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, 2014

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

Commission File Number: 000-23601

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

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

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

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


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

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

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

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

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

As of August 8, 2014, there were 2,979,969 shares issued and 2,623,182 shares outstanding of the registrant’s common stock.


 
 


PATHFINDER BANCORP, INC.
INDEX



PART I - FINANCIAL INFORMATION
 
PAGE NO.
       
Item 1.
Consolidated Financial Statements (Unaudited)
   
   
   
   
   
   
   
       
Item 2.
 
     
       
Item 3.
 
       
Item 4.
 
       
 
50
       
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
   
       
 
       
EXHIBITS
   
52
 
 
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 and per share data)
 
2014
   
2013
 
ASSETS:
           
Cash and due from banks
  $ 6,525     $ 6,535  
Interest earning deposits
    3,651       10,040  
Total cash and cash equivalents
    10,176       16,575  
Interest earning time deposits
    500       500  
Available-for-sale securities, at fair value
    99,120       80,959  
Held-to-maturity securities, at amortized cost (fair value of $43,757 and $34,222, respectively)
    42,774       34,412  
Federal Home Loan Bank stock, at cost
    2,484       2,440  
Loans
    358,776       341,633  
Less: Allowance for loan losses
    5,166       5,041  
Loans receivable, net
    353,610       336,592  
Premises and equipment, net
    12,296       11,644  
Accrued interest receivable
    1,775       1,715  
Foreclosed real estate
    770       619  
Intangible assets, net
    181       187  
Goodwill
    4,367       4,367  
Bank owned life insurance
    10,175       8,268  
Other assets
    6,301       5,515  
Total assets
  $ 544,529     $ 503,793  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Deposits:
               
Interest-bearing
  $ 393,192     $ 361,969  
Noninterest-bearing
    54,971       48,171  
Total deposits
    448,163       410,140  
Short-term borrowings
    25,000       24,000  
Long-term borrowings
    16,798       16,853  
Junior subordinated debentures
    5,155       5,155  
Accrued interest payable
    67       86  
Other liabilities
    4,698       4,489  
Total liabilities
    499,881       460,723  
Shareholders' equity:
               
Preferred stock - SBLF, par value $0.01 per share; $1,000 liquidation preference;
               
13,000 shares authorized; 13,000 shares issued and outstanding
    13,000       13,000  
Common stock, par value $0.01; authorized 10,000,000 shares;
               
2,979,969 shares issued and 2,623,182 shares outstanding
    30       30  
Additional paid in capital
    8,304       8,226  
Retained earnings
    29,771       28,788  
Accumulated other comprehensive loss
    (1,320 )     (1,745 )
Unearned ESOP
    (771 )     (826 )
Treasury stock, at cost; 356,787 shares
    (4,761 )     (4,761 )
Total Pathfinder Bancorp, Inc. shareholders' equity
    44,253       42,712  
Noncontrolling interest
    395       358  
Total equity
    44,648       43,070  
Total liabilities and shareholders' equity
  $ 544,529     $ 503,793  

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

 
 
- 3 -

Pathfinder Bancorp, Inc.
Consolidated Statements of Income
(Unaudited)
   
For the three
   
For the three
   
For the six
   
For the six
 
 
 
months ended
   
months ended
   
months ended
   
months ended
 
(In thousands, except per share data)
 
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
Interest and dividend income:
                       
Loans, including fees
  $ 4,104     $ 4,116     $ 8,168     $ 8,241  
Debt securities:
                            -  
Taxable
    466       398       886       782  
Tax-exempt
    194       189       389       379  
Dividends
    17       25       50       60  
Interest earning time deposits
    2       5       4       11  
Federal funds sold and interest earning deposits
    1       2       2       3  
       Total interest income
    4,784       4,735       9,499       9,476  
Interest expense:
                               
