UNITED
STATES


SECURITIES
EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K





T  ANNUAL
REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934


For the
fiscal year ended December 31, 2009.


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 registrant as specified in its charter)


Federal                                                                                                                                                                                                                                                                                           16-1540137


(State or
other jurisdiction of    I.R.S.
Employer


incorporation
or organization)             
Identification No.)





214
West First Street


Oswego,
NY                                                                                                                                                    
13126


(Address
of principal executive offices)                                          (Zip
Code)





Registrant's
telephone number, including area code:  (315)
343-0057





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


Title of each
className of each exchange on
which registered





Common Stock, $0.01 par
value                                                                                                                                                                                                                                                                     
The  NASDAQ Stock Market LLC





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES
*      NO
T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES *NO T





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 website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files).          YES *        NO
*





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.T





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. (Check
one):





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
Act).   YES*NOT





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2009, as reported by the Nasdaq Capital Market, was approximately
$4.6 million.





As of
March 17, 2010, there were 2,972,119 shares issued and 2,484,832 shares
outstanding of the Registrant’s Common Stock.





DOCUMENTS
INCORPORATED BY REFERENCE:


(1) Proxy Statement for the 2010 Annual
Meeting of Stockholders of the Registrant (Part III).


(2) Annual Report to Stockholders (Part
II and IV).












TABLE OF CONTENTS
 
 FORM 10-K
ANNUAL REPORT
 FOR THE
YEAR ENDED
 DECEMBER
31, 2009
 PATHFINDER
BANCORP, INC.


PagePART IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              11Item
      1B.
              Unresolved
      Staff Comments
              11Item
      2.
              Properties
              12Item
      3.
              Legal
      Proceedings
              12Item
      4.
              (Removed
      and Reserved)
              12PART IIItem
      5.
              Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
              13Purchases
      of Equity SecuritiesItem 6.
              Selected Financial Data
              14Item 7.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              15Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              32Item 8.
              Financial Statements and Supplementary
      Data
              33Item 9.
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
              75Item
      9A(T).
              Controls
      and Procedures
              75Item
      9B.
              Other
      Information
              75PART IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              76Item
      11.
              Executive
      Compensation
              76Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and
      Related
              76Stockholder
      MattersItem
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              76Item
      14.
              Principal
      Accounting Fees and Services
              76PART IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              77














Table of Contents








PART I





FORWARD-LOOKING
STATEMENTS





When used in this Annual
Report the words or phrases “will likely result”, “are expected to”, “will
continue”, “is anticipated”, “estimate”, ”project” or similar expression are
intended to identify “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995.  Such statements are
subject to certain risks and uncertainties.By identifying these
forward-looking statements for you in this manner, the Company is alerting you
to the possibility that its actual results and financial condition may differ,
possibly materially, from the anticipated results and financial condition
indicated in these forward-looking statements. Important factors that could
cause the Company’s actual results and financial condition to differ from those
indicated in the forward-looking statements include, among others, those
discussed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form
10-K.  These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made.  The Company wishes to advise readers that the factors listed
above could affect the Company’s financial performance and could cause the
Company’s actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.  Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.





ITEM
1: BUSINESS





GENERAL





Pathfinder
Bancorp, Inc.





Pathfinder
Bancorp, Inc. (the "Company") is a Federally chartered mid-tier holding company
headquartered in Oswego, New York.  The primary business of the
Company is its investment in Pathfinder Bank (the "Bank").  The
Company is majority owned by Pathfinder Bancorp, M.H.C., a federally-chartered
mutual holding company (the "Mutual Holding Company").   At
December 31, 2009, the Mutual Holding Company held 1,583,239 shares of the
Company’s common stock (“Common Stock”) and the public held 901,593 shares of
Common Stock (the "Minority Stockholders").  At December 31, 2009,
Pathfinder Bancorp, Inc. had total assets of $371.7 million, total deposits of
$296.8 million and shareholders' equity of $29.2 million.





The
Company's executive office is located at 214 West First Street, Oswego, New York
and the telephone number at that address is (315) 343-0057.





Pathfinder
Bank





The Bank
is a New York-chartered savings bank headquartered in Oswego, New
York.  The Bank operates from its main office as well as six branch
offices located in its market area consisting of Oswego County and the
contiguous counties.  The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC").  The Bank was chartered as a
New York savings bank in 1859 as Oswego City Savings Bank.  The Bank
is a customer-oriented institution dedicated to providing mortgage loans and
other traditional financial services to its customers.  The Bank is
committed to meeting the financial needs of its customers in Oswego County, New
York, and the contiguous counties.





The Bank
is primarily engaged in the business of attracting deposits from the general
public in the Bank's market area, and investing such deposits, together with
other sources of funds, in loans secured by one- to four-family residential real
estate and commercial real estate.  At December 31, 2009, $196.6
million, or 75% of the Bank's total loan portfolio consisted of loans secured by
real estate, of which $134.3 million, or 68%, were loans secured by one- to
four-family residences and $62.2 million, or 32%, were secured by commercial
real estate.  Additionally, $26.1 million, or 10%, of total loans,
were secured by second liens on residential properties that are classified as
consumer loans.  The Bank also originates commercial and consumer
loans that totaled $35.4 million and $3.6 million, respectively, or 15%, of the
Bank's total loan portfolio at December 31, 2009.  The Bank







Table of Contents


invests a
portion of its assets in securities issued by the United States Government and
its agencies and sponsored enterprises, state and municipal obligations,
corporate debt securities, mutual funds, and equity securities.  The
Bank also invests in mortgage-backed securities primarily issued or guaranteed
by United States Government sponsored enterprises.  The Bank's
principal sources of funds are deposits, principal and interest payments on
loans and investments, as well as borrowings from correspondent financial
institutions.  The principal source of income is interest on loans and
investment securities.  The Bank's principal expenses are interest
paid on deposits, and employee compensation and benefits.





