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 September 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 November 8, 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.
 
48
       
Item 4.
 
48
       
 
49
       
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.
   
       
 
50
       
 
     

 
 


PART I -  FINANCIAL INFORMATION
Item 1 – Consolidated Financial Statements

Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(Unaudited)
   
September 30,
   
December 31,
 
(In thousands, except share data)
 
2013
   
2012
 
ASSETS:
           
Cash and due from banks
  $ 8,135     $ 6,435  
Interest earning deposits
    3,659       2,230  
Total cash and cash equivalents
    11,794       8,665  
Interest earning time deposits
    1,500       2,000  
Available-for-sale securities, at fair value
    82,908       108,339  
Held-to-maturity securities (fair value of $32,495 and $0, respectively)
    32,495       -  
Federal Home Loan Bank stock, at cost
    2,913       1,929  
Loans
    338,074       333,748  
Less: Allowance for loan losses
    5,085       4,501  
Loans receivable, net
    332,989       329,247  
Premises and equipment, net
    10,183       10,108  
Accrued interest receivable
    1,806       1,717  
Foreclosed real estate
    301       426  
Goodwill
    3,840       3,840  
Bank owned life insurance
    8,216       8,046  
Other assets
    3,562       3,479  
Total assets
  $ 492,507     $ 477,796  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Deposits:
               
Interest-bearing
  $ 350,941     $ 347,892  
Noninterest-bearing
    50,358       43,913  
Total deposits
    401,299       391,805  
Short-term borrowings
    24,000       9,000  
Long-term borrowings
    16,881       25,964  
Junior subordinated debentures
    5,155       5,155  
Accrued interest payable
    72       140  
Other liabilities
    4,345       4,985  
Total liabilities
    451,752       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
    8,211       8,120  
Retained earnings
    28,314       26,685  
Accumulated other comprehensive loss
    (3,119 )     (1,318 )
Unearned ESOP
    (853 )     (936 )
Treasury stock, at cost; 361,787,and 362,287 shares respectively
    (4,828 )     (4,834 )
Total shareholders' equity
    40,755       40,747  
Total liabilities and shareholders' equity
  $ 492,507     $ 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 nine
   
For the nine
 
 
 
months ended
   
months ended
   
months ended
   
months ended
 
(In thousands, except per share data)
 
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
Interest and dividend income:
                       
Loans, including fees
  $ 4,057     $ 3,974     $ 12,298     $ 11,962  
Debt securities:
                               
Taxable
    399       439       1,181       1,386  
Tax-exempt
    189       190       569       535  
Dividends
    29       38       89       97  
Interest earning time deposits
    5       6       16       18  
Federal funds sold and interest earning deposits
    2       1       5       3  
       Total interest income
    4,681       4,648       14,158       14,001  
Interest expense:
                               
Interest on deposits
    605       714       1,894       2,211  
Interest on short-term borrowings
    23       6       40       14  
Interest on long-term borrowings
    151       243       575       750  
       Total interest expense
    779       963       2,509       2,975  
          Net interest income
    3,902       3,685       11,649       11,026  
Provision for loan losses
    216       275       816       650  
          Net interest income after provision for loan losses
    3,686       3,410       10,833       10,376  
Noninterest income:
                               
Service charges on deposit accounts
    313       285       856       838  
Earnings and gain on bank owned life insurance
    60       46       172       235  
Loan servicing fees
    30       51       112       159  
Net gains on sales and redemptions of investment securities
    17       18       116       179  
Net gains on sales of loans and foreclosed real estate
    36       6       487       31  
Debit card interchange fees
    114       105       341       308  
Other charges, commissions & fees
    134       150       400       423  
          Total noninterest income
    704       661       2,484       2,173  
Noninterest expense:
                               
Salaries and employee benefits
    2,033       1,733       5,884       5,576  
Building occupancy
    382       348       1,109       1,077  
Data processing
    356       390       1,067       1,072  
Professional and other services
    178       174       502       473  
Advertising
    146       108       393       268  
FDIC assessments
    123       78       291       233  
Audits and exams
    61       73       184       184  
Other expenses
    388       274       1,343       1,106  
          Total noninterest expenses
    3,667       3,178       10,773       9,989  
Income before income taxes
    723       893       2,544       2,560  
Provision for income taxes
    195       223       688       641  
Net income
    528       670       1,856       1,919  
Preferred stock dividends
    -       113       -       367  
Net income available to common shareholders
  $ 528     $ 557     $ 1,856     $ 1,552  
                                 
Earnings per common share - basic
  $ 0.21     $ 0.22     $ 0.74     $ 0.62  
Earnings per common share - diluted
  $ 0.20     $ 0.22     $ 0.73     $ 0.62  
Dividends per common share
  $ 0.03     $ 0.03     $ 0.09     $ 0.09  

