Recorded |  |  | Principal |  |  | Related |  |  | Recorded |  |  | Principal |  |  | Related |
(In thousands) |  | Investment |  |  | Balance |  |  | Allowance |  |  | Investment |  |  | Balance |  |  | Allowance |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  | $ | 1,023 |  |  | $ | 1,023 |  |  | $ | - |  |  | $ | 1,027 |  |  | $ | 1,027 |  |  | $ | - |
Commercial real estate |  |  | 3,979 |  |  |  | 4,052 |  |  |  | - |  |  |  | 3,996 |  |  |  | 4,067 |  |  |  | - |
Commercial lines of credit |  |  | 83 |  |  |  | 83 |  |  |  | - |  |  |  | 86 |  |  |  | 86 |  |  |  | - |
Other commercial and industrial |  |  | 336 |  |  |  | 355 |  |  |  | - |  |  |  | 69 |  |  |  | 77 |  |  |  | - |
Home equity and junior liens |  |  | 77 |  |  |  | 77 |  |  |  | - |  |  |  | 40 |  |  |  | 40 |  |  |  | - |
Other consumer |  |  | 55 |  |  |  | 55 |  |  |  | - |  |  |  | 55 |  |  |  | 55 |  |  |  | - |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  |  | 581 |  |  |  | 581 |  |  |  | 95 |  |  |  | 584 |  |  |  | 584 |  |  |  | 97 |
Commercial real estate |  |  | 448 |  |  |  | 448 |  |  |  | 76 |  |  |  | 450 |  |  |  | 450 |  |  |  | 78 |
Commercial lines of credit |  |  | 98 |  |  |  | 98 |  |  |  | 98 |  |  |  | 98 |  |  |  | 98 |  |  |  | 98 |
Other commercial and industrial |  |  | 545 |  |  |  | 545 |  |  |  | 379 |  |  |  | 866 |  |  |  | 866 |  |  |  | 406 |
Home equity and junior liens |  |  | 142 |  |  |  | 142 |  |  |  | 128 |  |  |  | 180 |  |  |  | 180 |  |  |  | 150 |
Other consumer |  |  | 35 |  |  |  | 35 |  |  |  | 1 |  |  |  | 36 |  |  |  | 36 |  |  |  | 1 |
Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family first-lien residential mortgages |  |  | 1,604 |  |  |  | 1,604 |  |  |  | 95 |  |  |  | 1,611 |  |  |  | 1,611 |  |  |  | 97 |
Commercial real estate |  |  | 4,427 |  |  |  | 4,500 |  |  |  | 76 |  |  |  | 4,446 |  |  |  | 4,517 |  |  |  | 78 |
Commercial lines of credit |  |  | 181 |  |  |  | 181 |  |  |  | 98 |  |  |  | 184 |  |  |  | 184 |  |  |  | 98 |
Other commercial and industrial |  |  | 881 |  |  |  | 900 |  |  |  | 379 |  |  |  | 935 |  |  |  | 943 |  |  |  | 406 |
Home equity and junior liens |  |  | 219 |  |  |  | 219 |  |  |  | 128 |  |  |  | 220 |  |  |  | 220 |  |  |  | 150 |
Other consumer |  |  | 90 |  |  |  | 90 |  |  |  | 1 |  |  |  | 91 |  |  |  | 91 |  |  |  | 1 |
Totals |  | $ | 7,402 |  |  | $ | 7,494 |  |  | $ | 777 |  |  | $ | 7,487 |  |  | $ | 7,566 |  |  | $ | 830 |

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

|  | For the three months ended |
|  | March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
1-4 family first-lien residential mortgages |  | $ | 1,608 |  |  | $ | 1,625 |
Commercial real estate |  |  | 4,437 |  |  |  | 2,868 |
Commercial lines of credit |  |  | 183 |  |  |  | 287 |
Other commercial and industrial |  |  | 908 |  |  |  | 938 |
Home equity and junior liens |  |  | 220 |  |  |  | 207 |
Other consumer |  |  | 91 |  |  |  | 51 |
Total |  | $ | 7,447 |  |  | $ | 5,976 |

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

|  | For the three months ended |
|  | March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
1-4 family first-lien residential mortgages |  | $ | 12 |  |  | $ | 12 |
Commercial real estate |  |  | 31 |  |  |  | 28 |
Commercial lines of credit |  |  | 2 |  |  |  | 4 |
Other commercial and industrial |  |  | 16 |  |  |  | 14 |
Home equity and junior liens |  |  | 3 |  |  |  | 3 |
Other consumer |  |  | 1 |  |  |  | - |
Total |  | $ | 65 |  |  | $ | 61 |

Note 7: Allowance for Loan Losses

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve needs on loans individually evaluated for impairment, in its determination of the adequacy of the allowance for loan losses. We recorded $1.1 million in provision for loan losses for the three-month period ended March 31, 2020, as compared to $144,000 for the three-month period ended March 31, 2019. The $923,000 increase in the provision for loan losses in the first quarter of 2020, as compared to the same quarter in 2019, resulted from year-over-year increases in: (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The increase in the quantitative factors used in determining the provision for loan losses reflects the substantial increase in economic uncertainty and the resultant potential for increased credit losses in future periods as a consequence of the COVID-19 pandemic. Outstanding loan balances increased $92.9 million, or 14.1%, in the quarter ended March 31, 2020, as compared to the same quarter in the previous year, and therefore required a corresponding increase in the estimable and probable loan losses inherent in the loan portfolio. Finally, the provision for loan losses in the quarter ended March 31, 2020 was further increased, as compared to the same quarter in 2019, by the effects of an increase in the ratio of delinquent loans to total loans, which increased to 3.05% at March 31, 2020 as compared to 2.75% at March 31, 2019, coupled with an increase in nonaccrual loans that increased $1.2 million to $4.7 million at March 31, 2020 as compared to $3.4 million at March 31, 2019.

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

|  | March 31, 2020 |
|  | 1-4 family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | first-lien |  |  | Residential |  |  |  |  |  |  |  |  |  |  | Other |
|  | residential |  |  | construction |  |  | Commercial |  |  | Commercial |  |  | commercial |
(In thousands) |  | mortgage |  |  | mortgage |  |  | real estate |  |  | lines of credit |  |  | and industrial |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance |  | $ | 580 |  |  | $ | - |  |  | $ | 4,010 |  |  | $ | 1,195 |  |  | $ | 1,645 |
Charge-offs |  |  | (26 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Recoveries |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |
Provisions |  |  | 176 |  |  |  | - |  |  |  | 233 |  |  |  | 21 |  |  |  | 113 |
Ending balance |  | $ | 731 |  |  | $ | - |  |  | $ | 4,243 |  |  | $ | 1,218 |  |  | $ | 1,758 |
Ending balance: related to loans individually evaluated for impairment |  | $ | 95 |  |  | $ | - |  |  | $ | 76 |  |  | $ | 98 |  |  | $ | 379 |
Ending balance: related to loans collectively evaluated for impairment |  | $ | 636 |  |  | $ | - |  |  | $ | 4,167 |  |  | $ | 1,120 |  |  | $ | 1,379 |
Loans receivables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 212,149 |  |  | $ | 2,338 |  |  | $ | 261,929 |  |  | $ | 59,354 |  |  | $ | 84,774 |
Ending balance: individually evaluated for impairment |  | $ | 1,604 |  |  | $ | - |  |  | $ | 4,427 |  |  | $ | 181 |  |  | $ | 881 |
Ending balance: collectively evaluated for impairment |  | $ | 210,545 |  |  | $ | 2,338 |  |  | $ | 257,502 |  |  | $ | 59,173 |  |  | $ | 83,893 |
|  |  |  |  |  | Home equity |  |  | Other |  |  |  |  |  |  |  |  |
|  | Tax exempt |  |  | and junior liens |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance |  | $ | 1 |  |  | $ | 553 |  |  | $ | 413 |  |  | $ | 272 |  |  | $ | 8,669 |
Charge-offs |  |  | - |  |  |  | (28 | ) |  |  | (133 | ) |  |  | - |  |  |  | (187 | )
Recoveries |  |  | - |  |  |  | 29 |  |  |  | 25 |  |  |  | - |  |  |  | 57 |
Provisions (credits) |  |  | - |  |  |  | 57 |  |  |  | 541 |  |  |  | (74 | ) |  |  | 1,067 |
Ending balance |  | $ | 1 |  |  | $ | 611 |  |  | $ | 846 |  |  | $ | 198 |  |  | $ | 9,606 |
Ending balance: related to loans individually evaluated for impairment |  | $ | - |  |  | $ | 128 |  |  | $ | 1 |  |  | $ | - |  |  | $ | 777 |
Ending balance: related to loans collectively evaluated for impairment |  | $ | 1 |  |  | $ | 483 |  |  | $ | 845 |  |  | $ | 198 |  |  | $ | 8,829 |
Loans receivables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 7,937 |  |  | $ | 44,732 |  |  | $ | 76,839 |  |  | $ | 150 |  |  | $ | 750,202 |
Ending balance: individually evaluated for impairment |  | $ | - |  |  | $ | 219 |  |  | $ | 90 |  |  | $ | - |  |  | $ | 7,402 |
Ending balance: collectively evaluated for impairment |  | $ | 7,937 |  |  | $ | 44,513 |  |  | $ | 76,749 |  |  | $ | 150 |  |  | $ | 742,800 |

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|  | March 31, 2019 |
|  | 1-4 family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | first-lien |  |  | Residential |  |  |  |  |  |  |  |  |  |  | Other |
|  | residential |  |  | construction |  |  | Commercial |  |  | Commercial |  |  | commercial |
(In thousands) |  | mortgage |  |  | mortgage |  |  | real estate |  |  | lines of credit |  |  | and industrial |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance |  | $ | 766 |  |  | $ | - |  |  | $ | 3,578 |  |  | $ | 730 |  |  | $ | 1,285 |
Charge-offs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (107 | ) |  |  | (1 | )
Recoveries |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Provisions (credits) |  |  | (44 | ) |  |  | - |  |  |  | (208 | ) |  |  | 179 |  |  |  | 276 |
Ending balance |  | $ | 722 |  |  | $ | - |  |  | $ | 3,370 |  |  | $ | 802 |  |  | $ | 1,560 |
Ending balance: related to loans individually evaluated for impairment |  | $ | 104 |  |  | $ | - |  |  | $ | 98 |  |  | $ | 92 |  |  | $ | 464 |
Ending balance: related to loans collectively evaluated for impairment |  | $ | 618 |  |  | $ | - |  |  | $ | 3,272 |  |  | $ | 710 |  |  | $ | 1,096 |
Loans receivables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 237,917 |  |  | $ | 3,855 |  |  | $ | 208,388 |  |  | $ | 55,238 |  |  | $ | 67,542 |
Ending balance: individually evaluated for impairment |  | $ | 1,422 |  |  | $ | - |  |  | $ | 2,863 |  |  | $ | 318 |  |  | $ | 1,052 |
Ending balance: collectively evaluated for impairment |  | $ | 236,495 |  |  | $ | 3,855 |  |  | $ | 205,525 |  |  | $ | 54,920 |  |  | $ | 66,490 |
|  |  |  |  |  | Home equity |  |  | Other |  |  |  |  |  |  |  |  |
|  | Tax exempt |  |  | and junior liens |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance |  | $ | 1 |  |  | $ | 409 |  |  | $ | 385 |  |  | $ | 152 |  |  | $ | 7,306 |
Charge-offs |  |  | - |  |  |  | - |  |  |  | (67 | ) |  |  | - |  |  |  | (175 | )
Recoveries |  |  | - |  |  |  | - |  |  |  | 9 |  |  |  | - |  |  |  | 9 |
Provisions (credits) |  |  | - |  |  |  | 21 |  |  |  | 72 |  |  |  | (152 | ) |  |  | 144 |
Ending balance |  | $ | 1 |  |  | $ | 430 |  |  | $ | 399 |  |  | $ | - |  |  | $ | 7,284 |
Ending balance: related to loans individually evaluated for impairment |  | $ | - |  |  | $ | 139 |  |  | $ | 9 |  |  | $ | - |  |  | $ | 906 |
Ending balance: related to loans collectively evaluated for impairment |  | $ | 1 |  |  | $ | 291 |  |  | $ | 390 |  |  | $ | - |  |  | $ | 6,378 |
Loans receivables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 9,256 |  |  | $ | 26,212 |  |  | $ | 49,272 |  |  |  |  |  |  | $ | 657,680 |
Ending balance: individually evaluated for impairment |  | $ | - |  |  | $ | 207 |  |  | $ | 101 |  |  |  |  |  |  | $ | 5,963 |
Ending balance: collectively evaluated for impairment |  | $ | 9,256 |  |  | $ | 26,005 |  |  | $ | 49,171 |  |  |  |  |  |  | $ | 651,717 |

The Company’s methodology for determining its allowance for loan losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for loan losses needed for this general pool of loans. The qualitative factors include:

| • | Changes in national and local economic trends;

| • | The rate of growth in the portfolio;

| • | Trends of delinquencies and nonaccrual balances;

| • | Changes in loan policy; and

| • | Changes in lending management experience and related staffing.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan losses analysis and calculation.