Interest on deposits
    497       629       1,026       1,288  
Interest on short-term borrowings
    21       9       39       17  
Interest on long-term borrowings
    148       195       295       425  
       Total interest expense
    666       833       1,360       1,730  
          Net interest income
    4,118       3,902       8,139       7,746  
Provision for loan losses
    275       276       520       600  
          Net interest income after provision for loan losses
    3,843       3,626       7,619       7,146  
Noninterest income:
                               
Service charges on deposit accounts
    305       287       584       542  
Earnings and gain on bank owned life insurance
    66       52       126       112  
Loan servicing fees
    67       38       120       82  
Net gains on sales and redemptions of investment securities
    24       60       26       99  
Net gains on sales of loans and foreclosed real estate
    26       421       30       451  
Debit card interchange fees
    129       122       243       228  
Other charges, commissions & fees
    261       124       575       266  
          Total noninterest income
    878       1,104       1,704       1,780  
Noninterest expense:
                               
Salaries and employee benefits
    2,187       1,941       4,384       3,852  
Building occupancy
    364       361       771       726  
Data processing
    399       343       764       711  
Professional and other services
    173       168       348       327  
Amortization of intangible assets
    3       -       6       -  
Advertising
    99       128       231       244  
FDIC assessments
    100       84       195       167  
Audits and exams
    61       63       125       123  
Other expenses
    377       513       846       955  
          Total noninterest expenses
    3,763       3,601       7,670       7,105  
Income before income taxes
    958       1,129       1,653       1,821  
Provision for income taxes
    275       306       451       493  
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc.
    683       823       1,202       1,328  
Net income attributable to noncontrolling interest
    7       -       37       -  
Net income attributable to Pathfinder Bancorp Inc.
    676       823       1,165     $ 1,328  
Preferred stock dividends
    30       -       30       -  
Net income available to common shareholders
  $ 646     $ 823     $ 1,135     $ 1,328  
                                 
Earnings per common share - basic
  $ 0.26     $ 0.33     $ 0.45     $ 0.53  
Earnings per common share - diluted
  $ 0.25     $ 0.33     $ 0.44     $ 0.53  
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 months ended
   
For the six months ended
 
(In thousands)
 
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
 
Net Income
  $ 683     $ 823     $ 1,202     $ 1,328  
                                 
Other Comprehensive Income (Loss)
                               
                                 
Retirement Plans:
                               
Net unrealized gains on retirement plans
    11       95       22       190  
                                 
Unrealized holding gains on financial derivative:
                               
Change in unrealized holding gains (losses) on financial derivative
    (4 )     13       (7 )     13  
Reclassification adjustment for interest expense included in net income
    15       15       30       30  
Net unrealized gain on financial derivative
    11       28       23       43  
                                 
Unrealized holding gains (losses)  on available-for-sale securities:
                               
Unrealized holding gains (losses) arising during the period
    310       (2,915 )     631       (3,289 )
Reclassification adjustment for net gains included in net income
    (24 )     (60 )     (26 )     (99 )
Net unrealized gains (losses) on securities available-for-sale
    286       (2,975 )     605       (3,388 )
                                 
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)
    29       -       59       -  
                                 
Other comprehensive income (loss),  before tax
    337       (2,852 )     709       (3,155 )
Tax effect
    (135 )     1,137       (284 )     1,258  
Other comprehensive income (loss), net of tax
    202       (1,715 )     425       (1,897 )
Comprehensive income (loss)
    885       (892 )     1,627       (569 )
Comprehensive income attributable to noncontrolling interest
    7       -       37       -  
Comprehensive income (loss) attributable to Pathfinder Bancorp, Inc.
  $ 878     $ (892 )   $ 1,590     $ (569 )
                                 
                                 
Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)
                               
Retirement plan net losses recognized in plan expenses
  $ (5 )   $ (38 )   $ (9 )   $ (76 )
Change in unrealized holding  losses on financial derivative
    2       (5 )     3       (5 )
Reclassification adjustment for interest expense included in net income
    (6 )     (6 )     (12 )     (12 )
Unrealized holding (losses) gains arising during the period
    (124 )     1,162       (253 )     1,311  
Reclassification adjustment for net gains included in net income
    10       24       10       40  
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)
    (12 )     -       (23 )     -  
Income tax effect related to other comprehensive income (loss)
  $ (135 )   $ 1,137     $ (284 )   $ 1,258  
                                 
(1) The accretion of the unrealized holding losses in accumulated other comprehensive income (loss) at the date of transfer partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.
                               
