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 June 30, 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 August 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)
   
   
   
   
   
   
   
       
Item 2.
 
     
       
Item 3.
 
       
Item 4.
 
       
 
       
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
   
       
 
       
     
 

 
 


PART I -  FINANCIAL INFORMATION
Item 1 – Consolidated Financial Statements

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

   
June 30,
   
December 31,
 
(In thousands, except share data)
 
2013
   
2012
 
ASSETS:
           
Cash and due from banks
  $ 7,194     $ 6,435  
Interest earning deposits
    2,834       2,230  
Total cash and cash equivalents
    10,028       8,665  
Interest earning time deposits
    1,500       2,000  
Investment securities, at fair value
    119,265       108,339  
Federal Home Loan Bank stock, at cost
    2,645       1,929  
Loans
    337,600       333,748  
Less: Allowance for loan losses
    4,864       4,501  
Loans receivable, net
    332,736       329,247  
Premises and equipment, net
    10,180       10,108  
Accrued interest receivable
    1,799       1,717  
Foreclosed real estate
    429       426  
Goodwill
    3,840       3,840  
Bank owned life insurance
    8,156       8,046  
Other assets
    3,789       3,479  
Total assets
  $ 494,367     $ 477,796  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Deposits:
               
Interest-bearing
  $ 351,466     $ 347,892  
Noninterest-bearing
    48,913       43,913  
Total deposits
    400,379       391,805  
Short-term borrowings
    27,860       9,000  
Long-term borrowings
    16,908       25,964  
Junior subordinated debentures
    5,155       5,155  
Accrued interest payable
    68       140  
Other liabilities
    3,854       4,985  
Total liabilities
    454,224       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
    8,175       8,120  
Retained earnings
    27,862       26,685  
Accumulated other comprehensive loss
    (3,215 )     (1,318 )
Unearned ESOP
    (881 )     (936 )
Treasury stock, at cost; 361,787 and 362,287 shares,  respectively
    (4,828 )     (4,834 )
Total shareholders' equity
    40,143       40,747  
Total liabilities and shareholders' equity
  $ 494,367     $ 477,796  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
- 3 -

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

   
For the three
   
For the three
   
For the six
   
For the six
 
 
 
months ended
   
months ended
   
months ended
   
months ended
 
(In thousands, except per share data)
 
June 30, 2013
   
June 30, 2012
   
June 30, 2013
   
June 30, 2012
 
Interest and dividend income:
                       
Loans, including fees
  $ 4,116     $ 3,977     $ 8,241     $ 7,988  
Debt securities:
                               
Taxable
    398       488       782       946  
Tax-exempt
    189       182       379       345  
Dividends
    25       26       60       59  
Interest earning time deposits
    5       6       11       12  
Federal funds sold and interest earning deposits
    2       1       3       2  
       Total interest income
    4,735       4,680       9,476       9,352  
Interest expense:
                               
Interest on deposits
    629       736       1,288       1,497  
Interest on short-term borrowings
    9       6       17       8  
Interest on long-term borrowings
    195       255       425       507  
       Total interest expense
    833       997       1,730       2,012  
          Net interest income
    3,902       3,683       7,746       7,340  
Provision for loan losses
    276       150       600       375  
          Net interest income after provision for loan losses
    3,626       3,533       7,146       6,965  
Noninterest income:
                               
Service charges on deposit accounts
    287       280       542       553  
Earnings and gain on bank owned life insurance
    52       96       112       188  
Loan servicing fees
    38       66       82       108  
Net gains on sales and redemptions of investment securities
    60       49       99       161  
Net gains on sales of loans and foreclosed real estate
    421       49       451       25  
Debit card interchange fees
    122       106       228       203  
Other charges, commissions & fees
    124       137       266       273  
          Total noninterest income
    1,104       783       1,780       1,511  
Noninterest expense:
                               
Salaries and employee benefits
    1,941       1,869       3,852       3,844  
Building occupancy
    361       346       726       729  
Data processing
    343       341       711       682  
Professional and other services
    168       146       327       298  
Advertising
    128       99       244       160  
FDIC assessments
    84       78       167       155  
Audits and exams
    63       56       123       111  
Other expenses
    513       419       955       830  
          Total noninterest expenses
    3,601       3,354       7,105       6,809  
Income before income taxes
    1,129       962       1,821       1,667  
Provision for income taxes
    306       241       493       418  
Net income
    823       721       1,328       1,249  
Preferred stock dividends
    -       116       -       254  
Net income available to common shareholders
  $ 823     $ 605     $ 1,328     $ 995  
                                 
Earnings per common share - basic
  $ 0.33     $ 0.24     $ 0.53     $ 0.40  
Earnings per common share - diluted
  $ 0.33     $ 0.24     $ 0.53     $ 0.40  
Dividends per common share
  $ 0.03     $ 0.03     $ 0.06     $ 0.06  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
- 4 -