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The allocation of the allowance fo r loan losses summarized on the basis of the Company’s calculation methodology was as follows:

|  | March 31, 2020 |
|  | 1-4 family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | first-lien |  |  | Residential |  |  |  |  |  |  |  |  |  |  | Other |
|  | residential |  |  | construction |  |  | Commercial |  |  | Commercial |  |  | commercial |
(In thousands) |  | mortgage |  |  | mortgage |  |  | real estate |  |  | lines of credit |  |  | and industrial |
Specifically reserved |  | $ | 95 |  |  | $ | - |  |  | $ | 76 |  |  | $ | 98 |  |  | $ | 379 |
Historical loss rate |  |  | 66 |  |  |  | - |  |  |  | 101 |  |  |  | 100 |  |  |  | 57 |
Qualitative factors |  |  | 570 |  |  |  | - |  |  |  | 4,066 |  |  |  | 1,020 |  |  |  | 1,322 |
Total |  | $ | 731 |  |  | $ | - |  |  | $ | 4,243 |  |  | $ | 1,218 |  |  | $ | 1,758 |
|  |  |  |  |  | Home equity |  |  | Other |  |  |  |  |  |  |  |  |
|  | Tax exempt |  |  | and junior liens |  |  | consumer |  |  | Unallocated |  |  | Total |
Specifically reserved |  | $ | - |  |  | $ | 128 |  |  | $ | 1 |  |  | $ | - |  |  | $ | 777 |
Historical loss rate |  |  | - |  |  |  | 146 |  |  |  | 584 |  |  |  | - |  |  |  | 1,054 |
Qualitative factors |  |  | 1 |  |  |  | 337 |  |  |  | 261 |  |  |  | - |  |  |  | 7,577 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 198 |  |  |  | 198 |
Total |  | $ | 1 |  |  | $ | 611 |  |  | $ | 846 |  |  | $ | 198 |  |  | $ | 9,606 |

|  | March 31, 2019 |
|  | 1-4 family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | first-lien |  |  | Residential |  |  |  |  |  |  |  |  |  |  | Other |
|  | residential |  |  | construction |  |  | Commercial |  |  | Commercial |  |  | commercial |
(In thousands) |  | mortgage |  |  | mortgage |  |  | real estate |  |  | lines of credit |  |  | and industrial |
Specifically reserved |  | $ | 104 |  |  | $ | - |  |  | $ | 98 |  |  | $ | 92 |  |  | $ | 464 |
Historical loss rate |  |  | 65 |  |  |  | - |  |  |  | 151 |  |  |  | 18 |  |  |  | 26 |
Qualitative factors |  |  | 553 |  |  |  | - |  |  |  | 3,121 |  |  |  | 692 |  |  |  | 1,070 |
Total |  | $ | 722 |  |  | $ | - |  |  | $ | 3,370 |  |  | $ | 802 |  |  | $ | 1,560 |
|  |  |  |  |  | Home equity |  |  | Other |  |  |  |  |  |  |  |  |
|  | Tax exempt |  |  | and junior liens |  |  | consumer |  |  | Unallocated |  |  | Total |
Specifically reserved |  | $ | - |  |  | $ | 139 |  |  | $ | 9 |  |  | $ | - |  |  | $ | 906 |
Historical loss rate |  |  | - |  |  |  | 13 |  |  |  | 149 |  |  |  | - |  |  |  | 422 |
Qualitative factors |  |  | 1 |  |  |  | 278 |  |  |  | 241 |  |  |  | - |  |  |  | 5,956 |
Total |  | $ | 1 |  |  | $ | 430 |  |  | $ | 399 |  |  | $ | - |  |  | $ | 7,284 |

Note 8: Foreclosed Real Estate

The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the property at each reporting period.

(Dollars in thousands) |  | Number of properties |  |  | March 31, 2020 |  |  | Number of properties |  |  | December 31, 2019 |
Foreclosed residential real estate |  |  | 2 |  |  | $ | 58 |  |  |  | - |  |  | $ | - |

At March 31, 2020 and December 31, 2019, the Company reported $1.0 million and $341,000, respectively, in residential real estate loans in the process of foreclosure.

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Note 9: Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Generally, all letters of credit, when issued have expiration dates within one year. The credit risks 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 $2.3 million of standby letters of credit as of March 31, 2020. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.

Note 10: Fair Value Measurements

Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

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

Investment securities: The fair values of available-for-sale and marketable equity securities are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.

The Company holds two corporate investment securities, categorized as Level 2, with an aggregate amortized historical cost of $4.7 million and an aggregate fair market value of $4.9 million as of March 31, 2020. These securities have valuations that are determined using published net asset values (NAV) derived by analyses of the securities’ underlying assets. These securities are comprised primarily of broadly-diversified real estate and adjustable-rate senior secured business loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable at least annually through tender offers made by their respective issuers, the liquidation value of the securities may be below their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled

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redemption. The Company anticipates that these securities will be redeemed by t heir respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of these investments.

Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are calculated based on a discounted cash flow model. All future floating rate cash flows are projected and both floating rate and fixed rate cash flows are discounted to the valuation date. The benchmark interest rate curve utilized for projecting cash flows and applying appropriate discount rates is built by obtaining publicly available third party market quotes for various swap maturity terms.

Impaired loans: Impaired loans are those loans in which the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

Foreclosed real estate: Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.

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The followin g tables summarize assets measured at fair value on a recurring basis as of the indicated dates, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:

|  | March 31, 2020 |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Total Fair |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Value |
Available-for-Sale Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSEs |  | $ | - |  |  | $ | 19,645 |  |  | $ | - |  |  | $ | 19,645 |
State and political subdivisions |  |  | - |  |  |  | 6,880 |  |  |  | - |  |  |  | 6,880 |
Corporate |  |  | - |  |  |  | 7,271 |  |  |  | - |  |  |  | 7,271 |
Asset backed securities |  |  | - |  |  |  | 12,416 |  |  |  | - |  |  |  | 12,416 |
Residential mortgage-backed - US agency |  |  | - |  |  |  | 20,146 |  |  |  | - |  |  |  | 20,146 |
Collateralized mortgage obligations - US agency |  |  | - |  |  |  | 35,100 |  |  |  | - |  |  |  | 35,100 |
Collateralized mortgage obligations - Private label |  |  | - |  |  |  | 14,855 |  |  |  | - |  |  |  | 14,855 |
Total |  |  |  |  |  |  | 116,313 |  |  |  |  |  |  |  | 116,313 |
Corporate measured at NAV |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,939 |
Total available-for-sale securities |  | $ | - |  |  | $ | 116,313 |  |  | $ | - |  |  | $ | 121,252 |
Marketable equity securities |  | $ | - |  |  | $ | 340 |  |  | $ | - |  |  | $ | 340 |
Interest rate swap derivative fair value hedge |  | $ | - |  |  | $ | (194 | ) |  | $ | - |  |  | $ | (194 | )
Interest rate swap derivative cash flow hedges |  | $ | - |  |  | $ | (1,344 | ) |  | $ | - |  |  | $ | (1,344 | )

|  | December 31, 2019 |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Total Fair |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Value |
Available-for-Sale Portfolio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury, agencies and GSEs |  | $ | - |  |  | $ | 16,820 |  |  | $ | - |  |  | $ | 16,820 |
State and political subdivisions |  |  | - |  |  |  | 1,736 |  |  |  | - |  |  |  | 1,736 |
Corporate |  |  | - |  |  |  | 7,631 |  |  |  | - |  |  |  | 7,631 |
Asset backed securities |  |  | - |  |  |  | 13,232 |  |  |  | - |  |  |  | 13,232 |
Residential mortgage-backed - US agency |  |  | - |  |  |  | 18,980 |  |  |  | - |  |  |  | 18,980 |
Collateralized mortgage obligations - US agency |  |  | - |  |  |  | 30,785 |  |  |  | - |  |  |  | 30,785 |
Collateralized mortgage obligations - Private label |  |  | - |  |  |  | 16,821 |  |  |  | - |  |  |  | 16,821 |
Total |  |  | - |  |  |  | 106,005 |  |  |  | - |  |  |  | 106,005 |
Corporate measured at NAV |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,923 |
Total available-for-sale securities |  | $ | - |  |  | $ | 106,005 |  |  | $ | - |  |  | $ | 110,928 |
Marketable equity securities |  | $ | - |  |  | $ | 534 |  |  | $ | - |  |  | $ | 534 |
Interest rate swap derivative fair value hedge |  | $ | - |  |  | $ | (92 | ) |  | $ | - |  |  | $ | (92 | )

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019:

|  |  |  |  |  | March 31, 2020 |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Total Fair |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Value |
Impaired loans |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Foreclosed real estate |  | $ | - |  |  | $ | - |  |  | $ | 58 |  |  | $ | 58 |

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|  |  |  |  |  | December 31, 2019 |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Total Fair |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Value |
Impaired loans |  | $ | - |  |  | $ | - |  |  | $ | 3,105 |  |  | $ | 3,105 |
Foreclosed real estate |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at the indicated dates.

|  | Quantitative Information about Level 3 Fair Value Measurements |
| Valuation | Unobservable | Range
| Techniques | Input | (Weighted Avg.)
At March 31, 2020 |  |  |
Foreclosed real estate | Appraisal of collateral | Appraisal Adjustments | 15% - 15% (15%)
| (Sales Approach) | Costs to Sell | 6% - 9% (8%)

|  | Quantitative Information about Level 3 Fair Value Measurements |
| Valuation | Unobservable | Range
| Techniques | Input | (Weighted Avg.)
At December 31, 2019 |  |  |
Impaired loans | Appraisal of collateral | Appraisal Adjustments | 5% - 20% (9%)
| (Sales Approach) | Costs to Sell | 7% - 13% (11%)
| Discounted Cash Flow |  |

There have been no transfers of assets into or out of any fair value measurement level during the three months ended March 31, 2020.

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of

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valuation techniques and the degree of subjectivity used in making the estimates, comparisons bet ween the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.

Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.

Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Loan value estimates include judgments based on expected prepayment rates. The measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.

Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.

Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.

Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.

Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.

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The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:

|  |  |  | March 31, 2020 |  |  | December 31, 2019 |
|  | Fair Value |  | Carrying |  |  | Estimated |  |  | Carrying |  |  | Estimated |
(In thousands) |  | Hierarchy |  | Amounts |  |  | Fair Values |  |  | Amounts |  |  | Fair Values |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | 1 |  | $ | 57,579 |  |  | $ | 57,579 |  |  | $ | 20,160 |  |  | $ | 20,160 |
Investment securities - available-for-sale |  | 2 |  |  | 116,313 |  |  |  | 116,313 |  |  |  | 106,005 |  |  |  | 106,005 |
Investment securities - available-for-sale |  | NAV |  |  | 4,939 |  |  |  | 4,939 |  |  |  | 4,923 |  |  |  | 4,923 |
Investment securities - marketable equity |  | 2 |  |  | 340 |  |  |  | 340 |  |  |  | 534 |  |  |  | 534 |
Investment securities - held-to-maturity |  | 2 |  |  | 120,549 |  |  |  | 117,088 |  |  |  | 122,988 |  |  |  | 124,148 |
Federal Home Loan Bank stock |  | 2 |  |  | 4,758 |  |  |  | 4,758 |  |  |  | 4,834 |  |  |  | 4,834 |
Net loans |  | 3 |  |  | 740,916 |  |  |  | 748,532 |  |  |  | 772,782 |  |  |  | 767,654 |
Accrued interest receivable |  | 1 |  |  | 3,700 |  |  |  | 3,700 |  |  |  | 3,712 |  |  |  | 3,712 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand Deposits, Savings, NOW and MMDA |  | 1 |  | $ | 495,806 |  |  | $ | 495,806 |  |  | $ | 460,293 |  |  | $ | 460,293 |
Time Deposits |  | 2 |  |  | 404,054 |  |  |  | 406,487 |  |  |  | 421,600 |  |  |  | 422,409 |
Borrowings |  | 2 |  |  | 91,437 |  |  |  | 93,956 |  |  |  | 93,125 |  |  |  | 93,643 |
Subordinated loans |  | 2 |  |  | 15,136 |  |  |  | 13,874 |  |  |  | 15,128 |  |  |  | 14,921 |
Accrued interest payable |  | 1 |  |  | 407 |  |  |  | 407 |  |  |  | 396 |  |  |  | 396 |
Interest rate swap derivative fair value hedge |  | 2 |  |  | 194 |  |  |  | 194 |  |  |  | 92 |  |  |  | 92 |
Interest rate swap derivative cash flow hedges |  | 2 |  |  | 1,344 |  |  |  | 1,344 |  |  |  | - |  |  |  | - |

Note 11: Interest Rate Derivatives

The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at March 31, 2020. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no derivative contracts not designated as hedging agreements at March 31, 2020 or December 31, 2019.