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               
 

 
 
- 5 -




PATHFINDER BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
Six months ended June 30, 2014 and June 30, 2013
 
                                                       
                           
Accumulated
                         
               
Additional
         
Other Com-
               
Non
       
   
Preferred
   
Common
   
Paid in
   
Retained
   
prehensive
   
Unearned
   
Treasury
   
controlling
       
 (In thousands, except share and per share data)
 
Stock
   
Stock
   
Capital
   
Earnings
   
Loss
   
ESOP
   
Stock
   
Interest
   
Total
 
                                                       
 Balance, January 1, 2014
  $ 13,000     $ 30     $ 8,226     $ 28,788     $ (1,745 )   $ (826 )   $ (4,761 )   $ 358     $ 43,070  
                                                                         
 Net income
    -       -       -       1,165       -       -       -       37       1,202  
                                                                         
 Other comprehensive income, net of tax
    -       -       -       -       425       -       -       -       425  
                                                                         
 Preferred stock dividends - SBLF
    -       -       -       (30 )     -       -       -               (30 )
                                                                         
 ESOP shares earned (6,250 shares)
    -       -       36       -       -       55       -       -       91  
                                                                         
 Stock based compensation
    -       -       42       -       -       -       -       -       42  
                                                                         
 Common stock dividends declared ($0.06 per share)
    -       -       -       (152 )     -       -       -       -       (152 )
 Balance, June 30, 2014
  $ 13,000     $ 30     $ 8,304     $ 29,771     $ (1,320 )   $ (771 )   $ (4,761 )   $ 395     $ 44,648  
                                                                         
 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  

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)
 
2014
   
2013
 
OPERATING ACTIVITIES
           
Net income attributable to Pathfinder Bancorp, Inc.
  $ 1,165     $ 1,328  
Adjustments to reconcile net income to net cash flows from operating activities:
               
Provision for loan losses
    520       600  
Proceeds from sales of loans
    -       10,237  
Originations of loans held-for-sale
    -       (9,825 )
Realized gains on sales and redemptions of:
               
Real estate acquired through foreclosure
    (30 )     (39 )
Loans
    -       (412 )
Available-for-sale investment securities
    (26 )     (99 )
Depreciation
    399       350  
Amortization of mortgage servicing rights
    7       (76 )
Amortization of deferred loan costs
    59       66  
Earnings on bank owned life insurance
    (126 )     (110 )
Realized gain on proceeds from bank owned life insurance
    -       (2 )
Net amortization of premiums and discounts on investment securities
    339       403  
Amortization of intangible assets
    6       -  
Stock based compensation and ESOP expense
    133       116  
Net change in accrued interest receivable
    (60 )     (82 )
Net change in other assets and liabilities
    (840 )     155  
Net cash flows from operating activities
    1,546       2,610  
INVESTING ACTIVITIES
               
Purchase of investment securities available-for-sale
    (25,688 )     (33,716 )
Purchase of investment securities held-to-maturity
    (8,767 )     -  
Proceeds from maturities of interest earning time deposits
    -       500  
Net proceeds of Federal Home Loan Bank stock
    (44 )     (716 )
Proceeds from maturities and principal reductions of
               
investment securities available-for-sale
    7,378       13,526  
Proceeds from maturities and principal reductions of
               
investment securities held-to-maturity
    399       -  
Proceeds from sales and redemptions of:
               
Available-for-sale investment securities
    506       5,572  
Real estate acquired through foreclosure
    273       188  
Purchase of bank owned life insurance
    (1,780 )     -  
Proceeds from bank owned life insurance
    -       2  
Net change in loans
    (17,989 )     (4,325 )
Purchase of premises and equipment
    (1,051 )     (422 )
Net cash flows from investing activities
    (46,763 )     (19,391 )
FINANCING ACTIVITIES
               
