UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
_____________________________
 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

       For the quarterly period ended March 31, 2013

OR
 
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
     For the transition period from _______ to _______

Commission File Number: 000-23601

PATHFINDER BANCORP, INC.
(Exact Name of Company as Specified in its Charter)

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

214 West First Street, Oswego, NY 13126
(Address of Principal Executive Office) (Zip Code)

(315) 343-0057
(Issuer's Telephone Number including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES T        NO *                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES T        NO *

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

Large accelerated filer*                                                Accelerated filer*                                                 Non-accelerated filer*                                               Smaller reporting company  T
                           (Do not check if a smaller reporting company)

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

As of May 9, 2013, there were 2,979,969 shares issued and 2,618,182 shares outstanding of the registrant’s common stock.

 
 





PATHFINDER BANCORP, INC.
INDEX



PART I - FINANCIAL INFORMATION
 
PAGE NO.
 
         
Item 1.
Consolidated Financial Statements (Unaudited)
     
      3  
      4  
      5  
      6  
      7  
      8  
           
    29  
         
           
    39  
           
    39  
           
    40  
           
Item 1.
Legal proceedings
       
Item 1A.
Risk Factors
       
Item 2.
Unregistered sales of equity securities and use of proceeds
       
Item 3.
Defaults upon senior securities
       
Item 4.
Mine Safety Disclosures
       
Item 5.
Other information
       
Item 6.
Exhibits
       
           
    41  
           
      42  

 
 
 
 


 
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 data)
 
2013
   
2012
 
ASSETS:
           
Cash and due from banks
  $ 5,982     $ 6,435  
Interest earning deposits
    7,236       2,230  
Total cash and cash equivalents
    13,218       8,665  
Interest earning time deposits
    2,000       2,000  
Investment securities, at fair value
    125,955       108,339  
Federal Home Loan Bank stock, at cost
    1,505       1,929  
Loans
    338,944       333,748  
Less: Allowance for loan losses
    4,686       4,501  
Loans receivable, net
    334,258       329,247  
Premises and equipment, net
    10,168       10,108  
Accrued interest receivable
    1,912       1,717  
Foreclosed real estate
    372       426  
Goodwill
    3,840       3,840  
Bank owned life insurance
    8,105       8,046  
Other assets
    3,631       3,479  
Total assets
  $ 504,964     $ 477,796  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Deposits:
               
Interest-bearing
  $ 378,709     $ 347,892  
Noninterest-bearing
    49,676       43,913  
Total deposits
    428,385       391,805  
Short-term borrowings
    -       9,000  
Long-term borrowings
    25,936       25,964  
Junior subordinated debentures
    5,155       5,155  
Accrued interest payable
    142       140  
Other liabilities
    4,297       4,985  
Total liabilities
    463,915       437,049  
Shareholders' equity:
               
Preferred stock - SBLF, par value $0.01 per share; $1,000 liquidation preference;
               
13,000 shares authorized; 13,000 shares issued and outstanding
    13,000       13,000  
Common stock, par value $0.01; authorized 10,000,000 shares;
               
2,979,969 and 2,980,469 shares issued and 2,618,182 and 2,618,182 shares outstanding, respectively
    30       30  
Additional paid in capital
    8,141       8,120  
Retained earnings
    27,115       26,685  
Accumulated other comprehensive loss
    (1,500 )     (1,318 )
Unearned ESOP
    (909 )     (936 )
Treasury stock, at cost; 361,787,and 362,287 shares,  respectively
    (4,828 )     (4,834 )
Total shareholders' equity
    41,049       40,747  
Total liabilities and shareholders' equity
  $ 504,964     $ 477,796  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
Page - 3 -

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

   
For the three
   
For the three
 
 
 
months ended
   
months ended
 
(In thousands, except per share data)
 
March 31, 2013
   
March 31, 2012
 
Interest and dividend income:
           