As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. In a fair value hedge, the fair value of the derivative (the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to the interest income or interest expense of the respective hedged item.

Cash flows related to floating rate assets and liabilities will fluctuate with changes in the underlying rate index. When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on cash flow hedges is accounted for similar to that associated with fair value hedges.

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Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap (or floor) contracts. The Company uses inter est rate swaps, cap or floor contracts as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount. An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest rate exceeds the contractually agree d upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in interest rates above the strike price. Similarly an interest rate floor is a derivative contract in which the buyer receives payments at the end of each per iod in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit from any rise in interest rates above the strike price.

The Company entered into a pay-fixed/receive variable interest rate swap with a notional amount of $9.2 million in April 2019, which was designated as a fair value hedge, associated with specific pools within the Company’s fixed-rate consumer loan portfolio. The swap contract will be in force from April 2019 to April 2021 and the Company will be required to pay 2.39% to the swap counterparty, while receiving 3-month LIBOR indexed payments from the same counterparty, with both payments calculated on the notional amount.

As of March 31, 2020 and December 31, 2019, the following amounts were recorded on the balance sheet related to the cumulative basis adjustments for fair value hedges:

(In thousands) |  | Carrying Amount of the Hedged Assets at March 31, 2020 |  |  | Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at March 31, 2020 |  |  | Carrying Amount of the Hedged Assets at December 31, 2019 |  |  | Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at December 31, 2019 |
Line item on the balance sheet in which the hedged item is included: |  |  |  |  |  |  |  |  |
Loans receivable (1) |  | $ | 18,021 |  |  | $ | 164 |  |  | $ | 19,254 |  |  | $ | 75 |

(1) | These amounts include the amortized cost basis of the hedged portfolio used to designate the hedging relationship in which the hedged item is the remaining amortized cost of the last layer expected to be remaining at the end of the hedging contract term. At March 31, 2020 and December 31, 2019, the amortized cost of the basis of the closed portfolio used in the hedging relationship was $18.0 million and $19.3 million, the cumulative basis adjustment associated with the hedging relationship was $164,000 and $75,000, and the amount of the designated hedged item was $9.2 million and $9.2 million, respectively.

At March 31, 2020 and December 31, 2019, the fair value of the fair value derivative resulted in a net liability position of $194,000 and $92,000 under the agreement, respectively, recorded by the Company in other liabilities. The Company’s participation in the swap contract reduced total loan interest income, recognized in consolidated earnings, by $16,000 in the quarter ended March 31, 2020.

In February 2020, the Company entered into an interest rate cap contract in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rising interest rates. This contractual agreement has been designated as a cash flow hedge with changes in the fair value of the contract, net of changes in the fair value of the designated hedged liability (certain short-term certificates of deposit with rates of interest that are highly correlated to the 3-month LIBOR index) being accounted for through other comprehensive income. The term of the cap contract will commence on May 1, 2020 and expire on May 1, 2023. The Company paid $228,000 in a one-time premium for the cap contract and has no further contractual obligations to the counterparty over the three-year life of the contract. The premium will be amortized ratably over the contractual term of the cap contract with an annual average cost to the Company of approximately 19 basis points relative to the notional amount. The Company will potentially benefit during the term of this cap contract, in the manner described above, for the period of time that the 3-month LIBOR index exceeds 1.85% (the strike price). The cap contract had no effect on recorded interest expense in the quarter ended March 31, 2020.

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In March 2020, the Company entered into an interest rate swap contract in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rising interest rates. This contractual agreement has been designated as a cash flow hedge with changes in the fair value of the contract, net of changes in the fair value of the designated h edged liability (certain short-term certificates of deposit with rates of interest that are highly correlated to the 3-month LIBOR index) being accounted for through other comprehensive income. The term of the swap contract will commence on May 15, 2020 an d expire on May 15, 2023. Under the terms of the swap contract, the Company will be obligated to pay the contractual counterparty an annual rate of 1.39% (the strike price) times the notional amount of the contract. Simultaneously, for the duration of th e swap contract, the counterparty will be obligated to pay the Company the annual rate of the 3-month LIBOR index, as determined each calendar quarter, times the notional contractual amount. The swap contract had no effect on recorded interest expense in t he quarter ended March 31, 2020.

(In thousands) |  |  |  | March 31, 2020 |  |  | December 31, 2019 |
Cash flow hedges: |  |  |  |  |  |  |  |
Total unamortized premium |  | $ | 228 |  |  | $ | - |
Fair market value adjustment interest rate cap |  |  | (192 | ) |  |  |  |
Total unamortized cap |  |  | 36 |  |  |  | - |
Fair market value adjustment interest rate swap |  |  | (1,152 | ) |  |  | - |
Total loss in comprehensive income |  | $ | (1,344 | ) |  | $ | - |

The amounts of hedge ineffectiveness, recognized during the quarter ended March 31, 2020, for cash flow hedges were not material to the Company’s consolidated results of operations. The Company had no hedged positions at March 31, 2019. Some or the entire amount included in accumulated other comprehensive loss would be reclassified into current earnings should a portion of, or the entire hedge no longer be considered effective, but at this time, management expects the hedge to remain fully effective during the remaining term of the swap. The changes in the fair values of the interest rate hedging agreements and the hedged items primarily result from the effects of changing interest rates and spreads.

The Company manages its potential credit exposure on interest rate swap transactions by entering into a bilateral credit support agreements with each counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold amounts. The Company posted cash in escrow of $1.3 million under collateral arrangements to satisfy collateral requirements associated with the interest rate swap contract at March 31, 2020.

|  | For the three months ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Balance as of December 31: |  | $ | - |  |  | $ | - |
Amount of losses recognized in other comprehensive income |  |  | (1,344 | ) |  |  | - |
Balance as of March 31: |  | $ | (1,344 | ) |  | $ | - |

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Note 12: Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the table below.

|  | For the three months ended March 31, 2020 |
(In thousands) |  | Retirement Plans |  |  | Unrealized Gains and Losses on Available-for- Sale Securities |  |  | Unrealized Losses on Derivatives and Hedging Activities |  |  | Unrealized Loss on Securities Transferred to Held-to-Maturity |  |  | Total |
Beginning balance |  | $ | (2,717 | ) |  | $ | (216 | ) |  | $ | - |  |  | $ | (38 | ) |  | $ | (2,971 | )
Reevaluation of deferred tax asset valuation allowance (1) |  |  | (188 | ) |  |  | (15 | ) |  |  | - |  |  |  | (3 | ) |  |  | (206 | )
Other comprehensive income before reclassifications |  |  | - |  |  |  | (2,869 | ) |  |  | (1,062 | ) |  |  | 6 |  |  |  | (3,925 | )
Amounts reclassified from AOCI |  |  | 46 |  |  |  | (21 | ) |  |  | - |  |  |  | - |  |  |  | 25 |
Ending balance |  | $ | (2,859 | ) |  | $ | (3,121 | ) |  | $ | (1,062 | ) |  | $ | (35 | ) |  | $ | (7,077 | )

(1) | Management determined that the Company, under the current New York State (“NYS”) tax code, was highly unlikely to incur a material NYS tax liability in the foreseeable future. As a result, certain net current and deferred tax assets, related to GAAP vs. tax timing differences under previous NYS tax law were no longer going to provide any future tax benefit. The substantial majority of these net deferred tax assets were offset by a related valuation allowance established in prior periods. Therefore, the Company eliminated its remaining NYS net deferred tax asset balances and the related valuation allowance on January 1, 2020. The effect of these eliminations required an adjustment to other comprehensive income balances and had no effect on 2020 reported earnings.

|  | For the three months ended March 31, 2019 |
(In thousands) |  | Retirement Plans |  |  | Unrealized Gains and Losses on Available-for- Sale Securities |  |  | Unrealized Loss on Securities Transferred to Held-to-Maturity |  |  | Total |
Beginning balance |  | $ | (3,152 | ) |  | $ | (2,832 | ) |  | $ | (58 | ) |  | $ | (6,042 | )
Other comprehensive income before reclassifications |  |  | - |  |  |  | 1,572 |  |  |  | 5 |  |  |  | 1,577 |
Amounts reclassified from AOCI |  |  | 65 |  |  |  | (62 | ) |  |  | - |  |  |  | 3 |
Ending balance |  | $ | (3,087 | ) |  | $ | (1,322 | ) |  | $ | (53 | ) |  | $ | (4,462 | )

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

|  | Amount Reclassified |  |  |
|  | from AOCI (1) |  |  |
|  | (Unaudited) |  |  |
(In thousands) |  | For the three months ended |  |  |
Details about AOCI (1) components |  | March 31, 2020 |  |  | March 31, 2019 |  |  | Affected Line Item in the Statement of Income
Retirement plan items |  |  |  |  |  |  |  |  |  |
Retirement plan net losses recognized in plan expenses (2) |  | $ | (58 | ) |  | $ | (84 | ) |  | Salaries and employee benefits
Tax effect |  |  | 12 |  |  |  | 19 |  |  | Provision for income taxes
|  | $ | (46 | ) |  | $ | (65 | ) |  | Net Income
Available-for-sale securities |  |  |  |  |  |  |  |  |  |
Realized gain (loss) on sale of securities |  | $ | 26 |  |  | $ | 79 |  |  | Net gains (losses) on sales and redemptions of investment securities
Tax effect |  |  | (5 | ) |  |  | (17 | ) |  | Provision for income taxes
|  | $ | 21 |  |  | $ | 62 |  |  | Net Income

(1) | Amounts in parentheses indicates debits in net income.

(2) | These items are included in net periodic pension cost.

See Note 5 for additional information.

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Note 13: Noninterest Income

The Company has included the following table regarding the Company’s noninterest income for the periods presented.

|  | For the three months |
|  | ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Service fees |  |  |  |  |  |  |  |
Insufficient funds fees |  | $ | 275 |  |  | $ | 208 |
Deposit related fees |  |  | 55 |  |  |  | 52 |
ATM fees |  |  | 26 |  |  |  | 22 |
Total service fees |  |  | 356 |  |  |  | 282 |
Fee Income |  |  |  |  |  |  |  |
Insurance commissions |  |  | 335 |  |  |  | 235 |
Investment services revenue |  |  | 68 |  |  |  | 48 |
ATM fees surcharge |  |  | 54 |  |  |  | 46 |
Banking house rents collected |  |  | 71 |  |  |  | 34 |
Total fee income |  |  | 528 |  |  |  | 363 |
Card income |  |  |  |  |  |  |  |
Debit card interchange fees |  |  | 163 |  |  |  | 144 |
Merchant card fees |  |  | 16 |  |  |  | 16 |
Total card income |  |  | 179 |  |  |  | 160 |
Mortgage fee income and realized gain on sale of loans and foreclosed real estate |  |  |  |  |  |  |  |
Loan servicing fees |  |  | 49 |  |  |  | 27 |
Net gains (losses) on sales of loans and foreclosed real estate |  |  | 672 |  |  |  | (8 | )
Total mortgage fee income and realized gain on sale of loans and foreclosed real estate |  |  | 721 |  |  |  | 19 |
Total |  |  | 1,784 |  |  |  | 824 |
Earnings and gain on bank owned life insurance |  |  | 116 |  |  |  | 121 |
Net gains on sales and redemptions of investment securities |  |  | 26 |  |  |  | 79 |
(Losses)/gains on marketable equity securities |  |  | (194 | ) |  |  | 41 |
Other miscellaneous income |  |  | 16 |  |  |  | 28 |
Total noninterest income |  | $ | 1,748 |  |  | $ | 1,093 |

The following is a discussion of key revenues within the scope of the new revenue guidance:

| • | Service fees – Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.

| • | Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The Company earns investment advisory fee income by providing investment management services to customers under investment management contracts. As the direction of investment management accounts is provided over time, the performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.

| • | Card income – Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

| • | Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and realized gain on sale of loans and foreclosed real estate is earned through the origination of residential

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|  | and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of SBA loans, and sales of foreclosed real estate, and is earned as the transaction occurs.

Note 14: Leases

The Company has operating leases for certain banking offices and land under noncancelable agreements. Our leases have remaining lease terms that vary from less than one year up to 30 years, some of which include options to extend the leases for various renewal periods. All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal options will be exercised.