Pathfinder
Bank formed a New York state chartered limited purpose commercial bank
subsidiary, Pathfinder Commercial Bank, in October of
2002.  Pathfinder Commercial Bank was established to serve the
depository needs of public entities in its market area.





In April
1999, the Bank established Pathfinder REIT, Inc., a New York corporation, as the
Bank's wholly-owned real estate investment trust subsidiary.  At
December 31, 2009, Pathfinder REIT, Inc. held $17.8 million in mortgages and
mortgage related assets.  All disclosures in this Form 10-K relating
to the Bank's loans and investments include loans and investments that are held
by Pathfinder REIT, Inc.





The Bank
also has 100% ownership in Whispering Oaks Development Corp., a New York
corporation, which is retained in case the need to operate or develop foreclosed
real estate emerges.  This subsidiary is currently
inactive.





In
addition, the Company has a non-consolidated Delaware statutory trust
subsidiary, Pathfinder Statutory Trust II, of which 100% of the common equity is
owned by the Company.  Pathfinder Statutory Trust II was formed in
connection with the issuance of trust preferred securities.





Employees





As of
December 31, 2009, the Bank had 90 full-time employees and 19 part-time
employees.  The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be
good.





MARKET
AREA AND COMPETITION





The
economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at
Oswego.  The major manufacturing employers in the Bank's market area
are Entergy Nuclear Northeast, Novelis, Constellation, NRG and
Huhtamaki.  The Bank is the largest depository institution
headquartered in Oswego County.  The Bank's business and operating
results are significantly affected by the general economic conditions prevalent
in its market areas.





The Bank
encounters strong competition both in attracting deposits and in originating
real estate loans and other loans.  Its most direct competition for
deposits has historically come from commercial banks, savings banks, savings
associations and credit unions in its market area.  Competition for
loans comes from such financial institutions as well as mortgage banking
companies.  The Bank competes for deposits by offering depositors a
high level of personal service and a wide range of competitively priced
financial services.  The Bank competes for real estate loans primarily
through the interest rates and loan fees it charges and advertising, as well as
by originating and holding in its portfolio mortgage loans which do not
necessarily conform to secondary market underwriting standards.  The
recent turmoil in the residential mortgage sector of the United States economy
has caused certain competitors to be less effective in the market
place.  While Central New York did not experience the level of
speculative lending and borrowing in residential real estate that has adversely
affected other regions on a national basis, certain mortgage brokers and finance
companies in our area are either no longer operating, or have limited aggressive
lending practices.  Additionally, as certain money centers and large
regional banks grapple with current economic conditions and the related credit
crisis, their ability to compete as effectively has been
muted.  Management believes that these conditions have created a
window of reduced competition for local community and regional banks in
residential loans, and to a lesser extent, commercial real estate
loans.







Page
2
 Table of Contents


REGULATION
AND SUPERVISION





General





The Bank
is a New York-chartered stock savings bank and its deposit accounts are insured
up to applicable limits by the FDIC through the Deposit Insurance Fund (“DIF
”).  The Bank is subject to extensive regulation by the New York State
Banking Department (the “Department”), as its chartering agency, and by the
FDIC, as its deposit insurer and primary federal regulator.  The Bank
is required to file reports with, and is periodically examined by, the FDIC and
the Superintendent of the Department concerning its activities and financial
condition and must obtain regulatory approvals prior to entering into certain
transactions, including, but not limited to, mergers with or acquisitions of
other banking institutions.  The Bank is a member of the Federal Home
Loan Bank of New York (“FHLBNY”) and is subject to certain regulations by the
Federal Home Loan Bank System.  The Company and the Mutual Holding
Company are federally chartered.  Consequently, they are subject to
regulations of the Office of Thrift Supervision ("OTS") as savings and loan
holding companies.  Any change in such regulations, whether by the
Department, the FDIC, or the OTS could have a material adverse impact on the
Bank, the Company or the Mutual Holding Company.





Regulatory
requirements applicable to the Bank, the Company and the Mutual Holding Company
are referred to below or elsewhere herein.  This description of
statutory and regulatory provisions does not purport to be a complete
description of all such statutes and regulations applicable to the Mutual
Holding Company, the Company, or the Bank.





Recent
Regulatory Developments





In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law.  EESA provides, among other
things, for a Troubled Assets Relief Program (“TARP”), under which the U.S.
Department of the Treasury has the authority to purchase up to $700 billion of
securities and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets.





See the
discussion relating to the Emergency Economic
Stabilization Act of 2008and the economic recovery package discussed
under that caption below.





On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(“TLGP”).  This program has two components. One guarantees newly
issued senior unsecured debt of the participating organizations, up to certain
limits established for each institution, issued between October 14, 2008 and
June 30, 2009. The other component of the program provides full FDIC insurance
coverage for non-interest bearing transaction deposit accounts, regardless of
dollar amount, until December 31, 2009. An annualized 10 basis point assessment
on balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions participating in this component of the
TLGP.  The Company has chosen to participate in both components of the
TLGP.  The additional expense related to this coverage has not been
significant for Pathfinder Bank.





The
American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as
the economic stimulus or economic recovery package, was signed into law on
February 17, 2009, by President Obama.  ARRA includes a wide variety
of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs.  In addition,
ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future CPP recipients until the recipient has repaid the
Treasury.