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 Nine
   
For the Nine
 
   
months ended
   
months ended
   
months ended
   
months ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
 
                                 
Net Income
  $ 528     $ 670     $ 1,856     $ 1,919  
                                 
Other Comprehensive Income
                               
                                 
Retirement Plans:
                               
Retirement plan net losses recognized in plan expenses
    95       78       286       318  
Gain on pension plan curtailment  net of additional plan losses not recognized in plan expenses
    -       -       -       1,919  
Retirement plan net losses recognized in plan expenses
    95       78       286       2,237  
                                 
Unrealized holding (losses) gains on financial derivative:
                               
Change in unrealized holding gains (losses) on financial derivative
    (10 )     (18 )     2       (53 )
Reclassification adjustment for interest expense included in net income
    15       13       46       43  
Net unrealized gain (loss) on financial derivative
    5       (5 )     48       (10 )
                                 
Unrealized holding gains (losses) on available-for-sale securities:
                               
Unrealized holding (losses) gains arising during the period
    1,401       939       (1,888 )     1,551  
Reclassification adjustment for net gains included in net income
    (17 )     (18 )     (116 )     (179 )
Net unrealized  gains (losses) on securities available-for-sale
    1,384       921       (2,004 )     1,372  
                                 
Unrealized loss on securities transferred to held-to-maturity
    (1,332 )     -       (1,332 )     -  
                                 
Other comprehensive income (loss) , before tax
    152       994       (3,002 )     3,599  
Tax effect
    (56 )     (397 )     1,201       (1,440 )
Other comprehensive income (loss), net of tax
    96       597       (1,801 )     2,159  
Comprehensive Income
  $ 624     $ 1,267     $ 55     $ 4,078  
                                 
Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)
                               
Retirement plan net losses recognized in plan expenses
  $ (38 )   $ (31 )   $ (115 )   $ (127 )
Gain on pension plan curtailment net of additional plan losses not recognized in plan expenses
    -       -       -       (768 )
Change in unrealized holding gains (losses) on financial derivative
    5       7       -       21  
Reclassification adjustment for interest expense included in net income
    (6 )     (5 )     (18 )     (17 )
Unrealized holding (losses) gains arising during the period
    (557 )     (375 )     755       (620 )
Reclassification adjustment for net gains included in net income
    7       7       46       71  
Unrealized loss on securities transferred to held-to-maturity
    533       -       533       -  
Income tax effect related to other comprehensive income (loss)
  $ (56 )   $ (397 )   $ 1,201     $ (1,440 )
                                 
                                 
The accompanying notes are an integral part of the consolidated financial statements

 
- 5 -



PATHFINDER BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
Nine months ended September 30, 2013 and September 30, 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
    -       -       -       1,856       -       -       -       1,856  
                                                                 
 Other comprehensive loss, net of tax:
    -       -       -       -       (1,801 )     -       -       (1,801 )
                                                                 
 ESOP shares earned (9,375 shares)
    -       -       38       -       -       83       -       121  
                                                                 
 Stock based compensation
    -       -       59       -       -       -       -       59  
                                                                 
 Stock options exercised
    -       -       (6 )     -       -       -       6       -  
                                                                 
 Common stock dividends declared ($0.09 per share)
    -       -       -       (227 )     -       -       -       (227 )
 Balance, September 30, 2013
  $ 13,000     $ 30     $ 8,211     $ 28,314     $ (3,119 )   $ (853 )   $ (4,828 )   $ 40,755  
                                                                 
 Balance, January 1, 2012
  $ 13,000     $ 30     $ 8,730     $ 24,618     $ (2,664 )   $ (1,039 )   $ (4,834 )   $ 37,841  
                                                                 
 Net income
    -       -       -       1,919       -       -       -       1,919  
                                                                 
 Other comprehensive income, net of tax:
    -       -       -       -       2,159       -       -       2,159  
                                                                 
 Purchase of CPP Warrants from Treasury
    -       -       (706 )     169       -       -       -       (537 )
                                                                 
 Preferred stock dividends - SBLF
    -       -       -       (367 )     -       -       -       (367 )
                                                                 
 ESOP shares earned (8,520 shares)
    -       -       6       -       -       75       -       81  
                                                                 
 Stock based compensation
    -       -       68       -       -       -       -       68  
                                                                 
 Common stock dividends declared ($0.09 per share)
    -       -       -       (225 )     -       -       -       (225 )
 Balance, September 30, 2012
  $ 13,000     $ 30     $ 8,098     $ 26,114     $ (505 )   $ (964 )   $ (4,834 )   $ 40,939  

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

 
- 6 -


Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
 (Unaudited)
   
For the nine months ended September 30,
 
(In thousands)
 
2013
   
2012
 
OPERATING ACTIVITIES
           
Net income
  $ 1,856     $ 1,919  
Adjustments to reconcile net income to net cash flows from operating activities:
               