The components of the lease expense are as follows:

|  | For the three months |
|  | ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Operating lease cost |  | $ | 61 |  |  | $ | 59 |
Finance lease cost |  |  | 20 |  |  |  | - |

Supplemental cash flow information related to leases was as follows:

|  | For the three months |
|  | ended March 31, |
(In thousands) |  | 2020 |  |  | 2019 |
Cash paid for amount included in the measurement of lease liabilities: |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 56 |  |  | $ | 48 |
Operating cash flows from finance leases |  |  | 20 |  |  |  | - |
Financing cash flows from finance leases |  |  | 18 |  |  |  | - |

Supplemental balance sheet information related to leases was as follows:

(In thousands, except lease term and discount rate) |  | March 31, 2020 |  |  | December 31, 2019 |
Operating Leases: |  |  |  |  |  |  |  |
Operating lease right-of-use assets |  | $ | 2,349 |  |  | $ | 2,386 |
Operating lease liabilities |  | $ | 2,618 |  |  | $ | 2,650 |
Finance Leases: |  |  |  |  |  |  |  |
Financial Liability |  | $ | 581 |  |  | $ | 578 |
Weighted Average Remaining Lease Term: |  |  |  |  |  |  |  |
Operating Leases |  | 19.45 years |  |  | 19.58 years |
Finance Leases |  | 29.17 years |  |  | 29.42 years |
Weighted Average Discount Rate: |  |  |  |  |  |  |  |
Operating Leases |  |  | 3.72 | % |  |  | 3.71 | %
Finance Leases |  |  | 13.75 | % |  |  | 13.75 | %

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Maturities of lease liabilities were as follows:

Twelve Months Ending March 31, |  |  |  |
(In thousands) |  |  |  |
2021 |  | $ | 114 |
2022 |  |  | 97 |
2023 |  |  | 102 |
2024 |  |  | 111 |
2025 |  |  | 120 |
Thereafter |  |  | 2,655 |
Total minimum lease payments |  | $ | 3,199 |

The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $71,000 and $34,000 for the twelve months ended March 31, 2020 and 2019, respectively. All lease agreements are accounted for as operating leases.

Note 15: COVID-19

In early January 2020, the World Health Organization issued an alert that a novel coronavirus outbreak was emanating from the Wuhan Province in China. Over the course of the next several weeks, the outbreak continued to spread to various regions of the world prompting the World Health Organization to declare COVID-19 a global pandemic on March 11, 2020. In the United States, the rapid spread of the COVID-19 virus invoked various Federal and New York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international and domestic travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public.

As a result, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many employees working remotely and has significantly reduced physical customer contact with employees and other customers by limiting branch activities to drive-thru transactions wherever possible, teleconferencing and in-branch “appointments only” services. Transactional volume has also increased through the Bank’s telephone and internet banking channels. We will take further actions as may be required by government authorities or that we determine to be in the best interests of our employees, customers and business partners.

Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, provides financial assistance in various forms to both businesses and consumers. In addition, the CARES Act also created many directives affecting the operations of financial services providers, such as the Company, including a forbearance program for federally-backed mortgage loans and protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. The Company has begun working with its business and individual customers affected by COVID-19 and expects a significant amount of modifications across many of its loan portfolios in the near term. Through May 15, 2020, the Bank granted payment deferral requests primarily for 90 days, on 540 loans representing approximately $142.9 million of existing loan balances.

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Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status. In the instances where the Company granted a payment deferral to a delinquent borrower, the borrower’s delinquency status was frozen as of February 29, 2020, and their loans will continue to be reported as del inquent during the deferment period based on their delinquency status as of that date. The Company anticipates that the number and amount of COVID-19 financial hardship payment deferral requests will increase significantly during the second quarter of 2020. Consistent with industry regulatory guidance, borrowers that were granted COVID-19 related deferrals but were otherwise current on loan payments will continue to have their loans reported as current loans during the agreed upon deferral period, accrue i nterest and not be accounted for as troubled debt restructurings.

The future performance of the Company’s loan portfolios with respect to credit losses will be highly dependent upon the course and duration, both nationally and within the Company’s market area, of the public health and economic factors related to the pandemic, as well as the concentrations in the Company’s loan portfolio. Concentrations of loans within a portfolio that are made to a singular borrower, to a related groups of borrowers, or to a limited number of industries, are generally considered to be additional risk factors in estimating future credit losses. Therefore, the Company monitors all of its credit relationships to ensure that the total loan amounts extended to one borrower, or to a related group of borrowers, does not exceed the maximum permissible levels defined by applicable regulation or the Company’s generally more restrictive internal policy limits.

Loans to a single borrower, or to a related group of borrowers, are referred to as total related credits. Total related credits encompass all related or affiliated borrower loan balances, including available unused lines of credit, for both personal and business loans. At March 31, 2020, the Company had 25 total related credit relationships, comprised of 179 individual loans, with outstanding balances in excess of $5.0 million. These total related credits ranged from $5.0 million to $12.8 million on that date with aggregate balances of $192.0 million. Of the $192.0 million in total related credits, $182.4 million was secured by various collateral assets, primarily commercial real estate, and $9.6 million was unsecured.

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In addition, the future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by type of loan and the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral type within major categories as of March 31, 2020:

(Dollars in thousands) |  | Balance |  |  | Number of Loans |  |  | Average Loan Balance |  |  | Minimum/ Maximum Loan Balance |  |  | Allowance for Loan Losses |  |  | Percent of Total Loans |
Residential Mortgage Loans |  | $ | 214,637 |  |  |  | 2,096 |  |  | $ | 102 |  |  | $ | 1 |  | - | $ | 1,576 |  |  | $ | 731 |  |  |  | 29 | %
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mixed Use |  | $ | 44,722 |  |  |  | 50 |  |  | $ | 894 |  |  | $ | 39 |  | - | $ | 7,433 |  |  | $ | 724 |  |  |  | 6 | %
Multi-Family Residential |  |  | 39,216 |  |  |  | 58 |  |  |  | 676 |  |  |  | 27 |  | - |  | 6,015 |  |  |  | 635 |  |  |  | 5 | %
Hotels and Motels |  |  | 32,576 |  |  |  | 10 |  |  |  | 3,258 |  |  |  | 226 |  | - |  | 11,500 |  |  |  | 528 |  |  |  | 4 | %
Office |  |  | 31,560 |  |  |  | 57 |  |  |  | 554 |  |  |  | 14 |  | - |  | 4,927 |  |  |  | 511 |  |  |  | 4 | %
Retail |  |  | 23,661 |  |  |  | 54 |  |  |  | 438 |  |  |  | 2 |  | - |  | 5,248 |  |  |  | 383 |  |  |  | 3 | %
1-4 Family Residential |  |  | 18,604 |  |  |  | 147 |  |  |  | 127 |  |  |  | 10 |  | - |  | 1,250 |  |  |  | 301 |  |  |  | 2 | %
Automobile Dealership |  |  | 16,054 |  |  |  | 10 |  |  |  | 1,605 |  |  |  | 174 |  | - |  | 6,099 |  |  |  | 260 |  |  |  | 2 | %
Recreation/Golf Course/Marina |  |  | 10,857 |  |  |  | 15 |  |  |  | 723 |  |  |  | 35 |  | - |  | 3,150 |  |  |  | 176 |  |  |  | 1 | %
Warehouse |  |  | 10,173 |  |  |  | 15 |  |  |  | 678 |  |  |  | 10 |  | - |  | 2,700 |  |  |  | 165 |  |  |  | 1 | %
Manufacturing/Industrial |  |  | 6,458 |  |  |  | 14 |  |  |  | 461 |  |  |  | 5 |  | - |  | 1,450 |  |  |  | 105 |  |  |  | 1 | %
Restaurant |  |  | 6,386 |  |  |  | 25 |  |  |  | 255 |  |  |  | 11 |  | - |  | 1,325 |  |  |  | 104 |  |  |  | 1 | %
Automobile Repair |  |  | 4,853 |  |  |  | 10 |  |  |  | 485 |  |  |  | 61 |  | - |  | 2,342 |  |  |  | 79 |  |  |  | 1 | %
Not-For-Profit & Community Service Real Estate |  |  | 3,398 |  |  |  | 3 |  |  |  | 1,133 |  |  |  | 110 |  | - |  | 1,698 |  |  |  | 55 |  |  |  | 1 | %
Land |  |  | 3,204 |  |  |  | 6 |  |  |  | 534 |  |  |  | 28 |  | - |  | 2,000 |  |  |  | 52 |  |  |  | 1 | %
Skilled Nursing Facility |  |  | 2,833 |  |  |  | 1 |  |  |  | 2,833 |  |  |  | 2,833 |  | - |  | 2,833 |  |  |  | 46 |  |  |  | 1 | %
All Other |  |  | 7,374 |  |  |  | 37 |  |  |  | 199 |  |  |  | 1 |  | - |  | 746 |  |  |  | 119 |  |  |  | 1 | %
Total Commercial Real Estate Loans |  | $ | 261,929 |  |  |  | 512 |  |  | $ | 512 |  |  |  |  |  |  |  |  |  |  | $ | 4,243 |  |  |  | 35 | %
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured Term Loans |  | $ | 64,025 |  |  |  | 366 |  |  | $ | 175 |  |  | $ | 0 |  | - | $ | 6,335 |  |  | $ | 1,322 |  |  |  | 9 | %
Unsecured Term Loans |  |  | 20,749 |  |  |  | 133 |  |  |  | 156 |  |  |  | 0 |  | - |  | 1,647 |  |  |  | 429 |  |  |  | 3 | %
Secured Lines of Credit |  |  | 48,009 |  |  |  | 284 |  |  |  | 169 |  |  |  | 0 |  | - |  | 5,000 |  |  |  | 991 |  |  |  | 6 | %
Unsecured Lines of Credit |  |  | 11,345 |  |  |  | 139 |  |  |  | 82 |  |  |  | 0 |  | - |  | 2,999 |  |  |  | 234 |  |  |  | 1 | %
Total Commercial and Industrial Loans |  | $ | 144,128 |  |  |  | 922 |  |  | $ | 156 |  |  |  |  |  |  |  |  |  |  | $ | 2,976 |  |  |  | 19 | %
Tax Exempt Loans |  | $ | 7,937 |  |  |  | 24 |  |  | $ | 331 |  |  | $ | 9 |  | - | $ | 2,425 |  |  | $ | 1 |  |  |  | 1 | %
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity Lines of Credit |  | $ | 44,732 |  |  |  | 1,100 |  |  | $ | 41 |  |  | $ | 1 |  | - | $ | 418 |  |  | $ | 536 |  |  |  | 6 | %
Automobile |  |  | 33,832 |  |  |  | 2,076 |  |  |  | 16 |  |  |  | 1 |  | - |  | 375 |  |  |  | 405 |  |  |  | 4 | %
Consumer Secured |  |  | 4,726 |  |  |  | 85 |  |  |  | 56 |  |  |  | 24 |  | - |  | 157 |  |  |  | 57 |  |  |  | 1 | %
Consumer Unsecured |  |  | 35,827 |  |  |  | 7,095 |  |  |  | 5 |  |  |  | 1 |  | - |  | 120 |  |  |  | 429 |  |  |  | 4 | %
All Others |  |  | 2,454 |  |  |  | 849 |  |  |  | 3 |  |  |  | 0 |  | - |  | 60 |  |  |  | 30 |  |  |  | 1 | %
Total Consumer Loans |  | $ | 121,571 |  |  |  | 11,205 |  |  | $ | 11 |  |  |  |  |  |  |  |  |  |  | $ | 1,457 |  |  |  | 16 | %
Net deferred loan fees |  |  | 320 |  |  |  | - |  |  |  | - |  |  |  |  |  |  |  | - |  |  |  | - |  |  |  | - |
Unallocated allowance for loan losses |  |  | - |  |  |  | - |  |  |  | - |  |  |  |  |  |  |  | - |  |  |  | 198 |  |  |  | - |
Total Loans |  | $ | 750,522 |  |  | $ | 14,759 |  |  | $ | 51 |  |  |  |  |  |  |  |  |  |  | $ | 9,606 |  |  |  | 100 | %

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Including the potential effects of t he COVID-19 outbreak on the Company’s loan portfolios, the ongoing and dynamic nature of the pandemic and the resultant, potentially sever e and long-lasting, economic dislocations, i t is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the re lated adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

| • | Demand for our products and services may decline, making it difficult to grow assets and income;

| • | If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

| • | Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

| • | Our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

| • | The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

| • | As the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

| • | A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

| • | Our cyber security risks are increased as the result of an increase in the number of employees working remotely;

| • | We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

| • | Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

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

General

The Company is a Maryland corporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial bank, which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements. At March 31, 2020, the Company and subsidiaries had total assets of $1.1 billion, total liabilities of $1.0 billion and shareholders' equity of $88.0 million plus noncontrolling interest of $305,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at March 31, 2020 and the results of operations for the three month periods ended March 31, 2020 and 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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 included in the 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2020 (“the consolidated annual financial statements”) as of December 31, 2019 and 2018 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.

Statement Regarding Forward-Looking Statements

Certain statements contained herein are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

| • | Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;

| • | Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;

| • | Competition in our primary market areas;

| • | Changes in interest rates and national or regional economic conditions;

| • | Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

| • | Significant government regulations, legislation and potential changes thereto;

| • | A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

| • | Increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

| • | Cyberattacks, computer viruses and other technological threats that may breach the security of our websites or other systems;

| • | Technological changes that may be more difficult or expensive than expected;

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| • | Limitations on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations; and

| • | Other risks described herein and in the other reports and statements we file with the SEC.