Net change in demand deposits, NOW accounts, savings accounts,
               
money management deposit accounts, MMDA accounts and escrow deposits
    29,707       18,718  
Net change in time deposits and brokered deposits
    8,316       (10,144 )
Net change in short-term borrowings
    1,000       18,860  
Payments on long-term borrowings
    (55 )     (9,056 )
Cash dividends paid to preferred shareholder – SBLF
    (30 )     -  
Cash dividends paid to common shareholders
    (157 )     (83 )
Change in noncontrolling interest, net
    37       (151 )
Net cash flows from financing activities
    38,818       18,144  
Change in cash and cash equivalents
    (6,399 )     1,363  
Cash and cash equivalents at beginning of period
    16,575       8,665  
Cash and cash equivalents at end of period
  $ 10,176     $ 10,028  
CASH PAID DURING THE PERIOD FOR:
               
Interest
  $ 1,379     $ 1,802  
Income taxes
    331       467  
NON-CASH INVESTING ACTIVITY
               
Real estate acquired in exchange for loans
    392       170  
                 
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. (the “Company”) 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 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 2013 consolidated financial statements may have been reclassified to conform to the current period presentation.  These reclassifications had no effect on net income or comprehensive income as previously reported.

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

On June 11, 2014, Pathfinder Bancorp, Inc. (“Pathfinder-Federal”), the holding company of Pathfinder Bank (the “Bank”), announced that Pathfinder Bancorp, Inc., a Maryland corporation and the proposed new holding company of the Bank (“New Pathfinder”), filed a registration statement on June 11, 2014, with the Securities and Exchange Commission in connection with the previously announced mutual-to-stock conversion of Pathfinder Bancorp, MHC.

In connection with the conversion, New Pathfinder expects to offer for sale between 1,700,000 and 2,645,000 shares of common stock at a purchase price of $10.00 per share in the offering.  The shares to be offered for sale represent the 60.8% of the outstanding shares of common stock of Pathfinder-Federal currently owned by Pathfinder Bancorp, MHC, as adjusted for the assets of Pathfinder Bancorp, MHC.  In addition, at the conclusion of the conversion, the existing shares of common stock held by the public stockholders of Pathfinder-Federal will be exchanged for new shares of common stock of New Pathfinder at an exchange ratio estimated to be between 1.0552 and 1.6417.

For further information, see the press release filed on form 8-K dated June 11, 2014.

The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2013 and 2012 and for the two years then ended.  Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Part I.

Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

(2)  New Accounting Pronouncements

On May 28, 2014, the FASB and IASB issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09 – Revenue from Contracts with Customers by the FASB and as IFRS 152 by the IASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The new requirements are the default guidance for any contracts (or parts of a contract) with customers that are not within the scope of other literature (e.g., guidance on leases or financial instruments). As a result, entities that have entered into contracts with customers may need to analyze those contracts or parts thereof in accordance with the ASU. For contracts within the scope of the new standard, management will be required to apply the new guidance in the ASU. An entity will need to carefully assess the ASU’s impact on all types of variable consideration and performance-based fees in particular, especially when such fees are based on future market performance. To meet the new accounting and disclosure requirements, an entity may have to gather information from contracts with customers that currently is not readily available. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. The Company does not expect a material impact on its consolidated statements of condition, results of operations, or cash flows.
 

 
 
- 8 -

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12 – Stock Compensation (Topic 718) Accounting for Share Based Payments when the terms of an award provide that a performance target could be achieved after the requisite service period.  Entities commonly issue share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. Examples of performance targets include an entity attaining a specified profitability metric or selling shares in an initial public offering. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.  This ASU is intended to resolve the diverse accounting treatment of those awards in practice.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with earlier adoption permitted.  The Company does not expect a material impact on its 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 that are not anti-dilutive using the treasury stock method.  Anti-dilutive stock options, not included in the computation below, were 10,000 in the three and six month periods ended June 30, 2014 and - and 53,000 in the three and six month periods ended June 30, 2013, respectively.  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
   