Provision for loan losses
    816       650  
Proceeds from sales of loans
    11,456       207  
Originations of loans held-for-sale
    (11,016 )     (195 )
Realized gains on sales and redemptions of:
               
Real estate acquired through foreclosure
    (47 )     (19 )
Loans
    (440 )     (12 )
Available-for-sale investment securities
    (116 )     (179 )
Depreciation
    532       593  
(Increase in) amortization of, mortgage servicing rights
    (82 )     6  
Amortization of deferred loan costs
    83       132  
Earnings on bank owned life insurance
    (170 )     (198 )
Realized gain on proceeds from bank owned life insurance
    (2 )     (37 )
Net amortization of premiums and discounts on investment securities
    567       851  
Stock based compensation and ESOP expense
    180       149  
Net change in accrued interest receivable
    (89 )     (236 )
Pension plan contribution
    -       (2,600 )
Net change in other assets and liabilities
    927       734  
Net cash flows from operating activities
    4,455       1,765  
INVESTING ACTIVITIES
               
Purchase of investment securities available-for-sale
    (34,861 )     (44,429 )
Net purchases of Federal Home Loan Bank stock
    (984 )     (382 )
Proceeds from maturities of interest earning time deposits
    500       -  
Proceeds from maturities and principal reductions of
               
investment securities available-for-sale
    18,421       20,859  
Proceeds from sales and redemptions of:
               
Available-for-sale investment securities
    5,589       10,353  
Real estate acquired through foreclosure
    324       331  
Proceeds from bank owned life insurance
    2       -  
Net change in loans
    (4,811 )     (20,020 )
Purchase of premises and equipment
    (607 )     (93 )
Net cash flows from investing activities
    (16,427 )     (33,381 )
FINANCING ACTIVITIES
               
Net change in demand deposits, NOW accounts, savings accounts,
               
money management deposit accounts, MMDA accounts and escrow deposits
    21,953       17,698  
Net change in time deposits and brokered deposits
    (12,459 )     10,011  
Net change in short-term borrowings
    15,000       9,000  
Payments on long-term borrowings
    (9,083 )     (4,083 )
Proceeds from long-term borrowings
    -       4,000  
Purchase of CPP warrants from the US Treasury
    -       (537 )
Cash dividends paid to preferred shareholder - SBLF
    (83 )     (392 )
Cash dividends paid to common shareholders
    (227 )     (225 )
Net cash flows from financing activities
    15,101       35,472  
Change in cash and cash equivalents
    3,129       3,856  
Cash and cash equivalents at beginning of period
    8,665       10,218  
Cash and cash equivalents at end of period
  $ 11,794     $ 14,074  
CASH PAID DURING THE PERIOD FOR:
               
Interest
  $ 2,577     $ 2,991  
Income taxes
    668       3  
NON-CASH INVESTING ACTIVITY
               
Real estate acquired in exchange for loans
    170       291  
Transfer of available-for-sale securities to held-to-maturity
    32,495       -  

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 nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

(2)  New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-10 - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.  Topic 815, Derivatives and Hedging, provides guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item’s fair value or a hedged transaction’s cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). In the United States, currently only the interest rates on direct Treasury obligations of the U.S. government (UST) and, for practical reasons, the London Interbank Offered Rate (LIBOR) swap rate are considered benchmark interest rates. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815 and are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption had no impact on our consolidated statements of condition, results of operations, or cash flows.

In July 2013, FASB issued ASU 2013-11 - Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  FASB is issuing this amendment because Topic 740, Income Taxes, does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances. Some entities present unrecognized tax benefits as a liability unless the unrecognized tax benefit is directly associated with a tax position taken in a tax year that results in, or that resulted in, the recognition of a net operating loss or tax credit carryforward for that year and the net operating loss or tax credit carryforward has not been utilized. Other entities present unrecognized tax benefits as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward in certain circumstances. The objective of the amendments in this Update is to eliminate that diversity in practice. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated statements of condition, results of operations, or cash flows.

 
 
- 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
   
Nine months ended
 
   
September 30,
   
September 30,
 
(In thousands, except per share data)
 
2013
   
2012
   
2013
   
2012
 
Basic Earnings Per Common Share
                       
Net income available to common shareholders
  $ 528     $ 557     $ 1,856     $ 1,552  
Weighted average common shares outstanding
    2,518       2,505       2,515       2,503  
Basic earnings per common share
  $ 0.21     $ 0.22     $ 0.74     $ 0.62  
                                 
Diluted Earnings Per Common Share
                               
Net income available to common shareholders
  $ 528     $ 557     $ 1,856     $ 1,552  
Weighted average common shares outstanding
    2,518       2,505       2,515       2,503  
Effect of assumed exercise of stock options
    21       12       13       6  
Effect of assumed exercise of stock warrants
    -       -       -       4  
Diluted weighted average common shares outstanding
    2,539       2,517       2,528       2,513  
Diluted earnings per common share
  $ 0.20     $ 0.22     $ 0.73     $ 0.62  