In addition to the risk factors enumerated above, the economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

| • | Demand for our products and services may decline, making it difficult to grow assets and income;

| • | If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

| • | Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

| • | Our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

| • | The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

| • | As the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

| • | A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

| • | Our cyber security risks are increased as the result of an increase in the number of employees working remotely;

| • | We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

| • | Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

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COVID-19 Response

In early January 2020, the World Health Organization issued an alert that a novel coronavirus outbreak was emanating from the Wuhan Province in China. Over the course of the next several weeks, the outbreak continued to spread to various regions of the world prompting the World Health Organization to declare COVID-19 a global pandemic on March 11, 2020. In the United States, the rapid spread of the COVID-19 virus invoked various Federal and New York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international and domestic travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. As a result, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many employees working remotely and we will take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, provides financial assistance in various forms to both businesses and consumers. In addition, the CARES Act also created many directives affecting the operations of financial services providers, such as the Company, including a forbearance program for federally-backed mortgage loans and protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. The Company has begun working with its business and individual customers affected by COVID-19 and expects a significant amount of modifications across many of its loan portfolios in the near term. Through May 15, 2020, the Bank granted payment deferral requests primarily for 90 days, on 540 loans representing approximately $142.9 million of existing loan balances. For more information on the Bank’s loan concentrations, please see Note 15 to the Unaudited Consolidated Financial Statements above.

The Bank also has and continues to participate in the Paycheck Protection Program (“PPP”), a $650 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). An eligible business can generally apply for a PPP loan up to the greater of: 2.5 times its average monthly payroll costs, or $10.0 million. PPP loans will have an interest rate of 1.0%, a two-year loan term to maturity, and principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. Through May 15, 2020, the Bank has submitted to and received approval from the SBA for 619 loans totaling approximately $73.5 million through this program. The Bank continues to be in the process of submitting a limited number of additional applications utilizing the latest round of available authorizations from the SBA and believes that it has sufficient liquidity to support current and anticipated funding requests from borrowers.

The COVID-19 crisis is expected to continue to impact the Company’s financial results, as well as demand for its services and products during the second quarter of 2020 and potentially beyond. The short- and long-term implications of the COVID-19 crisis, possibly muted by offsetting governmental monetary and fiscal stimulus measures, on the Company’s future revenues, earnings results, allowance for credit losses, capital reserves, and liquidity are unknown at this time.

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Application of Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated annual 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 accounting 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 unaffiliated third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.

The most significant accounting policies followed by the Company are presented in Note 1 to the annual audited consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated annual financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses, deferred income taxes, pension obligations, the evaluation of investment securities for other than temporary impairment, the estimation of fair values for accounting and disclosure purposes, and the evaluation of goodwill for impairment to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available.

The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

Our Allowance for Loan and Lease Losses policy establishes criteria for selecting loans to be measured for impairment based on the following:

Residential and Consumer Loans:

| • | All loans rated substandard or worse, on nonaccrual, and above our total related credit (“TRC”) threshold balance of $300,000.

| • | All Troubled Debt Restructured Loans.

Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans:

| • | All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000.

| • | All Troubled Debt Restructured Loans.

Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value. For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the probable incurred loss for each risk-rating category.

Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied

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to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in t he period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable inco me, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.

Effective in January 2018, the Company adopted a modification methodology, made available following changes to the New York State tax code, affecting how the Company’s state income tax liability is computed. Under this adopted methodology it is unlikely that the Company will pay income taxes to New York in future periods and it is therefore probable that the Company’s deferred tax assets related to New York State income taxes are unlikely to further reduce the Company’s state income tax rate in the future. Accordingly, a valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York income taxes to $0. Therefore, as of January 1, 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes.

In the quarter ended March 31, 2020, Management determined that the Company, under the current New York State (“NYS”) tax code, was highly unlikely to incur a material NYS tax liability in the foreseeable future. As a result, certain net current and deferred tax assets, related to GAAP vs. tax timing differences under previous NYS tax law, were no longer going to provide any future tax benefit. The substantial majority of these net deferred tax assets were offset by a related valuation allowance established in prior periods. Upon analysis of all factors related to the expected future filings of NYS tax returns, the Company eliminated its remaining NYS net deferred tax asset balances and the related valuation allowance on January 1, 2020. The effect of these eliminations required an adjustment to other comprehensive income of $206,000 and had no effect on first quarter 2020 reported earnings. At March 31, 2019, the Company had a valuation allowance of $33,000 established against the future projected benefits of deferred tax assets related to New York State income tax obligations.

The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits, as well as a the effects of transitional adjustments related to state income taxes and certain taxes payable to states other than New York. The effective tax rate was 22.0% for the three month period ended March 31, 2020.

We maintain a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, we informed our employees of our decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. Pension and post-retirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events; including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated annual financial statements.

The Company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities impairment losses and other-than-temporary impairment (“OTTI”) of equity securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities (both available-for-sale and held-to-maturity) portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to whether OTTI is present. The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security

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to make scheduled interest or principal payments, (4) any changes to t he rating of the security by a nationally recognized statistical rating organization (“N RSRO”), and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

The estimation of fair value is significant to several of our assets; including available-for-sale and marketable equity investment securities, intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the annual audited consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.

Fair values for securities available-for-sale are obtained from unaffiliated third party pricing services. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing sources. Fair values for marketable equity securities are based on quoted prices on a nationally recognized securities exchange for similar benchmark securities. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.

Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the results of the December 31, 2019 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. Management will continuously evaluate all relevant economic and operational factors potentially affecting the Bank or the fair value of its assets, including goodwill. Should the current pandemic, or the future economic consequences thereof, require a significant and sustained change in the operations of the Bank, re-evaluations of the Bank’s goodwill valuation will be conducted on a more frequent basis. The evaluation approach is described in Note 10 of the consolidated annual financial statements. Further information on the estimation of fair values can be found in Note 22 to the consolidated annual financial statements.

Recent Events

On March 23, 2020, the Company announced that its Board of Directors had declared a cash dividend of $0.06 per common and preferred share, and a cash dividend of $0.06 per notional share for the issued common stock Warrant. The dividend was payable on May 8, 2020 to shareholders of record on April 16, 2020.

Overview and Results of Operations

The following represents the significant highlights of the Company’s operating results between the first quarter of 2020 and the first quarter of 2019.

| • | Net income increased $1.2 million, or 228.8%, to $1.7 million.

| • | Basic and diluted earnings per share both increased $0.17 to $0.29 per share.

| • | Return on average assets increased 40 basis points to 0.62% as the increase in income outpaced the increase in average assets.

| • | Net interest income, after provision for loan losses, increased $309,000, or 4.8%, to $6.7 million. This increase in was primarily due to the increase in average balances of interest-earning assets, offset by a significant increase in the provision for loan losses, which is reflective of an increase in average loan balances. Additional provisioning for loan losses was also applied as a reflection of the substantial increase in economic uncertainty and the resultant potential for increased credit losses in future periods as a consequence of the COVID-19 pandemic.

| • | Net interest margin increased by eleven basis points to 3.03%, primarily a result of an eight basis point increase in the average yield earned on average loans, along with a 12 basis point decrease in the average interest rate paid on average interest-bearing liabilities.

| • | Total average interest-earning assets were $1.0 billion, an increase of $128.4 million, or 14.3%.

| • | Total deposits increased $94.3 million, or 11.7%, to $899.9 million.

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| • | The effective income tax rate decreased 11.8% to 22.0% for the three months ended March 31, 20 20, as compared to 33.8% for the same three month period in 201 9. This de crease was primarily related to the 2019 nonrecurring establishment, through a charge to earnings, of a $136,000 valuation allowance to reserve against deferred tax assets related to New York State income taxes.

The following reflects the significant changes in financial condition between March 31, 2019, December 31, 2019 and March 31, 2020.

| • | Total assets increased $132.6 million, or 13.6%, to $1.1 billion at March 31, 2020 from $975.1 million at March 31, 2019. The increase was primarily due to increases in loans and cash and cash equivalents. The increases in loans were funded largely by increases in deposits, including brokered deposits.

| • | Asset quality metrics remained stable in comparison to recent reporting periods. The Company’s consistent asset quality metrics are reflective of its disciplined risk management process, along with continued relative economic stability for the Central New York State region. In light of the COVID-19 challenges faced by its customer base, the Bank is monitoring this situation and working closely with customers to help navigate through the current economic challenges. The annualized net loan charge-offs to average loans ratio was 0.07% for the first quarter of 2020, compared to 0.10% for the first quarter of 2019, and 0.09% for the fourth quarter of 2019. Nonperforming loans to total loans increased 11 basis points to 0.62% at March 31, 2020, compared to 0.51% at March 31, 2019. Nonperforming loans to total loans decreased 5 basis points to 0.62% at March 31, 2020, compared to 0.67% at December 31, 2019. Correspondingly, the ratio of the allowance for loan losses to nonperforming loans for first quarter 2020 was 205.87%, as compared to 215.18%, at March 31, 2019, and 165.25% at December 31, 2019.

The Company had net income of $1.7 million for the three months ended March 31, 2020 compared to net income of $514,000 for the three months ended March 31, 2019. The $1.2 million increase in net income was due primarily to a $1.4 million increase in interest and dividend income, a $655,000 increase in noninterest income, and a $466,000 decrease in noninterest expense. These fluctuations were partially offset by a $923,000 increase in the provision for loan losses, a $204,000 increase in income tax expense, and a $142,000 increase in interest expense.

Net interest income before the provision for loan losses increased $1.2 million to $7.8 million for the three months ended March 31, 2020 as compared to $6.5 million for the same three month period in 2019. The increase was due principally to a $1.4 million, or 14.2%, increase in interest and dividend income that was a result of growth in average interest-earning assets of $128.4 million compared to the prior year first quarter. Average loans for the first quarter of 2020 increased by $127.4 million, or 20.1%, over the prior year first quarter primarily as a result of growth in the commercial and consumer loan portfolios. The higher first quarter 2020 interest income was partially offset by a volume driven increase in the average balance of interest-bearing liabilities. Average interest-bearing liabilities increased by $99.6 million, or 12.8%, for the first quarter of 2020 as compared to the first quarter of 2019, however the average interest rate paid on interest-bearing liabilities decreased by 12 basis points.

The $655,000 increase in noninterest income in the quarter ended March 31, 2020, as compared to the same quarterly period in 2019, was primarily the result of an increase of $680,000 in net gains on sales of loans and foreclosed real estate. The gain on the sale of loans and foreclosed real estate was primarily the result of the sale of $35.9 million in seasoned conforming residential mortgage loans that was completed in January 2020. Also contributing to the increase in noninterest income was a $94,000 increase in insurance agency revenue and a $74,000 increase in service charges on deposit accounts for the current period. These increases in noninterest income were partially offset by a $235,000 decrease in unrealized gains on equity securities compared to the first quarter of 2019. This decrease in unrealized gains on equity securities was the result of a significant decline in the equity markets during the three months ended March 31, 2020 primarily due to the economic effects of the COVID-19 pandemic. All other noninterest income categories decreased by $42,000, or 7.9%, in the three months ended March 31, 2020, as compared to the same prior year period.

Total noninterest expense in the first quarter of 2020 was $6.2 million, a decrease of $466,000, or 6.9%, compared to $6.7 million for the same prior year quarter. The $466,000 decrease in noninterest expense in the quarter ended March 31, 2020, as compared to the same quarterly period in 2019, was primarily due to a decrease of $403,000, or 11.0%, in

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salaries and employee benefits expense and a $207,000 decrease in foreclosed real estate expense s. The decrease in salaries and employee benefits expense was primarily due to a $150,000 decrease in employee benefits expense, a $124,000 decrease in commissions and incentives expense, and a $110,000 decrease in salaries expense. The decrease in foreclosed real estate expenses was related to the final disposition of a single foreclosed commercial property in 2019. These decreases were partially offset by a $9 9,000 increase in building and occupancy expense related to the placement i n service of a new rental property w hich will have an increasing level of rental income in future periods. All other non interest expenses increased $46,000, or 2.1%, in aggregate during the quarter ended March 31, 20 20, as compared to the same three-month period in 201 9.

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve needs on loans individually evaluated for impairment, in its determination of the adequacy of the allowance for loan losses. We recorded $1.1 million in provision for loan losses for the three-month period ended March 31, 2020, as compared to $144,000 for the three-month period ended March 31, 2019. The $923,000 increase in the provision for loan losses in the first quarter of 2020, as compared to the same quarter in 2019, resulted from year-over-year increases in: (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The increase in the quantitative factors used in determining the provision for loan losses reflects the substantial increase in economic uncertainty and the resultant potential for increased credit losses in future periods as a consequence of the COVID-19 pandemic. Outstanding loan balances increased $92.9 million, or 14.1%, in the quarter ended March 31, 2020, as compared to the same quarter in the previous year, and therefore required a corresponding increase in the estimable and probable loan losses inherent in the loan portfolio. Finally, the provision for loan losses in the quarter ended March 31, 2020 was further increased, as compared to the same quarter in 2019, by the effects of an increase in the ratio of delinquent loans to total loans, which increased to 3.05% at March 31, 2020 as compared to 2.75% at March 31, 2019, coupled with an increase in nonaccrual loans that increased $1.2 million to $4.7 million at March 31, 2020 as compared to $3.4 million at March 31, 2019.