Loans, including fees
  $ 4,125     $ 4,011  
Debt securities:
               
Taxable
    384       458  
Tax-exempt
    191       163  
Dividends
    34       33  
Interest earning time deposits
    6       7  
Federal funds sold and interest earning deposits
    1       1  
       Total interest income
    4,741       4,673  
Interest expense:
               
Interest on deposits
    659       761  
Interest on short-term borrowings
    8       3  
Interest on long-term borrowings
    229       252  
       Total interest expense
    896       1,016  
          Net interest income
    3,845       3,657  
Provision for loan losses
    324       225  
          Net interest income after provision for loan losses
    3,521       3,432  
Noninterest income:
               
Service charges on deposit accounts
    255       273  
Earnings and gain on bank owned life insurance
    61       93  
Loan servicing fees
    44       41  
Net gains on sales and redemptions of investment securities
    39       112  
Net gains (losses) on sales of loans and foreclosed real estate
    29       (24 )
Debit card interchange fees
    106       97  
Other charges, commissions & fees
    142       136  
          Total noninterest income
    676       728  
Noninterest expense:
               
Salaries and employee benefits
    1,910       1,974  
Building occupancy
    365       383  
Data processing
    368       341  
Professional and other services
    159       153  
Advertising
    116       60  
FDIC assessments
    84       77  
Audits and exams
    61       56  
Other expenses
    442       411  
          Total noninterest expenses
    3,505       3,455  
Income before income taxes
    692       705  
Provision for income taxes
    187       176  
Net income
    505       529  
Preferred stock dividends
    -       138  
Net income available to common shareholders
  $ 505     $ 391  
                 
Earnings per common share - basic
  $ 0.20     $ 0.16  
Earnings per common share - diluted
  $ 0.20     $ 0.16  
Dividends per common share
  $ 0.03     $ 0.03  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
Page - 4 -

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

   
For the three
   
For the three
 
   
months ended
   
months ended
 
   
March 31,
   
March 31,
 
(In thousands)
 
2013
   
2012
 
 
Net Income
  $ 505     $ 529  
                 
Other Comprehensive Income
               
                 
Retirement Plans:
               
Retirement plan net losses recognized in plan expenses
    95       134  
                 
Unrealized holding gain on financial derivative:
               
Change in unrealized holding loss on financial derivative
    -       (8 )
Reclassification adjustment for interest expense included in net income
    15       14  
Net unrealized gain on financial derivative
    15       6  
                 
Unrealized holding (losses) gains on available-for-sale securities:
               
Unrealized holding (losses) gains arising during the period
    (374 )     167  
Reclassification adjustment for net gains included in net income
    (39 )     (112 )
Net unrealized (losses) gains on securities available-for-sale
    (413 )     55  
                 
Other comprehensive (loss) income , before tax
    (303 )     195  
Tax effect
    121       (78 )
Other comprehensive (loss)  income, net of tax
    (182 )     117  
Comprehensive Income
  $ 323     $ 646  
                 
Tax Effect Allocated to Each Component of Other Comprehensive Income
               
Retirement plan net losses recognized in plan expenses
  $ (38 )   $ (53 )
Change in unrealized holding loss on financial derivative
    -       3  
Reclassification adjustment for interest expense included in net income
    (6 )     (6 )
Unrealized holding (losses) gains arising during the period
    149       (67 )
Reclassification adjustment for net gains included in net income
    16       45  
Income tax effect related to other comprehensive income
  $ 121     $ (78 )

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

 
 
Page - 5 -


PATHFINDER BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
Three months ended March 31, 2013 and March 31, 2012
 
                                                 
                           
Accumulated
                   
               
Additional
         
Other Com-
                   
   
Preferred
   
Common
   
Paid in
   
Retained
   
prehensive
   
Unearned
   
Treasury
       
 (In thousands, except share and per share  data)
 