 
- 9 -



(4) Investment Securities

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


   
September 30, 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
  $ 16,941     $ 2     $ (330 )   $ 16,613  
State and political subdivisions
    6,319       142       (7 )     6,454  
Corporate
    15,061       190       -       15,251  
Residential mortgage-backed - US agency
    41,208       630       (572 )     41,266  
Total
    79,529       964       (909 )     79,584  
Equity investment securities:
                               
Mutual funds:
                               
Ultra short mortgage fund
    1,286       12       -       1,298  
Large cap equity fund
    905       363       -       1,268  
Other mutual funds
    183       156       -       339  
Common stock - financial services industry
    402       17       -       419  
Total
    2,776       548       -       3,324  
Total available-for-sale
  $ 82,305     $ 1,512     $ (909 )   $ 82,908  
 
                               
Held-to-Maturity Portfolio
                               
Debt investment securities
US Treasury, agencies and GSEs
  $ 1,868     $ -     $ -     $ 1,868  
State and political subdivisions
    20,370       -       -       20,370  
Corporate
    3,747       -       -       3,747  
Residential mortgage-backed - US agency
    6,510       -       -       6,510  
Total held-to-maturity
  $ 32,495     $ -     $ -     $ 32,495  




 
- 10 -




 Available-for-Sale Portfolio
 
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 Company elected to transfer 55 available-for-sale (“AFS”) securities with an aggregate fair value of $32.5 million to a classification of held-to-maturity (“HTM”) on September 30, 2013.  In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer.  The net unrealized holding loss of $799,000, net of tax, at the date of transfer was retained in accumulated other comprehensive loss, with the associated pretax amount retained in the carrying value of the HTM securities.  Such amounts will be amortized to interest income over the remaining life of the securities.  The fair value of the transferred AFS securities became the book value of the HTM securities at September 30, 2013, with no unrealized gain or loss at this date.  Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and estimated fair value of debt investments at September 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.

   
Available-for-Sale
   
Held-to-Maturity
 
 
 
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
(In thousands)
                       
Due in one year or less
  $ 6,935     $ 6,963     $ -     $ -  
Due after one year through five years
    26,696       26,827       -       -  
Due after five years through ten years
    4,517       4,355       11,171       11,171  
Due after ten years
    173       173       14,814       14,814  
Sub-total
    38,321       38,318       25,985       25,985  
Residential mortgage-backed - US agency
    41,208       41,266       6,510       6,510  
Totals
  $ 79,529     $ 79,584     $ 32,495     $ 32,495  
 
 
 
- 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:

   
September 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)
       
 
                                           
Available-for-Sale
                                                     
US Treasury, agencies and GSE's
    13     $ (330 )   $ 14,588       -     $ -     $ -       13     $ (330 )   $ 14,588  
State and political subdivisions
    10       (7 )     1,660       -       -       -       10       (7 )     1,660  
Corporate
    -       -       -       -       -       -       -       -       -  
Residential mortgage-backed - US agency
    24       (572 )     22,963       -       -       -       24       (572 )     22,963  
Totals
    47     $ (909 )   $ 39,211       -     $ -     $ -       47     $ (909 )   $ 39,211  
Held-to-Maturity
                                                                       
US Treasury, agencies and GSE's
    -     $ -     $ -       -     $ -     $ -       -     $ -     $ -  
State and political subdivisions
    -       -       -       -       -       -       -       -       -  
Corporate
    -       -       -       -       -       -       -       -       -  
Residential mortgage-backed - US agency
    -       -       -       -       -       -       -       -       -  
Totals
    -     $ -     $ -       -     $ -     $ -       -     $ -     $ -  
 
                                                                       
 
                                                                       
   
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
 
Available-for-Sale
 
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 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.
 

 
 
- 12 -


Management does not believe any individual unrealized loss in other securities within the portfolio as of September 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 2 municipal securities and 1 mortgage-backed security that have been in unrealized loss positions for 11 months and 10 months, respectively.  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 September 30, 2013.

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

   
For the three months
   
For the nine months
 
   
ended September 30,
   
ended September 30,
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
 
Realized gains
  $ 17     $ 30     $ 121     $ 191  
Realized losses
    -       (12 )     (5 )     (12 )
    $ 17     $ 18     $ 116     $ 179  

As of September 30, 2013 and December 31, 2012, securities with a fair value of $57.4 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 $23.2 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 September 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, who continue to be employed by the Bank, will continue to earn vesting credit with respect to their frozen accrued benefits.

 
 
- 13 -

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 does not foresee any issues or conditions t