The
administration of President Obama introduced the Making Home Affordable program
in 2009.  This program allows homeowners with loans guaranteed by
Fannie Mae or Freddie Mac an opportunity to refinance into more affordable
monthly payments.  Pathfinder Bank services loans that


have been
purchased by Fannie Mae, and therefore the Bank does participate in this
program.  The program also encourages banks to voluntarily modify
portfolio loans for borrowers who are eligible.  Pathfinder Bank also
participates in that manner.  Very few of our borrowers have been
eligible to participate in the program, although participating in the program
has increased our administrative expenses.




Page
3
 Table of Contents





The New
York Legislature passed, and the Governor signed into law, Governor’s Program
Bill No. 46.  This law, which became effective January 14, 2010,
amends and supplements various existing statues including the Real Property
Actions and Proceedings Law, the Uniform Commercial Code, the Civil Practice Law
and Rules and the Banking Law.  In brief, the law imposes additional
foreclosure notice provisions on owners and tenants of 1-4 family residential
premises; additional filing requirements in such foreclosures; mandatory
judicial settlement conferences in residential foreclosures; an obligation on
the bank to maintain premises in foreclosure prior to taking title; and other
miscellaneous requirements.  We believe this new law will delay
foreclosures on residential properties and increase foreclosure
cost.





New York State Banking Law and FDIC
Regulation





The Bank
derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.  Under these laws and regulations, savings banks,
including the Bank, may invest in real estate mortgages, consumer and commercial
loans, certain types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and agencies,
certain types of corporate equity securities and certain other
assets.  New York State chartered savings banks may also invest in
subsidiaries under their service corporation investment authority.  A
savings bank may use this power to invest in corporations that engage in various
activities authorized for savings banks, plus any additional activities, which
may be authorized by the Banking Board.  Under FDICIA and the FDIC’s
implementation of regulations, the Bank’s investment and service corporation
activities are limited to activities permissible for a national bank unless the
FDIC otherwise permits it.





The FDIC
and the Superintendent have broad enforcement authority over the
Bank.  Under this authority, the FDIC and the Superintendent have the
ability to issue formal or informal orders to correct violations of laws or
unsafe or unsound banking practices.





FDIC
Insurance on Deposits





The Bank
is a member of the DIF, which is administered by the FDIC.  Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the U.S. Government.





The
Federal Deposit Insurance Reform Act of 2005 gives the FDIC increased
flexibility in assessing premiums on banks and savings associations, including
the Bank, to pay for deposit insurance and in managing its deposit insurance
reserves.  The reform legislation provided a credit to all insured
institutions, based on the amount of their insured deposits at year-end 1996, to
offset the premiums that they may be assessed; combined the BIF and SAIF to form
a single Deposit Insurance Fund; increased deposit insurance to $250,000 for
Individual Retirement Accounts; and authorized inflation-based increases in
deposit insurance on other accounts every 5 years. In 2008, Congress has
temporarily extended the $250,000 insurance limit to all other depositor
accounts through December 31, 2013.





On December 22, 2008, the
FDIC published a final rule that raises the current deposit insurance assessment
rates uniformly for all institutions by 7 basis points (to a range from 12 to 50
basis points) effective for the first quarter of 2009.  On February
27, 2009, the FDIC also issued a final rule that revises the way the FDIC
calculates federal deposit insurance assessment rates beginning in the second
quarter of 2009.  Under the new rule, the total base assessment rate
will range from 7 to 77.5 basis points of the institution’s deposits, depending
on the risk category of the institution and








Page
4
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the institution’s levels
of unsecured debt, secured liabilities, and brokered
deposits.  On May 22, 2009, the FDIC adopted a final rule
imposing a 5 basis point special assessment on each insured depository
institution's assets minus Tier 1 capital as of June 30, 2009. The impact of the
special assessment was approximately $180,000.  Finally, on November
12, 2009, the FDIC adopted a final rule amending the assessment regulations to
require insured depository institutions to prepay their quarterly risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012,
on December 30, 2009.  The three-year assessment recorded in the
Company’s other assets amounted to $1.7 million. Both the special and regular
assessment changes have been imposed on all FDIC insured institutions for the
year ended December 31, 2009.


The
credit provided by the 2005 Act was determined based on the assessment base of
the institution as of December31, 1996 as
compared with the combined aggregate assessment base of all eligible
institutions as of that date. Those institutions having credits could use them
to offset up to 100% of the 2007 DIF assessment, and if not completely used in
2007, applied the remaining credits to not more than 90% of each of the
aggregate 2008, 2009 and 2010 DIF assessments. Pathfinder Bank offset 90% of its
DIF assessments with available one-time assessment credits for the first two
quarters of 2008 and took the remaining balance of the credit against the third
quarter assessment. For the first nine months of 2008, credits utilized to
offset amounts assessed for Pathfinder Bank totaled $76,000. Fourth quarter 2008
assessments and 2009 assessments for Pathfinder Bank were not offset by
credits.
 
 See the
discussion of recent regulatory developments relating to the FDIC and its impact
on the Company discussed above under the caption “Recent Regulatory
Developments”.





Regulatory
Capital Requirements





The FDIC
has adopted risk-based capital guidelines to which the Bank is subject. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.





These
guidelines divide a savings bank's capital into two tiers. The first tier ("Tier
I") includes common equity, retained earnings, certain non-cumulative perpetual
preferred stock (excluding auction rate issues) and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and other intangible assets
(except mortgage servicing rights and purchased credit card relationships
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital ratio of at least 8%, and a Tier I risk
based capital level of at least 4%.





In
addition, the FDIC has established regulations prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.  The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage capital ratio
for a depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be
4% unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution.  The FDIC
may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum
levels.





Page
5
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Limitations
on Dividends and Other Capital Distributions





The FDIC
has the authority to use its enforcement powers to prohibit a savings bank from
paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice.  Federal law also prohibits the payment
of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis.  New York law
also restricts the Bank from declaring a dividend that would reduce its capital
below the amount that is required to be maintained by state law and
regulation.  The Company is also subject to the OTS capital
distribution rules by virtue of being an OTS regulated savings and loan holding
company.