In comparing the year-over-year first quarter periods, the return on average assets increased 40 basis points to 0.62% due to the combined effects of the increase in net income (the numerator in the ratio) and the increase in average assets (the denominator in the ratio). The Company’s net income increased $1.2 million, or 228.8%, which outpaced the increase in average assets. Average assets increased due to increases in average loans and average taxable investment securities of $127.4 million and $23.0 million, respectively in the first quarter of 2020 as compared to the same quarter of 2019. Average deposits increased $99.4 million in the first quarter of 2020, as compared with the same quarter in 2019, due to strong growth in retail and commercial relationship deposits along with brokered deposit inflows and the seasonally-normal strong deposit inflows related to the Bank’s municipal depositor relationships.

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.

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The following table set s forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and resultant yield information in the table has not been adjusted for tax e quivalency. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purpos es of these calculations.

|  | For the three months ended March 31, |
|  | 2020 |  |  | 2019 |
|  |  |  |  |  |  |  |  |  | Average |  |  |  |  |  |  |  |  |  |  | Average |
|  | Average |  |  |  |  |  |  | Yield / |  |  | Average |  |  |  |  |  |  | Yield / |
(Dollars in thousands) |  | Balance |  |  | Interest |  |  | Cost |  |  | Balance |  |  | Interest |  |  | Cost |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 761,214 |  |  | $ | 9,242 |  |  |  | 4.86 | % |  | $ | 633,823 |  |  | $ | 7,575 |  |  |  | 4.78 | %
Taxable investment securities |  |  | 247,651 |  |  |  | 1,762 |  |  |  | 2.85 | % |  |  | 224,646 |  |  |  | 1,799 |  |  |  | 3.20 | %
Tax-exempt investment securities |  |  | 1,364 |  |  |  | 7 |  |  |  | 2.05 | % |  |  | 18,473 |  |  |  | 108 |  |  |  | 2.34 | %
Fed funds sold and interest-earning deposits |  |  | 15,683 |  |  |  | 32 |  |  |  | 0.82 | % |  |  | 20,547 |  |  |  | 187 |  |  |  | 3.64 | %
Total interest-earning assets |  |  | 1,025,912 |  |  |  | 11,043 |  |  |  | 4.31 | % |  |  | 897,489 |  |  |  | 9,669 |  |  |  | 4.31 | %
Noninterest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other assets |  |  | 77,009 |  |  |  |  |  |  |  |  |  |  |  | 65,808 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (8,704 | ) |  |  |  |  |  |  |  |  |  |  | (7,276 | ) |  |  |  |  |  |  |  |
Net unrealized gains (losses) on available-for-sale securities |  |  | 119 |  |  |  |  |  |  |  |  |  |  |  | (3,260 | ) |  |  |  |  |  |  |  |
Total assets |  | $ | 1,094,336 |  |  |  |  |  |  |  |  |  |  | $ | 952,761 |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NOW accounts |  | $ | 75,845 |  |  | $ | 29 |  |  |  | 0.15 | % |  | $ | 70,367 |  |  | $ | 28 |  |  |  | 0.16 | %
Money management accounts |  |  | 14,184 |  |  |  | 5 |  |  |  | 0.14 | % |  |  | 14,229 |  |  |  | 5 |  |  |  | 0.14 | %
MMDA accounts |  |  | 194,458 |  |  |  | 402 |  |  |  | 0.83 | % |  |  | 184,570 |  |  |  | 434 |  |  |  | 0.94 | %
Savings and club accounts |  |  | 87,118 |  |  |  | 26 |  |  |  | 0.12 | % |  |  | 84,296 |  |  |  | 25 |  |  |  | 0.12 | %
Time deposits |  |  | 403,214 |  |  |  | 2,094 |  |  |  | 2.08 | % |  |  | 322,003 |  |  |  | 1,853 |  |  |  | 2.30 | %
Subordinated loans |  |  | 15,131 |  |  |  | 206 |  |  |  | 5.45 | % |  |  | 15,092 |  |  |  | 217 |  |  |  | 5.75 | %
Borrowings |  |  | 87,019 |  |  |  | 502 |  |  |  | 2.31 | % |  |  | 86,781 |  |  |  | 560 |  |  |  | 2.58 | %
Total interest-bearing liabilities |  |  | 876,969 |  |  |  | 3,264 |  |  |  | 1.49 | % |  |  | 777,338 |  |  |  | 3,122 |  |  |  | 1.61 | %
Noninterest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  |  | 112,358 |  |  |  |  |  |  |  |  |  |  |  | 101,283 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 12,059 |  |  |  |  |  |  |  |  |  |  |  | 8,363 |  |  |  |  |  |  |  |  |
Total liabilities |  |  | 1,001,386 |  |  |  |  |  |  |  |  |  |  |  | 886,984 |  |  |  |  |  |  |  |  |
Shareholders' equity |  |  | 92,950 |  |  |  |  |  |  |  |  |  |  |  | 65,777 |  |  |  |  |  |  |  |  |
Total liabilities & shareholders' equity |  | $ | 1,094,336 |  |  |  |  |  |  |  |  |  |  | $ | 952,761 |  |  |  |  |  |  |  |  |
Net interest income |  |  |  |  |  | $ | 7,779 |  |  |  |  |  |  |  |  |  |  | $ | 6,547 |  |  |  |  |
Net interest rate spread |  |  |  |  |  |  |  |  |  |  | 2.82 | % |  |  |  |  |  |  |  |  |  |  | 2.70 | %
Net interest margin |  |  |  |  |  |  |  |  |  |  | 3.03 | % |  |  |  |  |  |  |  |  |  |  | 2.92 | %
Ratio of average interest-earning assets to average interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  | 116.98 | % |  |  |  |  |  |  |  |  |  |  | 115.46 | %

As indicated in the above table, net interest income, before provision for loan losses, increased $1.2 million, or 18.8%, to $7.8 million for the three months ended March 31, 2020, as compared to $6.5 million for the same prior year period. This increase was due principally to a $1.4 million, or 14.2%, increase in interest and dividend income. This increase in interest and dividend income was due principally to the $128.4 million, or 14.3%, increase in the average balance of interest-earning assets. This was primarily the result of an increase in average loans, which increased $127.4 million, or 20.1%, coupled with the eight basis point increase in the average yield earned on these loans. These positive factors on net interest income were partially offset by the increase in the average balance of interest-bearing liabilities which increased $99.6 million, or 12.8%, while the average rate paid on those interest-bearing liabilities decreased 12 basis points. The following analysis should also be viewed in conjunction with the table below which reports the changes in net interest income attributable to rate and volume.

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Interest and dividend income increased $1.4 million, or 1 4.2%, to $11.0 million for the three months ended March 31, 20 20 compared to $9.7 million for the same three-month period in 201 9. The increase in interest income was due principally to the increase the in average balances of loans and taxable investment securities which increased 20.1% and 10.2%, respectively, between the year-over-year fi r st quarter periods. The average balance of loans increased by $127.4 million and the average yiel d on that portfolio improved eight basis points to 4.86%. The increase in the average balance of loans reflect ed the Company’s continued success in its expansion within the greater Syracuse, New York market.

Interest expense for the three months ended March 31, 2020 increased $142,000, or 4.6%, to $3.3 million when compared to the same prior year period. Deposit interest expense increased $211,000, or 9.0%, to $2.6 million due to a $99.4 million increase in the average balance of interest-bearing deposits, partially offset by a seven basis point decrease in the average annualized rate paid on these deposits to 1.32% for the three months ended March 31, 2020, as compared with the same three-month period in 2019. The average balance of deposits increased due to an increase of $81.2 million in the average balance of time deposits during the first quarter of 2020 as compared to the same period in 2019. The decrease in the average rate of deposits was primarily due to 22 and 11 basis point decreases in the average rates paid on time deposits and money market deposit accounts (“MMDA”), respectively, during the three months ended March 31, 2020 as compared to the same time period in 2019 due to declining market rates during the first quarter of 2020. In 2019, the average rates paid on time deposits and MMDA accounts reflected the competitive environment for such deposits within the Company’s marketplace as well as a general increase in short-term interest rates nationally.

Rate/Volume Analysis

Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably.

|  | Three months ended March 31, |
|  | 2020 vs. 2019 |
|  | Increase/(Decrease) Due to |
|  |  |  |  |  |  |  |  |  | Total |
|  |  |  |  |  |  |  |  |  | Increase |
(In thousands) |  | Volume |  |  | Rate |  |  | (Decrease) |
Interest Income: |  |  |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 1,545 |  |  | $ | 122 |  |  | $ | 1,667 |
Taxable investment securities |  |  | 751 |  |  |  | (788 | ) |  |  | (37 | )
Tax-exempt investment securities |  |  | (89 | ) |  |  | (12 | ) |  |  | (101 | )
Interest-earning deposits |  |  | (36 | ) |  |  | (119 | ) |  |  | (155 | )
Total interest income |  |  | 2,171 |  |  |  | (797 | ) |  |  | 1,374 |
Interest Expense: |  |  |  |  |  |  |  |  |  |  |  |
NOW accounts |  |  | 6 |  |  |  | (5 | ) |  |  | 1 |
Money management accounts |  |  | - |  |  |  | - |  |  |  | - |
MMDA accounts |  |  | 119 |  |  |  | (151 | ) |  |  | (32 | )
Savings and club accounts |  |  | 1 |  |  |  | - |  |  |  | 1 |
Time deposits |  |  | 1,217 |  |  |  | (976 | ) |  |  | 241 |
Subordinated loans |  |  | 4 |  |  |  | (15 | ) |  |  | (11 | )
Borrowings |  |  | 11 |  |  |  | (69 | ) |  |  | (58 | )
Total interest expense |  |  | 1,358 |  |  |  | (1,216 | ) |  |  | 142 |
Net change in net interest income |  | $ | 813 |  |  | $ | 419 |  |  | $ | 1,232 |

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Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. The provision for loan losses represents management’s estimate of the amount necessary to maintain the allowance for loan losses at an adequate level.

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve needs on loans individually evaluated for impairment, in its determination of the adequacy of the allowance for loan losses. We recorded $1.1 million in provision for loan losses for the three-month period ended March 31, 2020, as compared to $144,000 for the three-month period ended March 31, 2019. The $923,000 increase in the provision for loan losses in the first quarter of 2020, as compared to the same quarter in 2019, resulted from year-over-year increases in: (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The increase in the quantitative factors used in determining the provision for loan losses reflects the substantial increase in economic uncertainty and the resultant potential for increased credit losses in future periods as a consequence of the COVID-19 pandemic. Outstanding loan balances increased $92.9 million, or 14.1%, in the quarter ended March 31, 2020, as compared to the same quarter in the previous year, and therefore required a corresponding increase in the estimable and probable loan losses inherent in the loan portfolio. Finally, the provision for loan losses in the quarter ended March 31, 2020 was further increased, as compared to the same quarter in 2019, by the effects of an increase in the ratio of delinquent loans to total loans, which increased to 3.05% at March 31, 2020 as compared to 2.75% at March 31, 2019, coupled with an increase in nonaccrual loans that increased $1.2 million to $4.7 million at March 31, 2020 as compared to $3.4 million at March 31, 2019.

The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of delinquent loans to total loans increased to 3.05% at March 31, 2020 as compared to 2.09% at December 31, 2019. Delinquent loans increased at a rate that was modestly more than the rate of increase in total loan balances, primarily driven by an increase of $5.2 million in loans delinquent 60-89 days, an increase of $2.3 million in loans 30-59 days past due, partially offset by an $866,000 decrease in loans delinquent more than 90 days. At March 31, 2020, there were $22.8 million in loans past due including $12.0 million in loans 30-59 days past due, $6.5 million in loans 60-89 days past due and $4.3 million in loans 90 or more days past due. At December 31, 2019, there were $16.3 million in loans past due including $9.7 million in loans 30-59 days past due, $1.4 million in loans 60-89 days past due and $5.2 million in loans 90 or more days past due.

The increase of $6.6 million in total loans past due at March 31, 2020, as compared to December 31, 2019, was primarily due to an increase of $5.2 million in loans 60-89 days past due. The increase in loans 60-89 days past due at March 31, 2020 as compared to December 31, 2019 was primarily due to the addition of five commercial and industrial loans with an outstanding balance of $3.4 million and six commercial lines of credit with a total outstanding balance of $2.0 million. Total loans 30-59 days past due increased in aggregate primarily due to the addition of four commercial real estate loans in the amount of $5.1 million, which was offset by a decrease in commercial lines of credit and commercial and industrial loans of $1.6 million and $1.4 million, respectively. The decrease in loans 90 days or more past due was primarily a result of a decrease in residential mortgages and commercial loans that were 90 days or more past due.