Stock
   
Stock
   
Capital
   
Earnings
   
Loss
   
ESOP
   
Stock
   
Total
 
                                                 
 Balance, January 1, 2013
  $ 13,000     $ 30     $ 8,120     $ 26,685     $ (1,318 )   $ (936 )   $ (4,834 )   $ 40,747  
                                                                 
 Net income
    -       -       -       505       -       -       -       505  
                                                                 
 Other comprehensive loss, net of tax:
    -       -       -       -       (182 )     -       -       (182 )
                                                                 
 ESOP shares earned (3,125 shares)
    -       -       7       -       -       27       -       34  
                                                                 
 Stock based compensation
    -       -       20       -       -       -       -       20  
                                                                 
 Stock options exercised
    -       -       (6 )     -       -       -       6       -  
                                                                 
 Common stock dividends declared ($0.03 per share)
    -       -       -       (75 )     -       -       -       (75 )
 Balance, March 31, 2013
  $ 13,000     $ 30     $ 8,141     $ 27,115     $ (1,500 )   $ (909 )   $ (4,828 )   $ 41,049  
                                                                 
 Balance, January 1, 2012
  $ 13,000     $ 30     $ 8,730     $ 24,618     $ (2,664 )   $ (1,039 )   $ (4,834 )   $ 37,841  
                                                                 
 Net income
    -       -       -       529       -       -       -       529  
                                                                 
 Other comprehensive income, net of tax:
    -       -       -       -       117       -       -       117  
                                                                 
 Purchase of CPP Warrants from Treasury
    -       -       (706 )     169       -       -       -       (537 )
                                                                 
 Preferred stock dividends - SBLF
    -       -       -       (138 )     -       -       -       (138 )
                                                                 
 ESOP shares earned (3,602 shares)
    -       -       1       -       -       32       -       33  
                                                                 
 Stock based compensation
    -       -       23       -       -       -       -       23  
                                                                 
 Common stock dividends declared ($0.03 per share)
    -       -       -       (75 )     -       -       -       (75 )
 Balance, March 31, 2012
  $ 13,000     $ 30     $ 8,048     $ 25,103     $ (2,547 )   $ (1,007 )   $ (4,834 )   $ 37,793  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
Page - 6 -

Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
 (Unaudited)
   
For the three months ended March 31,
 
(In thousands)
 
2013
   
2012
 
OPERATING ACTIVITIES
           
Net income
  $ 505     $ 529  
Adjustments to reconcile net income to net cash flows from operating activities:
               
Provision for loan losses
    324       225  
Proceeds from sales of loans
    182       41  
Originations of loans held-for-sale
    (172 )     (40 )
Realized (gains) losses on sales and redemptions of:
               
Real estate acquired through foreclosure
    (19 )     25  
Loans
    (10 )     (1 )
Available-for-sale investment securities
    (39 )     (112 )
Depreciation
    176       199  
Amortization of mortgage servicing rights
    -       4  
Amortization of deferred loan costs
    34       51  
Earnings on bank owned life insurance
    (59 )     (93 )
Realized gain on proceeds from bank owned life insurance
    (2 )     -  
Net amortization of premiums and discounts on investment securities
    222       285  
Stock based compensation and ESOP expense
    54       56  
Net change in accrued interest receivable
    (195 )     (284 )
Pension plan contribution
    -       (2,600 )
Net change in other assets and liabilities
    (505 )     (129 )
Net cash flows from operating activities
    496       (1,844 )
INVESTING ACTIVITIES
               
Purchase of investment securities available-for-sale
    (28,173 )     (37,225 )
Redemptions of Federal Home Loan Bank stock
    424       129  
Proceeds from maturities and principal reductions of
               
investment securities available-for-sale
    8,067       4,937  
Proceeds from sales and redemptions of:
               