Prompt
Corrective Action





The
federal banking agencies have promulgated regulations to implement the system of
prompt corrective action required by federal law.  Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10% or more, has a Tier I risk-based capital ratio of 6%
or more, has a Tier I leverage capital ratio of 5% or more and is not subject to
any written capital order or directive; (ii) "adequately capitalized" if it has
a total risk based capital ratio of 8% or more, a Tier I risk-based capital
ratio of 4% or more and a Tier I leverage capital ratio of 4% or more (3% under
certain circumstances) and does not meet the definition of "well capitalized";
(iii) "undercapitalized" if it has a total risk-based capital ratio that is
lessthan
8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage
capital ratio that is less than 4% (3% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a
Tier I leverage capital ratio that is less than 3%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2%.  Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).





The Bank
currently meets the criteria to be classified as a "well capitalized" savings
institution.





Transactions
With Affiliates and Insiders





Under
current federal law, transactions between depository institutions and their
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and
its implementing regulations. An affiliate of a savings bank is any company or
entity that controls, is controlled by, or is under common control with the
savings bank, other than a subsidiary of the savings bank. In a holding company
context, at a minimum, the parent holding company of a savings bank, and any
companies that are controlled by such parent holding company, are affiliates of
the savings bank. Generally, Section 23A limits the extent to which the savings
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such savings bank's capital stock and
surplus and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.





Further,
Section 22(h) of the Federal Reserve Act and its implementing regulations
restrict a savings bank with respect to loans to directors, executive officers,
and principal stockholders. Under Section 22(h), loans to directors, executive
officers and stockholders who control, directly or indirectly, 10% or more of
voting securities of a savings bank and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total unimpaired capital and
unimpaired surplus. Section 22(h)








Page
6
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also
prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and stockholders who control 10% or
more of voting securities of a stock savings bank, and their respective related
interests, unless such loan is approved in advance by a majority of the board of
directors of the savings bank. Any "interested" director may not participate in
the voting. Further, pursuant to Section 22(h), loans to directors, executive
officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.





Supervisory
Agreement





During
May 2009, the Company entered into a Supervisory Agreement with the
OTS.  The agreement was issued in connection with the identification
of certain violations of applicable statutory and regulatory restrictions on
capital distributions and transactions with affiliates.  As a result
of the identified violations, the Company recorded $41,000 of income relating to
certain transactions with its unconsolidated parent company Pathfinder Bancorp,
MHC.  In addition the Company is prohibited from accepting or
directing Pathfinder Bank to declare or pay a dividend or other capital
distributions without the prior written approval of the Office of Thrift
Supervision.  All violations have been corrected and the Company
believes it is in compliance with the Agreement.





Federal
Holding Company Regulation





General.  The Company and
the Mutual Holding Company are nondiversified savings and loan holding companies
within the meaning of the Home Owners' Loan Act.  The Company and the
Mutual Holding Company are registered with the OTS and are subject to OTS
regulations, examinations, supervision and reporting requirements.  As
such, the OTS has enforcement authority over the Company and the Mutual Holding
Company, and their non-savings institution subsidiaries.  Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings
institution.





Permitted
Activities.  Under OTS
regulation and policy, a mutual holding company and a federally chartered
mid-tier holding company, such as the Company, may engage in the following
activities: (i) investing in the stock of a savings association;
(ii) acquiring a mutual association through the merger of such association
into a savings association subsidiary of such holding company or an interim
savings association subsidiary of such holding company; (iii) merging with
or acquiring another holding company, one of whose subsidiaries is a savings
association; (iv) investing in a corporation, the capital stock of which is
available for purchase by a savings association under federal law or under the
law of any state where the subsidiary savings association or associations share
their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings
association subsidiary of such company; (viii) acting as trustee under
deeds of trust; (ix) any other activity (A) that the Federal Reserve
Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956,
unless the Director of the OTS, by regulation, prohibits or limits any such
activity for savings and loan holding companies; or (B) in which multiple
savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; (x) any activity permissible for financial holding
companies under Section 4(k) of the Bank Holding Company Act, including
securities and insurance underwriting; and (xi) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director.  If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (xi) above, and has a period of
two years to cease any nonconforming activities and divest of any nonconforming
investments.







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The Home
Owners' Loan Act prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS.  It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary savings association, a nonsubsidiary
holding company, or a nonsubsidiary company engaged in activities other than
those permitted by the Home Owners' Loan Act; or acquiring or retaining control
of an institution that is not federally insured.  In evaluating
applications by holding companies to acquire savings associations, the OTS must
consider the financial and managerial resources, future prospects of the company
and association involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.





The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings associations in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws
of the state of the target savings institution specifically permit such
acquisitions.  The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.





Waivers of
Dividends by Mutual Holding Company.  OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its receipt of dividends from the Company.  The OTS may object to such
waivers.





Conversion of the
Mutual Holding Company to Stock Form.  OTS regulations
permit the Mutual Holding Company to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction").  There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Directors has no current intention or
plan to undertake a Conversion Transaction.  In a Conversion
Transaction a new holding company would be formed as the successor to the
Company (the "New Holding Company"), the Mutual Holding Company's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the New Holding Company.  In a
Conversion Transaction, each share of common stock held by stockholders other
than the Mutual Holding Company ("Minority Stockholders") would be automatically
converted into a number of shares of common stock of the New Holding Company
determined pursuant to an exchange ratio (determined by an independent
valuation) that ensures that Minority Stockholders own the same percentage of
common stock in the New Holding Company as they owned in the Company immediately
prior to the Conversion Transaction.    The total number of
shares held by Minority Stockholders after a Conversion Transaction also would
be increased by any purchases by Minority Stockholders in the stock offering
conducted as part of the Conversion Transaction.