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



   
For the three
   
For the three
   
For the Six
   
For the Six
 
   
months ended
   
months ended
   
months ended
   
months ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
    2013      2012      2013      2012   
(In thousands)
 
 
   
 
   
 
   
 
 
Net Income
  $ 823     $ 721     $ 1,328     $ 1,249  
                                 
Other Comprehensive Income
                               
                                 
Retirement Plans:
                               
Retirement plan net losses recognized in plan expenses
    95       106       190       240  
Gain on pension plan curtailment  net of additional plan losses not recognized in plan expenses
    -       1,919       -       1,919  
Retirement plan net losses recognized in plan expenses
    95       2,025       190       2,159  
                                 
Unrealized holding gains (losses) on financial derivative:
                               
Change in unrealized holding gains (losses) on financial derivative
    13       (27 )     13       (35 )
Reclassification adjustment for interest expense included in net income
    15       16       30       30  
Net unrealized gain (loss) on financial derivative
    28       (11 )     43       (5 )
                                 
Unrealized holding (losses) gains on available-for-sale securities:
                               
Unrealized holding (losses) gains arising during the period
    (2,915 )     445       (3,289 )     612  
Reclassification adjustment for net gains included in net income
    (60 )     (49 )     (99 )     (161 )
Net unrealized (losses) gains on securities available-for-sale
    (2,975 )     396       (3,388 )     451  
                                 
Other comprehensive (loss) income , before tax
    (2,852 )     2,410       (3,155 )     2,605  
Tax effect
    1,137       (966 )     1,258       (1,043 )
Other comprehensive (loss)  income, net of tax
    (1,715 )     1,444       (1,897 )     1,562  
Comprehensive (loss) Income
  $ (892 )   $ 2,165     $ (569 )   $ 2,811  
                                 
Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)
                               
Retirement plan net losses recognized in plan expenses
  $ (38 )   $ (43 )   $ (76 )   $ (96 )
Gain on pension plan curtailment net of additional plan losses not recognized in plan expenses
    -       (768 )     -       (768 )
Change in unrealized holding (losses) gains on financial derivative
    (5 )     10       (5 )     14  
Reclassification adjustment for interest expense included in net income
    (6 )     (8 )     (12 )     (12 )
Unrealized holding (losses) gains arising during the period
    1,162       (176 )     1,311       (245 )
Reclassification adjustment for net gains included in net income
    24       19       40       64  
Income tax effect related to other comprehensive income (loss)
  $ 1,137     $ (966 )   $ 1,258     $ (1,043 )
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               
                                 

 
- 5 -


 
 


Pathfinder Bancorp, Inc.
 
Consolidated Statements of Changes in Shareholders’ Equity
 
Six months ended June 30, 2013 and June 30, 2012
(Unaudited)
 
                                                 
                           
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
    -       -       -       1,328       -       -       -       1,328  
                                                                 
 Other comprehensive loss, net of tax:
    -       -       -       -       (1,897 )     -       -       (1,897 )
                                                                 
 ESOP shares earned (6,250 shares)
    -       -       22       -       -       55       -       77  
                                                                 
 Stock based compensation
    -       -       39       -       -       -       -       39  
                                                                 
 Stock options exercised
    -       -       (6 )     -       -       -       6       -  
                                                                 
 Common stock dividends declared ($0.06 per share)
    -       -       -       (151 )     -       -       -       (151 )
 Balance, June 30, 2013
  $ 13,000     $ 30     $ 8,175     $ 27,862     $ (3,215 )   $ (881 )   $ (4,828 )   $ 40,143  
                                                                 
 Balance, January 1, 2012
  $ 13,000     $ 30     $ 8,730     $ 24,618     $ (2,664 )   $ (1,039 )   $ (4,834 )   $ 37,841  
                                                                 
 Net income
    -       -       -       1,249       -       -       -       1,249  
                                                                 
 Other comprehensive income, net of tax:
    -       -       -       -       1,562       -       -       1,562  
                                                                 
 Purchase of CPP Warrants from Treasury
    -       -       (706 )     169       -       -       -       (537 )
                                                                 
 Preferred stock dividends - SBLF
    -       -       -       (254 )     -       -       -       (254 )
                                                                 
 ESOP shares earned (1,793 shares)
    -       -       2       -       -       48       -       50  
                                                                 
 Stock based compensation
    -       -       45       -       -       -       -       45  
                                                                 
 Common stock dividends declared ($0.06 per share)
    -       -       -       (150 )     -       -       -       (150 )
 Balance, June 30, 2012
  $ 13,000     $ 30     $ 8,071     $ 25,632     $ (1,102 )   $ (991 )   $ (4,834 )   $ 39,806  


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

 
- 6 -


Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
 (Unaudited)
   