The determination of the overall adequacy of the allowance for loan losses is also influenced by individual loan and borrower analyses that include reviews of such factors as the delinquency status of loans, assessments of underlying collateral sufficiency and/or the borrower’s documented resources outside of the specific loan relationship (referred to as the borrower’s “global” capacity to repay), personal or corporate guarantees, and the conclusions drawn from detailed discussions with borrowers. Therefore, the level of loan delinquencies, while generally indicative of the potential levels of future loan charge-offs, are not wholly-definitive in making that determination. Management believes that the allowance for loan losses was adequate at March 31, 2020, based on its analyses of the totality of factors related to making that determination.

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Noninterest Income

The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions, including insurance agency commissions, and net gains on sales of securities, loans, and foreclosed real estate.

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

|  | Three months ended March 31, |
(Dollars in thousands) |  | 2020 |  |  | 2019 |  |  | Change |
Service charges on deposit accounts |  | $ | 356 |  |  | $ | 282 |  |  | $ | 74 |  |  |  | 26.2 | %
Earnings and gain on bank owned life insurance |  |  | 116 |  |  |  | 121 |  |  |  | (5 | ) |  |  | -4.1 | %
Loan servicing fees |  |  | 49 |  |  |  | 27 |  |  |  | 22 |  |  |  | 81.5 | %
Debit card interchange fees |  |  | 163 |  |  |  | 144 |  |  |  | 19 |  |  |  | 13.2 | %
Insurance agency revenue |  |  | 337 |  |  |  | 243 |  |  |  | 94 |  |  |  | 38.7 | %
Other charges, commissions and fees |  |  | 223 |  |  |  | 164 |  |  |  | 59 |  |  |  | 36.0 | %
Noninterest income before gains (losses) |  |  | 1,244 |  |  |  | 981 |  |  |  | 263 |  |  |  | 26.8 | %
Net gains on sales and redemptions of investment securities |  |  | 26 |  |  |  | 79 |  |  |  | (53 | ) |  |  | -67.1 | %
(Losses) gains on marketable equity securities |  |  | (194 | ) |  |  | 41 |  |  |  | (235 | ) |  |  | -573.2 | %
Net gains (losses) on sales of loans and foreclosed real estate |  |  | 672 |  |  |  | (8 | ) |  |  | 680 |  |  |  | 8500.0 | %
Total noninterest income |  | $ | 1,748 |  |  | $ | 1,093 |  |  | $ | 655 |  |  |  | 59.9 | %

The $655,000, or 59.9%, increase in noninterest income in the quarter ended March 31, 2020, as compared to the same quarterly period in 2019, was primarily the result of an increase of $680,000 in net gains on sales of loans and foreclosed real estate. The gain on the sale of loans and foreclosed real estate was primarily the result of the sale of $35.9 million in seasoned conforming residential mortgage loans that was completed in January 2020. Also contributing to the increase in noninterest income was a $94,000 increase in insurance agency revenue and a $74,000 increase in service charges on deposit accounts for the current period. These increases in noninterest income were partially offset by a $235,000 decrease in unrealized gains on equity securities compared to the first quarter of 2019. This decrease in unrealized gains on equity securities was the result of a significant decline in the equity markets at March 31, 2020 primarily due to the economic effects of the COVID-19 pandemic. All other noninterest income categories decreased by $42,000, or 7.9%, in the three months ended March 31, 2020 as compared to the same prior year period.

Noninterest Expense

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

|  | Three months ended March 31, |
(Dollars in thousands) |  | 2020 |  |  | 2019 |  |  | Change |
Salaries and employee benefits |  | $ | 3,247 |  |  | $ | 3,650 |  |  | $ | (403 | ) |  |  | -11.0 | %
Building and occupancy |  |  | 754 |  |  |  | 655 |  |  |  | 99 |  |  |  | 15.1 | %
Data processing |  |  | 600 |  |  |  | 574 |  |  |  | 26 |  |  |  | 4.5 | %
Professional and other services |  |  | 316 |  |  |  | 336 |  |  |  | (20 | ) |  |  | -6.0 | %
Advertising |  |  | 176 |  |  |  | 239 |  |  |  | (63 | ) |  |  | -26.4 | %
FDIC assessments |  |  | 189 |  |  |  | 111 |  |  |  | 78 |  |  |  | 70.3 | %
Audits and exams |  |  | 125 |  |  |  | 100 |  |  |  | 25 |  |  |  | 25.0 | %
Insurance agency expense |  |  | 192 |  |  |  | 199 |  |  |  | (7 | ) |  |  | -3.5 | %
Community service activities |  |  | 107 |  |  |  | 138 |  |  |  | (31 | ) |  |  | -22.5 | %
Foreclosed real estate expenses |  |  | 30 |  |  |  | 237 |  |  |  | (207 | ) |  |  | -87.3 | %
Other expenses |  |  | 509 |  |  |  | 472 |  |  |  | 37 |  |  |  | 7.8 | %
Total noninterest expenses |  | $ | 6,245 |  |  | $ | 6,711 |  |  | $ | (466 | ) |  |  | -6.9 | %

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The $466,000, or 6.9%, de crease in noninterest expense between the year-over-year first quarter periods was principally due to a de crease in salaries and employee benefits expense. All other noninterest expenses in aggregate, de creased $6 3,000, or 2.1%, for the three months ended March 31, 20 20, as compared to the same three-month period in 201 9. The detail of the components of th e overall de crease in noninterest expense follows:

| • | The $403,000 decrease in salaries and employee benefits expense in the first quarter of 2020, as compared to the same three-month period in 2019, was primarily due to a $150,000 decrease in employee benefits expense, a $124,000 decrease in commissions and incentives expense, and a $110,000 decrease in salaries expense. Employee benefits expense decreased primarily due to increased accrued earnings from the Company’s defined benefit pension plan reflecting higher plan asset valuations on January 1, 2020, as compared to the same date in 2019. Commissions and incentives expense declined primarily due to management’s election to suspend the substantial majority of incentive accruals in response to the uncertainties associated with the COVID-19 pandemic. Those accruals totaled $172,000 in the first quarter of 2019.

| • | The $99,000 increase in building and occupancy expenses was primarily due to a $40,000 increase in property taxes, a $33,000 increase in maintenance expenses, and a $30,000 increase in additional depreciation expense related to recently completed building modernization and refurbishment projects. These increases are consistent with branch and operational growth.

| • | The $78,000 increase in the FDIC assessment is consistent with our increase in asset size year-over-year.

| • | Foreclosed real estate expenses decreased $207,000 as a result of a foreclosed property that the Bank paid taxes on in 2019. This foreclosed property was sold in February 2019.

| • | All other noninterest expenses decreased in aggregate in the year-over-year three-month periods by a total of $33,000, or 1.6%. The Bank is continuously monitoring operating expenses to reduce the annual rate of growth in those operating expenses. The decrease in the various categories of operating expense is consistent with this initiative.

Income Tax Expense

Income tax expense increased $204,000 to $455,000, with an effective tax rate of 22.0% for the quarter ended March 31, 2020, as compared to $251,000, with an effective tax rate of 33.8%, for the same three month period in 2019. Effective in January 2018, the Company adopted a modification methodology, made available following changes to the New York State tax code, affecting how the Company’s state income tax liability is computed. Under this adopted methodology it is unlikely that the Company will pay income taxes to New York in future periods. It was therefore determined to be probable that the Company’s deferred tax assets related to New York State income taxes were unlikely to further reduce the Company’s state income tax rate in the future. Accordingly, a valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York income taxes to $0. As a result, in the quarter ended March 31, 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000. This charge to earnings increased the Company’s effective tax rate by 18.3% in that period. In the quarter ended March 31, 2020, management further evaluated all factors related to the expected filings of future New York State tax returns and elected to eliminate its remaining New York State net deferred tax asset balances and the related, and offsetting valuation allowance on January 1, 2020. The effect of these eliminations required an adjustment to other comprehensive income balances and had no effect on first quarter 2020 reported earnings. At March 31, 2020, the Company’s net deferred tax asset related to New York income taxes was $0. At March 31, 2019, the Company had a valuation allowance of $33,000. At March 31, 2020, the Company’s net deferred tax asset related to New York income taxes was $0.

The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits, as well as the effects of transitional adjustments related to state income taxes and certain taxes payable to states other than New York. In addition, the tax effects of certain incentive stock option activity may also reduce the Company’s effective tax rate on a sporadic basis. During the quarter ended March 31, 2020, these effects reduced the Company’s effective tax rate by 0.4%. Excluding the nonrecurring charge related to the deferred tax asset valuation allowance, income tax expense in the first quarter of 2020 would have been $340,000 more than the same prior year period. The increase in income tax expense, as compared to the previous year’s same period, was primarily attributable to the year-over-year first quarter increase in pre-tax net income.

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Earnings per Share

Basic and diluted earnings per share were $0.29 for the first quarter of 2020, as compared to $0.12 per basic and diluted share for the same quarter of 2019. These $0.17 increases in basic and fully diluted earnings per share, respectively, were driven principally by the increase in net income between these two periods. Further information on earnings per share can be found in Note 3 of this Form 10-Q.

Changes in Financial Condition

Assets

Total assets increased $13.8 million, or 1.3%, to $1.11 billion at March 31, 2020, as compared to $1.09 billion at December 31, 2019. This increase was due primarily to increases in cash and cash equivalents and investment securities, partially offset by a decrease in loans.

Cash and cash equivalents increased $37.4 million, or 185.6%, to $57.6 million at March 31, 2020, as compared to $20.2 million at December 31, 2019. The $37.4 million increase in cash and cash equivalents was primarily a result of a perceived need for additional readily-available liquidity reserves in a time of unprecedented uncertainty and significant market instability, as a result of the pandemic. Total restricted cash was $1.3 million and $0 at March 31, 2020 and December 31, 2019, respectively.

Investment securities increased $7.6 million, or 3.2%, to $247.1 million at March 31, 2020, as compared to $239.5 million at December 31, 2019, due principally to purchases of securities during the first quarter of 2020.

Total net loans receivable decreased $31.9 million, or 4.1%, to $740.9 million at March 31, 2020 from $772.8 million at December 31, 2019. This decrease was primarily the result of the sale of $35.9 million in seasoned conforming residential mortgage loans that was completed in January 2020 and generated a $680,000 gain. Further contributing to the decrease in loans was a $7.4 million decrease in consumer loans. However, commercial loans increased by $11.0 million during the first quarter of 2020. Consumer loans decreased primarily due to general amortization. Commercial loans increased primarily due to increases of $7.7 million in commercial real estate loans and $3.3 million among all other commercial loan categories. This was reflective of organic loan growth and the Company’s continued success in its expansion within the greater Syracuse, New York market.

Liabilities

Total liabilities increased $16.2 million to $1.02 billion at March 31, 2020 compared to $1.00 billion at December 31, 2019. Deposits increased $17.9 million, or 2.0%, to $899.9 million at March 31, 2020, compared to $881.9 million at December 31, 2019. Noninterest-bearing deposits were up $6.0 million, or 5.6%, from the 2019 year end, primarily the result of continued growth in business banking relationships. The increase in deposits compared to December 31, 2019 was due to growth in retail and commercial relationship deposits along with brokered deposit inflows. Brokered deposits increased during the quarter ended March 31, 2020, by $42.4 million, or 56.9%, primarily as a result of the Bank’s efforts to significantly increase cash and cash equivalent balances in response to the COVID-19 pandemic. The Bank utilizes the Certificates of Deposit Account Registry Service (“CDARS”) provided by Promontory Interfinancial Network and other deposits acquired through unaffiliated financial institutions as forms of brokered deposits. At March 31, 2020, deposits obtained through the use of these services increased $6.2 million to $116.8 million as compared to $110.6 million at December 31, 2019. Borrowed funds balances from the FHLB-NY decreased $1.7 million, or 1.8%, to $91.4 million at March 31, 2020 from $93.1 million at December 31, 2019.

Shareholders’ Equity

The Company’s shareholders’ equity, exclusive of the noncontrolling interest, decreased $2.4 million to $88.0 million at March 31, 2020 from $90.4 million at December 31, 2019. This decrease in shareholders’ equity during the quarter ended March 31, 2020 was principally due to a $4.1 million increase in accumulated comprehensive loss. The decrease in total shareholders’ equity was partially offset by a $1.3 million increase in retained earnings, a $297,000 increase in paid-in capital, and a $46,000 increase in earned ESOP shares. The comprehensive loss recorded in the quarter ended March 31,

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2020 was primarily the result of the unrealized depreciation in the fair market value of our available-for-sale investment securities during the three months ended Marc h 31, 2020. This depreciation was primarily due to the effects of the COVID-19 pandemic on global fixed income markets at the end of March 2020, as trading activity in those markets was substantially halted and normal market-based price discovery mechanis ms were temporarily, but substantially, incapacitated. As a result, available market price quotations for many of the securities within the Company’s investment securities portfolio were not reflective of the fair values that would be obtainable in normall y functioning markets.