Federal
Securities Law





The
common stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (“Exchange Act”).  The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.





The
Company Common Stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale
restrictions.  If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.





Federal
Reserve System





The
Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, money management and NOW checking
accounts).  At December 31, 2009, the Bank was in compliance with
these reserve requirements.







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Federal
Community Reinvestment Regulation





Under the
Community Reinvestment Act, as amended (the "CRA"), as implemented by FDIC
regulations, a savings bank has a continuing and affirmative obligation,
consistent with its safe and sound operation, to help meet the credit needs of
its entire community, including low and moderate income
neighborhoods.  The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
CRA.  The CRA requires the FDIC, in connection with its examination of
a savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution.  The CRA requires the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system.  The Bank's latest CRA rating
was "satisfactory."





New
York State Community Reinvestment Regulation





The Bank
is subject to provisions of the New York State Banking Law which impose
continuing and affirmative obligations upon banking institutions organized in
New York State to serve the credit needs of its local community ("NYCRA") which
are substantially similar to those imposed by the CRA.  Pursuant to
the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA
reports with the Department.  The NYCRA requires the Department to
make a biennial written assessment of a bank's compliance with the NYCRA,
utilizing a four-tiered rating system and make such assessment available to the
public.  The NYCRA also requires the Superintendent to consider a
bank's NYCRA rating when reviewing a bank's application to engage in certain
transactions, including mergers, asset purchases and the establishment of branch
offices or automated teller machines, and provides that such assessment may
serve as a basis for the denial of any such application.





The
Bank's NYCRA rating as of its latest examination was
"satisfactory."





The
USA PATRIOT Act





The USA
PATRIOT Act (“the PATRIOT Act”) was signed into law on October 26,
2001.  The PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements.  The PATRIOT Act also requires the federal
banking agencies to take into consideration the effectiveness of controls
designed to combat money laundering activities in determining whether to approve
a merger or other acquisition application of a financial
institution.  Accordingly, if the Company were to engage in a merger
or other acquisitions, its controls designed to combat money laundering would be
considered as part of the application process.  The Company and the
Bank have established policies, procedures and systems designed to comply with
these regulations.





Sarbanes-Oxley
Act of 2002





The
Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”) was signed into law on July 30,
2002.  Sarbanes-Oxley is a law that addresses, among other issues,
corporate governance, auditing and accounting, executive compensation, and
enhanced and timely disclosure of corporate information.  As directed
by Section 302(a) of Sarbanes-Oxley, the Company’s Chief Executive Officer and
Chief Financial Officer are each required to certify that the Company’s
quarterly and annual reports do not contain any untrue statement of a material
fact.  The rules have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal controls; they have made
certain disclosures to our auditors and the audit committee of the Board of
Directors about our internal controls; and they have included information in our
quarterly and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the
evaluation.  On October 2, 2009, the
SEC granted








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another extension for the
outside auditor assessment until fiscal years ending after June 15,
2010.  We have existing policies, procedures and systems
designed to comply with these regulations, and are further enhancing and
documenting such policies, procedures and systems to ensure continued compliance
with these regulations.




Emergency
Economic Stabilization Act of 2008






The
Emergency Economic Stabilization Act of 2008 ("EESA") was enacted on
October 3, 2008. EESA enables the federal government, under terms and
conditions to be developed by the Secretary of the Treasury, to insure troubled
assets, including mortgage-backed securities, and collect premiums from
participating financial institutions. EESA includes, among other provisions:
(a) the $700 billion Troubled Assets Relief Program ("TARP"), under
which the Secretary of the Treasury is authorized to purchase, insure, hold, and
sell a wide variety of financial instruments, particularly those that are based
on or related to residential or commercial mortgages originated or issued on or
before March 14, 2008; and (b) an increase in the amount of deposit
insurance provided by the FDIC.




Under the
TARP, the United States Department of Treasury authorized a voluntary Capital
Purchase Program to purchase up to $250 billion of senior preferred shares
of qualifying financial institutions that elected to participate by
November 14, 2008. Theprogram was developed to
attract broad participation by strong financial institutions, to stabilize the
financial system and increase lending to benefit the national economy and
citizens of the United States.The board of directors and management
analyzed the potential merits of participating in the Capital Purchase Program
(“CPP”) of the Treasury Department’s TARP.  It was the general view of
the board and management that in the present national economic risk environment,
enhancing the Company’s capital ratios is both prudent, given the current
climate, and potentially opportunistic as we move into the next business
cycle.  Additionally, any increase to capital will continue to support
the Company’s lending activities to individuals, families, and businesses in our
community.  Companies participating in the CPP are required to adopt
certain standards relating to executive compensation.  The terms of
the CPP also limit certain uses of capital by the issuer, including with respect
to repurchases of securities and increases in
dividends.





On
September 11, 2009, the Company entered into a Purchase Agreement with the
Treasury Department pursuant to which the Company has issued and sold to
Treasury: (i) 6,771 shares of the Company’s Series A Preferred Stock,
having a liquidation amount per share equal to $1,000, for a total price of
$6,771,000; and (ii) a Warrant to purchase 154,354 shares of the Company’s
common stock, par value $0.01 per share, at an exercise price per share of
$6.58.





The Chief
Executive Officer and the Chief Financial Officer are required to certify
compliance with the compensation provisions of the CPP program.  Our
certifications are appended to this 10-K in Exhibit 99.1 and 99.2.