Available-for-sale investment securities
    1,893       5,052  
Real estate acquired through foreclosure
    55       46  
Proceeds from bank owned life insurance
    2       -  
Net change in loans
    (5,369 )     494  
Purchase of premises and equipment
    (236 )     (43 )
Net cash flows from investing activities
    (23,337 )     (26,610 )
FINANCING ACTIVITIES
               
Net change in demand deposits, NOW accounts, savings accounts,
               
money management deposit accounts, MMDA accounts and escrow deposits
    30,973       18,341  
Net change in time deposits and brokered deposits
    5,607       10,795  
Net change in short-term borrowings
    (9,000 )     -  
Payments on long-term borrowings
    (28 )     (1,028 )
Redemption of preferred stock - CPP
    -       (537 )
Cash dividends paid to preferred shareholder - SBLF
    (83 )     (142 )
Cash dividends paid to common shareholders
    (75 )     (75 )
Net cash flows from financing activities
    27,394       27,354  
Change in cash and cash equivalents
    4,553       (1,100 )
Cash and cash equivalents at beginning of period
    8,665       10,218  
Cash and cash equivalents at end of period
  $ 13,218     $ 9,118  
CASH PAID DURING THE PERIOD FOR:
               
Interest
  $ 894     $ 1,012  
Income taxes
    140       -  
NON-CASH INVESTING ACTIVITY
               
Real estate acquired in exchange for loans
    -       108  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
Page - 7 -

 
Notes to Consolidated Financial Statements (Unaudited)
 
 
(1)  Basis of Presentation

The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.  Certain amounts in the 2012 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.

The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2012 and 2011 and for the two years then ended.  Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Part 1.

Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

(2)  New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02 - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The objective of this ASU is to improve the reporting of reclassifications out of accumulated other comprehensive income.  The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“U.S. GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts.  The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  The amendments are effective prospectively for reporting periods beginning after December 15, 2012.  The adoption did not have a material impact on our consolidated statements of condition, results of operations, or cash flows.

(3)  Earnings per Common Share

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Net income available to common shareholders is net income less the total of preferred dividends declared.  Diluted earnings per share include the potential dilutive effect that could occur upon the assumed exercise of issued stock options using the treasury stock method.  Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.
 
 
 
Page - 8 -


The following table sets forth the calculation of basic and diluted earnings per share:
 
   
Three months ended
 
   
March 31,
 
(In thousands, except share and per share data)
 
2013
   
2012
 
Basic Earnings Per Common Share
           
Net income available to common shareholders
  $ 505     $ 391  
Weighted average common shares outstanding
    2,512       2,500  
Basic earnings per common share
  $ 0.20     $ 0.16  
                 
Diluted Earnings Per Common Share
               
Net income available to common shareholders
  $ 505     $ 391  
Weighted average common shares outstanding
    2,512       2,500  
Effect of assumed exercise of stock options
    -       3  
Effect of assumed exercise of stock warrants
    -       16  
Diluted weighted average common shares outstanding
    2,512       2,519  
Diluted earnings per common share
  $ 0.20     $ 0.16  

(4) Investment Securities - Available-for-Sale

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

   
March 31, 2013
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
Debt investment securities:
                       
US Treasury, agencies and GSEs
  $ 19,953     $ 15     $ (34 )   $ 19,934  
State and political subdivisions
    25,540       864       (93 )     26,311  
Corporate
    21,774       420       (341 )     21,853  
Residential mortgage-backed - US agency
    53,440       1,056       (149 )     54,347  
Residential mortgage-backed - private label
    261       8       -       269  
Total
    120,968       2,363       (617 )     122,714  
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
    1,286       -       -       1,286  
Large cap equity fund
    905       303       -       1,208  
Other mutual funds
    183       128       -       311  
Common stock - financial services industry
    420       16       -       436  
Total
    2,794       447       -       3,241  
Total investment securities
  $ 123,762     $ 2,810     $ (617 )   $ 125,955  

 
 
Page - 9 -


 
   
December 31, 2012
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
Debt investment securities:
                       