The increase in retained earnings resulted from $1.7 million in net income recorded in the first three months of 2020. Retained earnings was partially offset by $278,000 for cash dividends declared on our common stock, $69,000 for cash dividends declared on our preferred stock, and $8,000 for cash dividends declared on our issued warrant.

Capital

Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its banking operations. This strong capital position serves to support growth and expansion activities while at the same time exceeding regulatory standards. At March 31, 2020, the Bank met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Actions (“PCA”) standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is now fully implemented at 2.5% of risk-weighted assets. At March 31, 2020, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a “Community Bank Leverage Ratio” (the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. Pursuant to the CARES Act, the federal banking agencies in April 2020 issued interim final rules to set the Community Bank Leverage Ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. The new rule took effect on January 1, 2020. The Bank did not elect to become subject to the Community Bank Leverage Ratio.

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Pathfinder Bank’s capital amounts and ratios as of the indicated dates are presented in the following tables:

|  | Actual |  |  | Minimum For Capital Adequacy Purposes |  |  | Minimum To Be "Well-Capitalized" Under Prompt Corrective Provisions |  |  | Minimum For Capital Adequacy with Buffer |
(Dollars in thousands) |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |
As of March 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Core Capital (to Risk-Weighted Assets) |  | $ | 103,118 |  |  |  | 13.48 | % |  | $ | 61,212 |  |  |  | 8.00 | % |  | $ | 76,515 |  |  |  | 10.00 | % |  | $ | 80,341 |  |  |  | 10.50 | %
Tier 1 Capital (to Risk-Weighted Assets) |  | $ | 93,553 |  |  |  | 12.23 | % |  | $ | 45,909 |  |  |  | 6.00 | % |  | $ | 61,212 |  |  |  | 8.00 | % |  | $ | 65,038 |  |  |  | 8.50 | %
Tier 1 Common Equity (to Risk-Weighted Assets) |  | $ | 93,553 |  |  |  | 12.23 | % |  | $ | 34,432 |  |  |  | 4.50 | % |  | $ | 49,735 |  |  |  | 6.50 | % |  | $ | 53,561 |  |  |  | 7.00 | %
Tier 1 Capital (to Assets) |  | $ | 93,553 |  |  |  | 8.59 | % |  | $ | 43,556 |  |  |  | 4.00 | % |  | $ | 54,445 |  |  |  | 5.00 | % |  | $ | 54,445 |  |  |  | 5.00 | %
As of December 31, 2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Core Capital (to Risk-Weighted Assets) |  | $ | 95,093 |  |  |  | 12.28 | % |  | $ | 61,934 |  |  |  | 8.00 | % |  | $ | 77,418 |  |  |  | 10.00 | % |  | $ | 81,289 |  |  |  | 10.50 | %
Tier 1 Capital (to Risk-Weighted Assets) |  | $ | 86,424 |  |  |  | 11.16 | % |  | $ | 46,451 |  |  |  | 6.00 | % |  | $ | 61,934 |  |  |  | 8.00 | % |  | $ | 65,805 |  |  |  | 8.50 | %
Tier 1 Common Equity (to Risk-Weighted Assets) |  | $ | 86,424 |  |  |  | 11.16 | % |  | $ | 34,838 |  |  |  | 4.50 | % |  | $ | 50,322 |  |  |  | 6.50 | % |  | $ | 54,192 |  |  |  | 7.00 | %
Tier 1 Capital (to Assets) |  | $ | 86,424 |  |  |  | 8.20 | % |  | $ | 42,175 |  |  |  | 4.00 | % |  | $ | 52,719 |  |  |  | 5.00 | % |  | $ | 52,719 |  |  |  | 5.00 | %

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Non-GAAP Financial Measures

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary bank are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC. The Company provided an explanation of the calculations, as supplemental information, for non-GAAP measures included in the consolidated annual financial statements. In addition, the Company provides a reconciliation of its subsidiary bank’s disclosed regulatory capital measures, below.

| March 31, |  |  | December 31, |  |
(Dollars in thousands) | 2020 |  |  | 2019 |  |
Regulatory Capital Ratios (Bank Only) |  |  |  |  |  |  |  |
Total capital (to risk-weighted assets) |  |  |  |  |  |  |  |
Total equity (GAAP) | $ | 91,157 |  |  | $ | 88,138 |  |
Goodwill |  | (4,536 | ) |  |  | (4,536 | ) |
Intangible assets |  | (145 | ) |  |  | (149 | ) |
Addback: Accumulated other comprehensive income |  | 7,077 |  |  |  | 2,971 |  |
Total Tier 1 Capital | $ | 93,553 |  |  | $ | 86,424 |  |
Allowance for loan and lease losses |  | 9,565 |  |  |  | 8,669 |  |
Total Tier 2 Capital | $ | 9,565 |  |  | $ | 8,669 |  |
Total Tier 1 plus Tier 2 Capital (numerator) | $ | 103,118 |  |  | $ | 95,093 |  |
Risk-weighted assets (denominator) |  | 765,152 |  |  |  | 774,177 |  |
Total core capital to risk-weighted assets |  | 13.48 |  | % |  | 12.28 |  | %
Tier 1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |
Total Tier 1 capital (numerator) | $ | 93,553 |  |  | $ | 86,424 |  |
Risk-weighted assets (denominator) |  | 765,152 |  |  |  | 774,177 |  |
Total capital to risk-weighted assets |  | 12.23 |  | % |  | 11.16 |  | %
Tier 1 capital (to adjusted assets) |  |  |  |  |  |  |  |
Total Tier 1 capital (numerator) | $ | 93,553 |  |  | $ | 86,424 |  |
Total average assets |  | 1,093,585 |  |  |  | 1,059,060 |  |
Goodwill |  | (4,536 | ) |  |  | (4,536 | ) |
Intangible assets |  | (145 | ) |  |  | (149 | ) |
Adjusted assets (denominator) | $ | 1,088,904 |  |  | $ | 1,054,375 |  |
Total capital to adjusted assets |  | 8.59 |  | % |  | 8.20 |  | %
Tier 1 Common Equity (to risk-weighted assets) |  |  |  |  |  |  |  |
Total Tier 1 capital (numerator) | $ | 93,553 |  |  | $ | 86,424 |  |
Risk-weighted assets (denominator) |  | 765,152 |  |  |  | 774,177 |  |
Total Tier 1 Common Equity to risk-weighted assets |  | 12.23 |  | % |  | 11.16 |  | %

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Loan and Asset Quality and Allowance for Loan Losses

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

|  | March 31, |  |  | December 31, |  |  | March 31, |
(Dollars In thousands) |  | 2020 |  |  | 2019 |  |  | 2019 |
Nonaccrual loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial and commercial real estate loans |  | $ | 2,969 |  |  | $ | 3,002 |  |  | $ | 1,958 |
Consumer |  |  | 657 |  |  |  | 631 |  |  |  | 154 |
Residential mortgage loans |  |  | 1,040 |  |  |  | 1,613 |  |  |  | 1,273 |
Total nonaccrual loans |  |  | 4,666 |  |  |  | 5,246 |  |  |  | 3,385 |
Total nonperforming loans |  |  | 4,666 |  |  |  | 5,246 |  |  |  | 3,385 |
Foreclosed real estate |  |  | 58 |  |  |  | 88 |  |  |  | 623 |
Total nonperforming assets |  | $ | 4,724 |  |  | $ | 5,334 |  |  | $ | 4,008 |
Accruing troubled debt restructurings |  | $ | 2,033 |  |  | $ | 2,008 |  |  | $ | 2,660 |
Nonperforming loans to total loans |  |  | 0.62 | % |  |  | 0.67 | % |  |  | 0.51 | %
Nonperforming assets to total assets |  |  | 0.43 | % |  |  | 0.49 | % |  |  | 0.41 | %

Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings (“TDR”), and foreclosed real estate (‘‘FRE”). The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest at the dates indicated in the table above. Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the categories of nonaccrual loans or accruing TDRs. There was one nonaccruing TDR loans, with an aggregate carrying value of $74,000 included among the nonaccrual loans detailed in the table above at March 31, 2020.

Pursuant to the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the CARES Act.

As indicated in the table above, nonperforming assets at March 31, 2020 were $4.7 million and were $610,000 lower than the $5.3 million reported at December 31, 2019, due primarily to a decrease of $606,000 in nonperforming commercial and residential mortgages loans and a $30,000 decrease in FRE, partially offset by an increase of $26,000 in nonperforming consumer loans.

As indicated in the nonperforming asset table above, FRE balances decreased $30,000 at March 31, 2020 from December 31, 2019, following one sale from the portfolio and two additions to the portfolio during the three-month period ended March 31, 2020. More information regarding foreclosed real estate can be found in Note 8 of this quarterly report on Form 10-Q.

Fair values for commercial FRE are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). On a prospective basis, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate’s fair value less costs to sell. Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash

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flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis for the FRE property.

The allowance for loan losses represents management’s estimate of the probable losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for loan losses was $9.6 million and $8.7 million at March 31, 2020 and December 31, 2019, respectively. The ratio of the allowance for loan losses to total loans increased 17 basis points to 1.28% at March 31, 2020 from 1.11% at December 31, 2019. Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of March 31, 2020.

The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. The measurement of impaired loans is generally based upon the fair value of the collateral, with a portion of the impaired loans measured based upon the present value of future cash flows discounted at the historical effective interest rate. A specific reserve is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or broker price opinions. When a loan is determined to be impaired, the Bank will reevaluate the collateral which secures the loan. For real estate, the Company will obtain a new appraisal or broker’s opinion whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from a firm able to provide such an evaluation. Collateral will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years. Appraised values and broker opinion values are discounted due to the market’s perception of a reduced price of Bank-owned property and the Bank’s desire to sell the property quicker to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

At March 31, 2020 and December 31, 2019, the Company had $7.4 million and $7.5 million in loans, which were deemed to be impaired, having established specific reserves of $777,000 and $830,000, respectively, on these loans. There was a decrease in impaired loans and the associated specific reserve among all categories. Most notably, impaired commercial and industrial loans decreased $54,000 and the associated reserve decreased $27,000.

Management has identified potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in those loans being included in future impaired loan reporting. Potential problem loans totaled $30.3 million as of March 31, 2020, a decrease of $1.1 million, or 3.6%, as compared to $31.5 million at December 31, 2019. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. Due to the adverse economic impacts of the COVID-19 pandemic on our market area and our customers, the Company expects that potential problem loans may increase during the course of fiscal 2020.

Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years.

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

Liquidity

Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company

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manages the pricing of deposits to maintain a desired depo sit composition and balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements.

The Company's liquidity has been enhanced by its ability to borrow from the Federal Home Loan Bank of New York (“FHLBNY”), whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense and/or losses on the sale of securities or loans.

For the first three months of 2020, cash and cash equivalents increased by $37.4 million. The Company reported net cash flows from financing activities of $16.2 million generated by increased customer deposit balances of $37.7 million. The increase in deposits was the result of organic growth in consumer, business and municipal segments within our existing marketplace. This increase was partially offset by an aggregate decrease in net cash of $21.5 million from all other financing sources, including dividends paid to common and preferred shareholders, and decreased balances in both brokered deposits and borrowings. Additionally, $38.0 million was provided through operating activities, primarily from the sale of residential loans to the secondary market.

The Company has a number of existing credit facilities available to it. At March 31, 2020, total credit available to the Company under the existing lines of credit was approximately $150.8 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. As of March 31, 2020, the Company had $91.4 million of the available lines of credit utilized on its existing lines of credit with $59.4 million available.

The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of March 31, 2020, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.

Off-Balance Sheet Arrangements

The Company is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. At March 31, 2020, the Company had $152.7 million in outstanding commitments to extend credit and standby letters of credit.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Item 4 – Controls and Procedures

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

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PART II – OTHE R INFORMATION

Item 1 – Legal Proceedings

At March 31, 2020, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material and adverse effect on the financial condition or results of operations of the Company.

Item 1A – Risk Factors

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

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Period |  | Total Number of Shares Purchased (1) |  |  | Average Price Paid Per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |  |  | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
January 1, 2020 through January 31, 2020 |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 74,292 |
February 1, 2020 through February 29, 2020 |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 74,292 |
March 1, 2020 through March 31, 2020 |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 74,292 |

(1) On August 29, 2016, our Board of Directors authorized the repurchase of up to 217,692 shares of our common stock, or 5% of the Company’s shares outstanding as of that date.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

None

Item 6 – Exhibits

Exhibit No. | Description
31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
101 | Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements tagged as blocks of text.

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SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PATHFINDER BANCORP, INC.

(registrant)

May 29, 2020 | /s/ Thomas W. Schneider |
| Thomas W. Schneider |
| President and Chief Executive Officer |
May 29, 2020 | /s/ Walter F. Rusnak |
| Walter F. Rusnak |
| Senior Vice President and Chief Financial Officer |

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