Securities
and Exchange Commission Reporting





The
Company maintains an Internet website located at www.pathfinderbank.com
on which, among other things, the Company makes available, free of charge,
various reports that it files with or furnishes to the Securities and Exchange
Commission, including its Annual Report on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K.  The Company has also made
available on its website its Audit Committee Charter, Compensation Committee
Charter, Governance Guidelines (which serve as the Nominating / Governance
Committee’s charter) and Code of Ethics.  These reports are made
available as soon as reasonably practicable after these reports are filed with
or furnished to the Securities and Exchange Commission.





The
Company's Annual Report on Form 10-K may be accessed on the Company's website at
www.pathfinderbank.com/annualmeeting.








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10
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FEDERAL
AND STATE TAXATION





Federal
Taxation





The
following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of
the tax rules applicable to the Company or the Bank.





Bad Debt
Reserves.  Prior to the Tax
Reform Act of 1996 (“the 1996 Act”), the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the
reserve.  These additions could, within specified formula limits, be
deducted in arriving at the Bank's taxable income.  As a result of the
1996 Act, the Bank must use the small bank experience method in computing its
bad debt deduction.





Taxable
Distributions and Recapture.  Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitionaltests.  New
federal legislation eliminated these thrift related recapture
rules.  However, under current law, pre-1988 reserves remain subject
to recapture should the Bank cease to retain a bank or thrift charter or make
certain non-dividend distributions.





Minimum
Tax.   The Internal Revenue Code imposes an alternative
minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus
certain tax preferences ("alternative minimum taxable income" or
"AMTI").  The AMT is payable to the extent such AMTI is in excess of
an exemption amount.  Net operating losses can offset no more than 90%
of AMTI.  Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years.





Net Operating
Loss Carryovers.  A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years.





State
Taxation





New York
Taxation.  The Bank is subject to the New York State Franchise
Tax on Banking Corporations in an annual amount equal to the greater of
(i) 7.1% of the Bank's "entire net income" allocable to New York State
during the taxable year, or (ii) the applicable alternative minimum
tax.  The alternative minimum tax is generally the greater of
(a) 0.01% of the value of the Bank's assets allocable to New York State
with certain modifications, (b) 3% of the Bank's "alternative entire net
income" allocable to New York State, or (c) $250.  Entire net
income is similar to federal taxable income, subject to certain modifications
and alternative entire net income is equal to entire net income without certain
modifications.  Net operating losses arising in the current period can
be carried forward to the succeeding 20 taxable years.





Neither
the Internal Revenue Service or New York State have examined our federal or
state tax returns within the past 5 years.








ITEM
1A: RISK FACTORS





Not
required of a smaller reporting company.








ITEM
1B:  UNRESOLVED STAFF COMMENTS





None.








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ITEM
2: PROPERTIES


The Bank
conducts its business through its main office located in Oswego, New York, and
six branch offices located in Oswego County.  The following table sets
forth certain information concerning the main office and each branch office of
the Bank at December 31, 2009.  The aggregate net book value of
the Bank's premises and equipment was $7.2 million at December 31,
2009.  For additional information regarding the Bank's properties, see
Notes 7 and 15 to the Consolidated Financial Statements.
 
 LOCATION
              OPENING
      DATE
              OWNED/LEASEDMain
      Office
                214
      West First Street
                Oswego,
      New York  13126
              1874
              OwnedPlaza
      Branch
                Route
      104, Ames Plaza
                Oswego,
      New York  13126
              1989
              Owned
      (1)Mexico
      Branch
                Norman
      & Main Streets
                Mexico,
      New York  13114
              1978
              OwnedOswego
      East Branch
                34
      East Bridge Street
                Oswego,
      New York  13126
              1994
              OwnedLacona
      Branch
                1897
      Harwood Drive
                Lacona,
      New York 13083
              2002
              OwnedFulton
      Branch
                5
      West First Street South
                Fulton,
      New York  13069
                
                Central
      Square Branch
                3025
      East Ave
                Central
      Square, New York  13036
              2003
                
                
                
                2005
              Owned
      (2)
                
                
                
                Owned
 (1)
              The
      building is owned; the underlying land is leased with an annual rent of
      $21,000
 (2)
              The
      building is owned; the underlying land is leased with an annual rent of
      $30,000






ITEM
3: LEGAL PROCEEDINGS





There are
various claims and lawsuits to which the Company is periodically involved
incident to the Company's business.  In the opinion of management,
such claims and lawsuits in the aggregate are not expected to have a material
adverse impact on the Company's consolidated financial condition and results of
operations.








ITEM
4: (REMOVED AND RESERVED)











Page
12
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PART  II








ITEM
5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





Pathfinder
Bancorp, Inc.'s common stock currently trades on the Nasdaq Capital Market under
the symbol "PBHC".  There were 510 shareholders of record as of March
17, 2010.  The following table sets forth the high and low closing bid
prices and dividends paid per share of common stock for the periods
indicated:





DividendQuarter
      Ended:
            
            High
            
            
            Low
            
            
            PaidDecember
      31, 2009
            
            $
            7.000
            
            
            $
            5.550
            
            
            $
            0.0300September
      30, 2009
            
            
            7.980
            
            
            
            5.430
            
            
            
            0.0300June
      30, 2009
            
            
            8.000
            
            
            
            4.950
            
            
            
            0.0600March
      31, 2009
            
            
            8.200
            
            
            
            4.750
            
            
            
            -December
      31, 2008
            
            $
            13.500
            
            
            $
            6.000
            
            
            $
            0.1025September
      30, 2008
            
            
            10.250
            
            
            
            6.890
            
            
            
            0.1025June
      30, 2008
            
            
            11.250
            
            
            
            7.000
            
            
            
            0.1025March
      31, 2008
            
            
            16.550
            
            
            
            9.720
            
            
            