For the six months ended June 30,
 
(In thousands)
 
2013
   
2012
 
OPERATING ACTIVITIES
           
Net income
  $ 1,328     $ 1,249  
Adjustments to reconcile net income to net cash flows from operating activities:
               
Provision for loan losses
    600       375  
Proceeds from sales of loans
    10,237       205  
Originations of loans held-for-sale
    (9,825 )     (195 )
Realized gains on sales and redemptions of:
               
Real estate acquired through foreclosure
    (39 )     (15 )
Loans
    (412 )     (10 )
Available-for-sale investment securities
    (99 )     (161 )
Depreciation
    350       401  
(Increase in) amortization of, mortgage servicing rights
    (76 )     5  
Amortization of deferred loan costs
    66       84  
Earnings on bank owned life insurance
    (110 )     (151 )
Realized gain on proceeds from bank owned life insurance
    (2 )     (37 )
Net amortization of premiums and discounts on investment securities
    403       559  
Stock based compensation and ESOP expense
    116       95  
Net change in accrued interest receivable
    (82 )     (106 )
Pension plan contribution
    -       (2,600 )
Net change in other assets and liabilities
    155       (21 )
Net cash flows from operating activities
    2,610       (323 )
INVESTING ACTIVITIES
               
Purchase of investment securities available-for-sale
    (33,716 )     (41,689 )
Net (purchases of) proceeds from the redemption of Federal Home Loan Bank stock
    (716 )     68  
Proceeds from maturities of interest earning time deposits
    500       -  
Proceeds from maturities and principal reductions of
               
investment securities available-for-sale
    13,526       11,434  
Proceeds from sales and redemptions of:
               
Available-for-sale investment securities
    5,572       6,974  
Real estate acquired through foreclosure
    188       222  
Proceeds from bank owned life insurance
    2       -  
Net change in loans
    (4,325 )     (8,230 )
Purchase of premises and equipment
    (422 )     (46 )
Net cash flows from investing activities
    (19,391 )     (31,267 )
FINANCING ACTIVITIES
               
Net change in demand deposits, NOW accounts, savings accounts,
               
money management deposit accounts, MMDA accounts and escrow deposits
    18,718       19,352  
Net change in time deposits and brokered deposits
    (10,144 )     14,182  
Net change in short-term borrowings
    18,860       -  
Payments on long-term borrowings
    (9,056 )     (1,055 )
Redemption of preferred stock - CPP
    -       (537 )
Cash dividends paid to preferred shareholder - SBLF
    (83 )     (281 )
Cash dividends paid to common shareholders
    (151 )     (150 )
Net cash flows from financing activities
    18,144       31,511  
Change in cash and cash equivalents
    1,363       (79 )
Cash and cash equivalents at beginning of period
    8,665       10,218  
Cash and cash equivalents at end of period
  $ 10,028     $ 10,139  
CASH PAID DURING THE PERIOD FOR:
               
Interest
  $ 1,802     $ 2,033  
Income taxes
    467       3  
NON-CASH INVESTING ACTIVITY
               
Real estate acquired in exchange for loans
    170       176  


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

 
- 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 and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

(2)  New Accounting Pronouncements

None that will materially impact the Company.

 
- 8 -



(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.


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


   
Three months ended June 30,
   
Six months ended June 30,
 
(In thousands, except  per share data)
 
2013
   
2012
   
2013
   
2012
 
Basic Earnings Per Common Share
                       
Net income available to common shareholders
  $ 823     $ 605     $ 1,328     $ 995  
Weighted average common shares outstanding
    2,515       2,503       2,514       2,502  
Basic earnings per common share
  $ 0.33     $ 0.24     $ 0.53     $ 0.40  
                                 
Diluted Earnings Per Common Share
                               
Net income available to common shareholders
  $ 823     $ 605     $ 1,328     $ 995  
Weighted average common shares outstanding
    2,515       2,503       2,514       2,502  
Effect of assumed exercise of stock options
    16       2       8       3  
Effect of assumed exercise of stock warrants
    -       -       -       7  
Diluted weighted average common shares outstanding
    2,531       2,505       2,522       2,512  
Diluted earnings per common share
  $ 0.33     $ 0.24     $ 0.53     $ 0.40  


 
- 9 -



(4) Investment Securities - Available-for-Sale

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

   
June 30, 2013
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
Debt investment securities:
                       
US Treasury, agencies and GSEs
  $ 18,947     $ 2     $ (480 )   $ 18,469  
State and political subdivisions
    26,452       345       (657 )     26,140  
Corporate
    20,738       242       (408 )     20,572  
Residential mortgage-backed - US agency
    51,134       634       (952 )     50,816  
Residential mortgage-backed - private label
    -       -       -       -  
Total
    117,271       1,223       (2,497 )     115,997  
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
    1,286       -       (11 )     1,275  
Large cap equity fund
    905       340       -       1,245  
Other mutual funds
    183       149       -       332  
Common stock - financial services industry
    402       14       -       416  
Total
    2,776       503       (11 )     3,268  
Total investment securities
  $ 120,047     $ 1,726     $ (2,508 )   $ 119,265  