US Treasury, agencies and GSEs
  $ 6,175     $ 16     $ (8 )   $ 6,183  
State and political subdivisions
    26,413       1,065       (7 )     27,471  
Corporate
    22,942       468       (404 )     23,006  
Residential mortgage-backed - US agency
    47,113       1,139       (1 )     48,251  
Residential mortgage-backed - private label
    296       9       -       305  
Total
    102,939       2,697       (420 )     105,216  
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
    1,286       5       -       1,291  
Large cap equity fund
    905       176       -       1,081  
Other mutual funds
    183       136       -       319  
Common stock - financial services industry
    420       12       -       432  
Total
    2,794       329       -       3,123  
Total investment securities
  $ 105,733     $ 3,026     $ (420 )   $ 108,339  

The amortized cost and estimated fair value of debt investments at March 31, 2013 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.

   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
 
(In thousands)
           
Due in one year or less
  $ 7,032     $ 7,062  
Due after one year through five years
    27,261       27,689  
Due after five years through ten years
    15,308       15,674  
Due after ten years
    17,666       17,673  
Mortgage-backed securities
    53,701       54,616  
Totals
  $ 120,968     $ 122,714  

 
 
Page - 10 -


 
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, 2013
                   
 
       
Less than Twelve Months
         
Twelve Months or More
         
Total
 
   
Number of
               
Number of
               
Number of
             
   
Individual
   
Unrealized
   
Fair
   
Individual
   
Unrealized
   
Fair
   
Individual
   
Unrealized
   
Fair
 
   
Securities
   
Losses
   
Value
   
Securities
   
Losses
   
Value
   
Securities
   
Losses
   
Value
 
(Dollars in thousands)
       
 
                                           
US Treasury, agencies and GSE's
    13     $ (34 )   $ 14,858       -     $ -     $ -       13     $ (34 )   $ 14,858  
State and political subdivisions
    7       (93 )     3,888       -       -       -       7       (93 )     3,888  
Corporate
    1       (6 )     403       2       (335 )     1,635       3       (341 )     2,038  
Residential mortgage-backed - US agency
    12       (149 )     13,696       -       -       -       12       (149 )     13,696  
Totals
    33     $ (282 )   $ 32,845       2     $ (335 )   $ 1,635       35     $ (617 )   $ 34,480  
 
                                                                       
 
                                                                       
                                   
December 31, 2012
                         
 
         
Less than Twelve Months
           
Twelve Months or More
           
Total
 
   
Number of
                   
Number of
                   
Number of
                 
   
Individual
   
Unrealized
   
Fair
   
Individual
   
Unrealized
   
Fair
   
Individual
   
Unrealized
   
Fair
 
   
Securities
   
Losses
   
Value
   
Securities
   
Losses
   
Value
   
Securities
   
Losses
   
Value
 
(Dollars in thousands)
                                                                       
US Treasury, agencies and GSE's
    1     $ (8 )   $ 992       -     $ -     $ -       1     $ (8 )   $ 992  
State and political subdivisions
    8       (7 )     2,008       -       -       -       8       (7 )     2,008  
Corporate
    2       (14 )     974       2       (390 )     1,580       4       (404 )     2,554  
Residential mortgage-backed - US agency
    2       (1 )     1,411       -       -       -       2       (1 )     1,411  
Totals
    13     $ (30 )   $ 5,385       2     $ (390 )   $ 1,580       15     $ (420 )   $ 6,965  

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

The Company’s investment securities portfolio includes two corporate securities representing trust preferred issuances from large money center financial institutions.  The securities have been in an unrealized loss position for more than 12 months.  The securities are both floating rate notes that adjust quarterly to LIBOR (“London Interbank Offered Rate”).  These securities are reflecting a net unrealized loss due to current similar offerings being originated at higher spreads to LIBOR, as the market currently demands a greater pricing premium for the associated risk. Management has performed a detailed credit analysis on the underlying companies and has concluded that neither issue is credit impaired.  Due to the fact that each security has approximately 15 years until final maturity, and management has determined that there is no related credit impairment, the associated pricing risk is managed similar to long-term, low yielding, 15 and 30-year fixed rate residential mortgages carried in the Company’s loan portfolio.  The risk is managed through the Company’s extensive interest rate risk management procedures.  The Company expects the present value of expected cash flows will be sufficient to recover the amortized cost basis.  Thus, the securities are not deemed to be other-than-temporarily impaired.