Six months ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2014
   
2013
   
2014
   
2013
 
Basic Earnings Per Common Share
                       
Net income available to common shareholders
  $ 646     $ 823     $ 1,135     $ 1,328  
Weighted average common shares outstanding
    2,533       2,515       2,532       2,514  
Basic earnings per common share
  $ 0.26     $ 0.33     $ 0.45     $ 0.53  
                                 
Diluted Earnings Per Common Share
                               
Net income available to common shareholders
  $ 646     $ 823     $ 1,135     $ 1,328  
Weighted average common shares outstanding
    2,533       2,515       2,532       2,514  
Effect of assumed exercise of stock options
    26       16       24       8  
Diluted weighted average common shares outstanding
    2,559       2,531       2,556       2,522  
Diluted earnings per common share
  $ 0.25     $ 0.33     $ 0.44     $ 0.53  


 
- 9 -

(4) Investment Securities

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

   
June 30, 2014
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
Available-for-Sale Portfolio
                       
Debt investment securities:
                       
US Treasury, agencies and GSEs
  $ 18,905     $ 6     $ (192 )   $ 18,719  
State and political subdivisions
    7,484       123       (6 )     7,601  
Corporate
    16,350       176       (23 )     16,503  
Residential mortgage-backed - US agency
    34,971       460       (226 )     35,205  
Collateralized mortgage obligations – US agency
    19,087       234       (219 )     19,102  
Total
    96,797       999       (666 )     97,130  
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
    643       4       -       647  
Large cap equity fund
    456       219       -       675  
Other mutual funds
    183       196       -       379  
Common stock - financial services industry
    270       19       -       289  
Total
    1,552       438       -       1,990  
Total available-for-sale
  $ 98,349     $ 1,437     $ (666 )   $ 99,120  
 
                               
Held-to-Maturity Portfolio
                               
Debt investment securities:
                               
US Treasury, agencies and GSEs
  $ 4,820     $ 19     $ -     $ 4,839  
State and political subdivisions
    22,819       634       -       23,453  
Corporate
    3,692       134       -       3,826  
Residential mortgage-backed - US agency
    8,549       109       (2 )     8,656  
Collateralized mortgage obligations – US agency
    2,894       89       -       2,983  
Total held-to-maturity
  $ 42,774     $ 985     $ (2 )   $ 43,757  


 
- 10 -

   
December 31, 2013
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
Available-for-Sale Portfolio
                       
Debt investment securities:
                       
US Treasury, agencies and GSEs
  $ 16,935     $ 2     $ (340 )   $ 16,597  
State and political subdivisions
    6,429       164       (6 )     6,587  
Corporate
    13,498       198       -       13,696  
Residential mortgage-backed - US agency
    22,231       332       (424 )     22,139  
Collateralized mortgage obligations - agency
    20,147       164       (308 )     20,003  
Total
    79,240       860       (1,078 )     79,022  
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
    643       5       -       648  
Large cap equity fund
    456       195       -       651  
Other mutual funds
    183       162       -       345  
Common stock - financial services industry
    271       22       -       293  
Total
    1,553       384       -       1,937  
Total available-for-sale
  $ 80,793     $ 1,244     $ (1,078 )   $ 80,959  
 
                               
Held-to-Maturity Portfolio
                               
Debt investment securities:
                               
US Treasury, agencies and GSEs
  $ 1,872     $ -     $ (25 )   $ 1,847  
State and political subdivisions
    21,371       11       (118 )     21,264  
Corporate
    3,746       16       (44 )     3,718  
Residential mortgage-backed - US agency
    5,556       -       (30 )     5,526  
Collateralized mortgage obligations - agency
    1,867       -       -       1,867  
Total held-to-maturity
  $ 34,412     $ 27     $ (217 )   $ 34,222  

The amortized cost and estimated fair value of debt investments at June 30, 2014 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

   
Available-for-Sale
   
Held-to-Maturity
 
 
 
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
(In thousands)
                       