   
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  
 

 
 
- 10 -

The amortized cost and estimated fair value of debt investments at June 30, 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
  $ 5,726     $ 5,750  
Due after one year through five years
    27,784       27,853  
Due after five years through ten years
    15,678       15,432  
Due after ten years
    16,949       16,146  
Mortgage-backed securities
    51,134       50,816  
Totals
  $ 117,271     $ 115,997  


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:

                           
June 30, 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
    17     $ (480 )   $ 18,446       -     $ -     $ -       17     $ (480 )   $ 18,446  
State and political subdivisions
    29       (657 )     12,473       -       -       -       29       (657 )     12,473  
Corporate
    3       (52 )     1,451       2       (356 )     1,615       5       (408 )     3,066  
Residential mortgage-backed - US agency
    21       (952 )     24,004       -       -       -       21       (952 )     24,004  
Ultra short mortgage fund
    1       (11 )     1,275       -       -       -       1       (11 )     1,275  
Totals
    71     $ (2,152 )   $ 57,649       2     $ (356 )   $ 1,615       73     $ (2,508 )   $ 59,264  
 
                                                                       
 
                                                                       
                                   
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.
 

 
 
- 11 -

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 14 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 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 June 30, 2013 represents OTTI.  All related securities are rated A2 or better by Moody’s and have been in an unrealized loss position for eight 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.

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. All of the Company’s equity securities had a fair value greater than the book value at June 30, 2013, with the exception of the Ultra Short Mortgage Fund.  This fund has been in an unrealized loss position for 1 month and incurred an $11,000, or .08% loss.  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.

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

   
For the three months
   
For the six months
 
   
ended June 30,
   
ended June 30,
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
 
Realized gains
  $ 65     $ 49     $ 104     $ 161  
Realized losses
    (5 )     -       (5 )     -  
    $ 60     $ 49     $ 99     $ 161  


As of June 30, 2013 and December 31, 2012, securities with a fair value of $60.4 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 $25.0 million and $37.8 million were pledged against certain borrowing arrangements.  Total borrowings of $0 and $5.0 million were outstanding relating to the above noted collateralized borrowing arrangements as of June 30, 2013 and December 31, 2012, respectively.

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.

 
 
- 12 -

Prior to being frozen, the plan provided defined benefits based on years of service and final average salary. Although the plan was frozen, the Company maintains the responsibility for funding the plan, and its funding practice is to contribute at least the minimum amount annually to meet minimum funding requirements.  The funded status of the plan has and will continue to be affected by market conditions.  The Company expects to continue to fund this plan on an as needed basis and 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.

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

   
Pension Benefits
   
Postretirement Benefits
   
Pension Benefits
   
Postretirement Benefits
 
   
For the three months ended June 30,
   
For the six months ended June 30,
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
 
 
                                               
Service cost
  $ -     $ 55     $ -     $ -     $ -     $ 166     $ -     $ -  
Interest cost
    95       101       5       5       189       212       9       9  
Expected return on plan assets
    (214 )     (201 )     -       -       (426 )     (399 )     -       -  
Amortization of net losses
    90       103       5       3       180       233       10       7  
Net periodic benefit plan (benefit) cost
  $ (29 )   $ 58     $ 10     $ 8     $ (57 )   $ 212     $ 19     $ 16  


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 the need for further contributions to the defined benefit pension plan during 2013, and has determined that no contribution was necessary during the six months ended June 30, 2013.

 
- 13 -



(6)  Loans

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

   
June 30,
   
December 31,
 
(In thousands)
 
2013
   
2012
 
Residential mortgage loans:
           
1-4 family first-lien residential mortgages
  $ 167,232     $ 173,955  
Construction
    1,461       2,655  
Total residential mortgage loans
    168,693       176,610  
                 
Commercial loans:
               
Real estate
    91,002       82,329  
Lines of credit
    12,615       13,748  
Other commercial and industrial
    34,438       31,477  
Municipal
    5,372       3,588  
Total commercial loans
    143,427       131,142  
                 
Consumer loans:
               
Home equity and junior liens
    21,272       22,073  
Other consumer
    3,858       3,469  
Total consumer loans
    25,130       25,542  
                 
Total loans
    337,250       333,294  
Net deferred loan costs
    350       454  
Less allowance for loan losses
    (4,864 )     (4,501 )
Loans receivable, net
  $ 332,736     $ 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.

As of June 30, 2013 and December 31, 2012, residential mortgage loans with a carrying value of $114.3 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.