Management does not believe any individual unrealized loss in other securities within the portfolio as of March 31, 2013 represents OTTI.  All related securities are rated A2 or better by Moody’s and have been in an unrealized loss position for five months or less, with the exception of the two corporate securities noted above.  The unrealized losses in the portfolio are primarily attributable to changes in interest rates.  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.
 
 
 
Page - 11 -


In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. Management has determined that we have the intent and ability to retain the equity securities for a sufficient period of time to allow for recovery. All of the Company’s equity securities had a fair value greater than the book value at March 31, 2013.
 
Gross realized gains on sales of securities for the indicated periods are detailed below:

   
For the three months
 
   
ended March 31,
 
(In thousands)
 
2013
   
2012
 
Realized gains
  $ 39     $ 112  
Realized losses
    -       -  
    $ 39     $ 112  
 
As of March 31, 2013 and December 31, 2012, securities with a fair value of $67.5 million and $46.0 million, respectively, were pledged to collateralize certain municipal deposit relationships.  As of the same dates, securities with a fair value of $32.8 million and $37.8 million were pledged against certain borrowing arrangements.  Total borrowings of $5.0 million were outstanding relating to the above noted collateralized borrowing arrangements as of both March 31, 2013 and December 31, 2012.

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

(5)  Pension and Postretirement Benefits

The Company had a non-contributory defined benefit pension plan that covered substantially all employees. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan.  The freeze became effective June 30, 2012.  Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date.  Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work.

Prior to being frozen, the plan provided defined benefits based on years of service and final average salary. Although the plan was frozen, the Company maintains the responsibility for funding the plan, and its funding practice is to contribute at least the minimum amount annually to meet minimum funding requirements.  The funded status of the plan has and will continue to be affected by market conditions.  We expect to continue to fund this plan on an as needed basis and do not foresee any issues or conditions that could negatively impact the payment of benefit obligations to plan participants.  In addition, the Company provides certain health and life insurance benefits for eligible retired employees.  The healthcare plan is contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory.  Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.

 
 
Page - 12 -


 
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)
 
2013
   
2012
   
2013
   
2012
 
 
                       
Service cost
  $ -     $ 111     $ -     $ -  
Interest cost
    95       111       4       4  
Expected return on plan assets
    (214 )     (198 )     -       -  
Amortization of transition obligation
    -       -       -       4  
Amortization of net losses
    90       130       5       -  
Net periodic benefit plan (benefit)cost
  $ (29 )   $ 154     $ 9     $ 8  

The Company made a contribution in the amount of $2.6 million to the defined benefit pension plan in January of 2012.  The Company will evaluate any need for further contributions to the defined benefit pension plan during 2013.

(6)  Loans

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

   
March 31,
   
December 31,
 
(In thousands)
 
2013
   
2012
 
Residential mortgage loans:
           
1-4 family first-lien residential mortgages
  $ 177,411     $ 173,955  
Construction
    778       2,655  
Total residential mortgage loans
    178,189       176,610  
                 
Commercial loans:
               
Real estate
    84,308       82,329  
Lines of credit
    13,461       13,748  
Other commercial and industrial
    32,826       31,477  
Municipal
    4,538       3,588  
Total commercial loans
    135,133       131,142  
                 
Consumer loans:
               
Home equity and junior liens
    21,552       22,073  
Other consumer
    3,643       3,469  
Total consumer loans
    25,195       25,542  
                 
Total loans
    338,517       333,294  
Net deferred loan costs
    427       454  
Less allowance for loan losses
    (4,686 )     (4,501 )
Loans receivable, net
  $ 334,258     $ 329,247  

The Company originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their contracts is dependent upon the counties’ employment and economic conditions.
 