            0.1025





Dividends
and Dividend History





The
Company has historically paid regular quarterly cash dividends on its common
stock, and the Board of Directors presently intends to continue the payment of
regular quarterly cash dividends, subject to the need for those funds for debt
service and other purposes.  Payment of dividends on the common stock
is subject to determination and declaration by the Board of Directors and will
depend upon a number of factors, including capital requirements, regulatory
limitations on the payment of dividends, Pathfinder Bank and its subsidiaries
results of operations and financial condition, tax considerations, and general
economic conditions.  Given deteriorating economic conditions, and the
Company’s focus on the retention and growth of capital, it is unlikely that
future, near-term dividends will replicate the historical dividend payouts of
2008 and prior years.  The Company's mutual holding company,
Pathfinder Bancorp, M.H.C., may elect to waive or receive dividends each time
the Company declares a dividend.  The election to waive the dividend
receipt requires prior non-objection of the OTS.  The Mutual Holding
Company did not waive the right to receive its portion of the cash dividends
declared during 2009.  During 2008, the Mutual Holding Company waived
one quarter’s dividends totaling $163,000.





Since the
Company has chosen to participate in the Treasury’s CPP program, its ability to
increase dividends to its stockholders is limited without prior approval by the
United States Treasury Department.


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13
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ITEM 6: SELECTED FINANCIAL DATA





The
Company is the parent company of the Bank and Pathfinder Statutory Trust
I.  The Bank has three operating subsidiaries – Pathfinder Commercial
Bank, Pathfinder REIT, Inc., and Whispering Oaks Development Corp.





The
following selected consolidated financial data sets forth certain financial
highlights of the Company and should be read in conjunction with the
consolidated financial statements and related notes, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere  in this annual report on  Form
10-K.





2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Year
      End (In
      thousands)Total
      assets
            
            $
            371,692
            
            
            $
            352,760
            
            
            $
            320,691
            
            
            $
            301,382
            
            
            $
            296,948Loans
      receivable, net
            
            
            259,387
            
            
            
            247,400
            
            
            
            221,046
            
            
            
            201,713
            
            
            
            187,889Deposits
            
            
            296,839
            
            
            
            269,438
            
            
            
            251,085
            
            
            
            245,585
            
            
            
            236,377Equity
            
            
            29,238
            
            
            
            19,495
            
            
            
            21,704
            
            
            
            20,850
            
            
            
            20,928For
      the Year (In
      thousands)Net
      interest income
            
            $
            11,777
            
            
            $
            10,675
            
            
            $
            8,667
            
            
            $
            8,346
            
            
            $
            8,742Core
      noninterest income (d)
            
            
            2,724
            
            
            
            2,786
            
            
            
            2,622
            
            
            
            2,396
            
            
            
            2,333Net
      gains/(losses) on sales of impairment ofinvestment
      securities
            
            
            112
            
            
            
            (2,191
            )
            
            
            378
            
            
            
            299
            
            
            
            (205
            )Net
      gains/(losses) on sales of loans andforeclosed
      real estate
            
            
            54
            
            
            
            (44
            )
            
            
            42
            
            
            
            (80
            )
            
            
            (88
            )Noninterest
      expense (e)
            
            
            10,381
            
            
            
            9,882
            
            
            
            9,799
            
            
            
            9,646
            
            
            
            10,023Regulatory
      assessments
            
            
            745
            
            
            
            53
            
            
            
            39
            
            
            
            22
            
            
            
            37Net
      income
            
            
            1,615
            
            
            
            368
            
            
            
            1,122
            
            
            
            1,028
            
            
            
            462Per
      ShareNet
      income (basic)
            
            $
            0.61
            
            
            $
            0.15
            
            
            $
            0.45
            
            
            $
            0.42
            
            
            $
            0.19Book
      value per common share
            
            
            9.31
            
            
            
            8.04
            
            
            
            8.74
            
            
            
            8.45
            
            
            
            8.50Tangible
      book value per common share (a)
            
            
            7.77
            
            
            
            6.50
            
            
            
            7.19
            
            
            
            6.82
            
            
            
            6.77Cash
      dividends declared
            
            
            0.12
            
            
            
            0.41
            
            
            
            0.41
            
            
            
            0.41
            
            
            
            0.41RatiosReturn
      on average assets
            
            
            0.45
            %
            
            
            0.11
            %
            
            
            0.36
            %
            
            
            0.34
            %
            
            
            0.15
            %Return
      on average equity
            
            
            7.04
            
            
            
            1.70
            
            
            
            5.27
            
            
            
            4.86
            
            
            
            2.16Return
      on average tangible equity (a)
            
            
            8.45
            
            
            
            2.07
            
            
            
            6.47
            
            
            
            6.04
            
            
            
            2.72Average
      equity to average assets
            
            
            6.40
            
            
            
            6.32
            
            
            
            6.82
            
            
            
            7.03
            
            
            
            6.95Dividend
      payout ratio (b)
            
            
            18.45
            
            
            
            232.61
            
            
            
            62.03
            
            
            
            66.73
            
            
            
            147.84Allowance
      for loan losses to loans receivable
            
            
            1.17
            
            
            
            0.99
            
            
            
            0.76
            
            
            
            0.74
            
            
            
            0.89Net
      interest rate spread
            
            
            3.40
            
            
            
            3.22
            
            
            
            2.81
            
            
            
            2.92
            
            
            
            3.07Noninterest
      income to average assets
            
            
            0.81
            
            
            
            0.16
            
            
            
            0.98
            
            
            
            0.87
            
            
            
            0.66Noninterest
      expense to average assets
            
            
            3.10
            
            
            
            2.91
            
            
            
            3.15
            
            
            
            3.21
            
            
            
            3.28Efficiency
      ratio (c)
            
            
            76.36
            
            
            
            73.02
            
            
            
            85.89
            
            
            
            88.71
            
            
            
            89.16





(a)
            Tangible
      equity excludes intangible assets.