Due in one year or less
  $ 7,401     $ 7,446     $ 186     $ 186  
Due after one year through five years
    30,793       30,922       3,960       3,968  
Due after five years through ten years
    4,545       4,455       17,620       17,954  
Due after ten years
    -       -       9,565       10,010  
Sub-total
    42,739       42,823       31,331       32,118  
Residential mortgage-backed - US agency
    34,971       35,205       8,549       8,656  
Collateralized mortgage obligations - US agency
    19,087       19,102       2,894       2,983  
Totals
  $ 96,797     $ 97,130     $ 42,774     $ 43,757  


 
- 11 -

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

   
June 30, 2014
 
   
Less than Twelve Months
   
Twelve Months or More
   
Total
 
   
Number of
               
Number of
               
Number of
             
   
Individual
   
Unrealized
   
Fair
   
Individual
   
Unrealized
   
Fair
   
Individual
   
Unrealized
   
Fair
 
   
Securities
   
Losses
   
Value
   
Securities
   
Losses
   
Value
   
Securities
   
Losses
   
Value
 
(Dollars in thousands)
       
 
                                           
Available-for-Sale
                                                     
US Treasury, agencies and GSE's
    3     $ (5 )   $ 4,008       11     $ (187 )   $ 11,804       14     $ (192 )   $ 15,812  
State and political subdivisions
    6       (6 )     1,957       1       -       91       7       (6 )     2,048  
Corporate
    7       (23 )     4,498       -       -       -       7       (23 )     4,498  
Residential mortgage-backed - US agency
    3       (6 )     5,977       7       (220 )     8,483       10       (226 )     14,460  
Collateralized mortgage obligations - US agency
    3       (37 )     3,289       5       (182 )     4,230       8       (219 )     7,519  
Totals
    22     $ (77 )   $ 19,729       24     $ (589 )   $ 24,608       46     $ (666 )   $ 44,337  
Held-to-Maturity
                                                                       
US Treasury, agencies and GSE's
    -     $ -     $ -       -     $ -     $ -       -     $ -     $ -  
State and political subdivisions
    -       -       -       -       -       -       -       -       -  
Corporate
    -       -       -       -       -       -       -       -       -  
Residential mortgage-backed - US agency
    1       (2 )     1,008       -       -       -       1       (2 )     1,008  
Collateralized mortgage obligations - US agency
    -       -       -       -       -       -       -       -       -  
Totals
    1     $ (2 )   $ 1,008       -     $ -     $ -       1     $ (2 )   $ 1,008  

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

Management does not believe any individual unrealized loss in other securities within the portfolio as of June 30, 2014 represents OTTI.    All  securities are rated A3 or better by Moody’s, with the exception of two Corporate securities and all have been in unrealized loss positions for seven months or less, with the exception of the two previously mentioned Corporate holdings, eleven US agency securities, one municipal security, seven mortgage-backed securities and five collateralized mortgage obligations.  The agency and municipal securities have relatively insignificant unrealized loss positions.  The unrealized losses reflected in the mortgage-backed security holdings and collateralized mortgage obligations are primarily attributable to changes in interest rates. The two corporate securities are floating rate notes which adjust quarterly based on 3-month Libor.  The securities are reflecting unrealized losses due to current similar offerings being originated at higher spread to Libor, as the market currently demands a greater pricing premium for the associated risk.    The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

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 June 30, 2014.

 
- 12 -

Gross realized gains (losses) 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)
 
2014
   
2013
   
2014
   
2013
 
Realized gains
  $ 24     $ 65     $ 26     $ 104  
Realized losses
    -       (5 )     -       (5 )
    $ 24     $ 60     $ 26     $ 99  

As of June 30, 2014 and December 31, 2013, securities with a fair value of $79.0 million and $58.6 million, respectively, were pledged to collateralize certain municipal deposit relationships.  As of the same dates, securities with a fair value of $20.7 million and $21.6 million were pledged against certain borrowing arrangements.

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

(5)  Pension and Postretirement Benefits

T