 
 
Page - 13 -


As of March 31, 2013 and December 31, 2012, residential mortgage loans with a carrying value of $121.4 million and $58.6 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.

Loan Origination / Risk Management

The Company’s lending policies and procedures are presented in Note 5 to the consolidated financial statements included in the 2012 Annual Report filed on Form 10-K on March 18, 2013, 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 and methodologies for assessing risk.  Each portfolio segment is broken down into loan classes where appropriate.  Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses.  Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class.  The following table illustrates the portfolio segments and classes for the Company’s loan portfolio:


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

 
 
Page - 14 -

 
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, 2013
 
         
Special
                   
(In thousands)
 
Pass
   
Mention
   
Substandard
   
Doubtful
   
Total
 
Residential mortgage loans:
                             
1-4 family first-lien residential mortgages
  $ 169,774     $ 1,177     $ 6,432     $ 28     $ 177,411  
Construction
    778       -       -       -       778  
Total residential mortgage loans
    170,552       1,177       6,432       28       178,189  
Commercial loans:
                                       
Real estate
    78,694       1,429       4,002       183       84,308  
Lines of credit
    11,868       396       1,197       -       13,461  
Other commercial and industrial
    30,987       400       1,139       300       32,826  
Municipal
    4,538       -       -       -       4,538  
Total commercial loans
    126,087       2,225       6,338       483       135,133  
Consumer loans:
                                       
Home equity and junior liens
    19,600       85       1,780       87       21,552  
Other consumer
    3,515       49       55       24       3,643  
Total consumer loans
    23,115       134       1,835       111       25,195  
Total loans
  $ 319,754     $ 3,536     $ 14,605     $ 622     $ 338,517  



   
As of December 31, 2012
 
         
Special
                   
(In thousands)
 
Pass
   
Mention
   
Substandard
   
Doubtful
   
Total
 
Residential mortgage loans:
                             
1-4 family first-lien residential mortgages
  $ 166,801     $ 1,323     $ 5,831     $ -     $ 173,955  
Construction
    2,655       -       -       -       2,655  
Total residential mortgage loans
    169,456       1,323       5,831       -       176,610  
Commercial loans:
                                       
Real estate
    76,719       1,685       3,925       -       82,329  
Lines of credit
    12,026       -       1,647       75       13,748  
Other commercial and industrial
    29,705       237       1,500       35       31,477  
Municipal
    3,588       -       -       -       3,588  
Total commercial loans
    122,038       1,922       7,072       110       131,142  
Consumer loans:
                                       
Home equity and junior liens
    20,078       145       1,801       49       22,073  
Other consumer
    3,199       133       111       26       3,469  
Total consumer loans
    23,277       278       1,912       75       25,542  
Total loans
  $ 314,771     $ 3,523     $ 14,815     $ 185     $ 333,294  

 
 
 
Page - 15 -


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

Nonaccrual and Past Due Loans

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

An age analysis of past due loans, segregated by portfolio segment and class of loans, as of March 31, 2013 and December 31, 2012, are detailed in the following tables:

   
As of March 31, 2013
 
                                     
   
30-59 Days
   
60-89 Days
   
90 Days
   
Total
         
Total Loans
 
(In thousands)
 
Past Due
   
Past Due
   
and Over
   
Past Due
   
Current
   
Receivable
 
Residential mortgage loans:
                                   
1-4 family first-lien residential mortgages
  $ 1,646     $ 1,153     $ 1,605     $ 4,404     $ 173,007     $ 177,411  
Construction
    -       -       -       -       778       778  
Total residential mortgage loans
    1,646       1,153       1,605