(b)
            The
      dividend payout ratio is calculated using dividends declared and not
      waived by the  Mutual Holding Company, divided by net
      income.


(c)
            The
      efficiency ratio is calculated as noninterest expense, including
      regulatory assessments, divided by the sum of taxable-equivalent net
      interest income and noninterest income excluding net gains (losses) on
      sales and impairment of investment securities and net gains (losses) on
      sales of loans and foreclosed real
estate.


(d)
            Exclusive
      of net gains (losses) on sales and impairment of investment securities and
      net gains (losses) on sales of loans and foreclosed real
      estate.


(e)
            Exclusive
      of regulatory assessments.


(f)
            As
      calculated in this ratio, noninterest income includes net gains (losses)
      on sales and impairment of investment securities and net gains (losses) on
      sales of loans and foreclosed real
estate.








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14
 Table of Contents


ITEM 7: MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





INTRODUCTION





Throughout
Management’s Discussion and Analysis (“MD&A”) the term, “the Company”,
refers to the consolidated entity of Pathfinder Bancorp,
Inc.  Pathfinder Bank and Pathfinder Statutory Trust II are wholly
owned subsidiaries of Pathfinder Bancorp, Inc., however, Pathfinder Statutory
Trust II is not consolidated for reporting purposes (see Note 10 of the
consolidated financial statements).  Pathfinder Commercial Bank,
Pathfinder REIT, Inc. and Whispering Oaks Development Corp. are wholly owned
subsidiaries of Pathfinder Bank.  At December 31, 2009, Pathfinder
Bancorp, M.H.C, the Company’s mutual holding company parent, whose activities
are not included in the consolidated financial statements or the MD&A, held
63.7% of the Company’s outstanding common stock and the public held 36.3% of the
outstanding common stock.





The
Company's business strategy is to operate as a well-capitalized, profitable and
independent community bank dedicated to providing value-added products and
services to our customers.  Generally, the Company has sought to
implement this strategy by emphasizing retail deposits as its primary source of
funds and maintaining a substantial part of its assets in locally-originated
residential first mortgage loans, loans to business enterprises operating in its
markets, and in investment securities.  Specifically, the Company's
business strategy incorporates the following elements: (i) operating as an
independent community-oriented financial institution; (ii) maintaining capital
in excess of regulatory requirements; (iii) emphasizing investment in
one-to-four family residential mortgage loans, loans to small businesses and
investment securities; and (iv) maintaining a strong retail deposit
base.





The
Company's net income is primarily dependent on its net interest income, which is
the difference between interest income earned on its investments in mortgage and
other loans, investment securities and other assets, and its cost of funds
consisting of interest paid on deposits and borrowings.  The Company's
net income also is affected by its provision for loan losses, as well as by the
amount of noninterest income, including income from fees, service charges and
servicing rights, net gains and losses on sales of securities, loans and
foreclosed real estate, and noninterest expense such as employee compensation
and benefits, occupancy and equipment costs, data processing costs and income
taxes.  Earnings of the Company also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, of
which these events are beyond the control of the Company.  In
particular, the general level of market rates tends to be highly
cyclical.





APPLICATION
OF CRITICAL ACCOUNTING POLICIES





The
Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry.  Application of these
principles requires management to make estimates, assumptions and judgments that
affect the amounts reported in the financial statements and accompanying
notes.  These estimates, assumptions and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions and judgments.  Certain policies inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported.  Estimates, assumptions and
judgments are necessary when assets and liabilities are required to be recorded
at fair value or when an asset or liability needs to be recorded contingent upon
a future event.  Carrying assets and liabilities at fair value
inherently results in more financial statement volatility.  The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available.  When third party information is
not available, valuation adjustments are estimated in good faith by
management.





The most
significant accounting policies followed by the Company are presented in Note 1
to the consolidated financial statements.  These policies, along with
the disclosures presented in the other financial statement notes and in this
discussion, provide information on how significant assets and liabilities are
valued in the consolidated financial statements and how those values are
determined.  Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions and
estimates underlying those amounts, management has identified








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15
 Table of Contents


the
allowance for loan losses, deferred income taxes, pension obligations, the
evaluation of goodwill for impairment, the evaluation of investment securities
for other than temporary impairment and the estimation of fair values for
accounting and disclosure purposes to be the accounting areas that require the
most subjective and complex judgments, and as such, could be the most subject to
revision as new information becomes available.





The
allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change.  The loan portfolio also represents the largest
asset type on the consolidated statements of condition.  Note 1 to the
consolidated financial statements describes the methodology used to determine
the allowance for loan losses, and a discussion of the factors driving changes
in the amount of the allowance for loan losses is included in this
report.





Deferred
income tax assets and liabilities are determined using the liability
method.  Under this method, the net deferred tax asset or liability is
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases as well as net operating and capital loss carry
forwards.  Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled.  The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date.  To the extent that current available evidence about the future
raises doubt about the likelihood of a deferred tax asset being realized, a
valuation allowance is established.  The judgment about the level of
future taxable income, including that which is considered capital, is inherently
subjective and is reviewed on a continual basis as regulatory and business
factors change.  A valuation allowance of
$458,000 was maintained at December 31, 2009, as management believes it may not
generate sufficient capital gains to offset its capital loss carry
forward.  The Company’s effective tax rate differs from the statutoryrate due to non-taxable investment securities, and bank owned life
insurance offset by the valuation allowance established on a portion of the
capital loss carry forwards.




Pension
and post-retirement benefit plan liabilities and expenses are based upon
actuarial assumptions of future events, including fair value of plan assets,
interest rates, rate of future compensation increases and the length of time the
Company will have to provide those benefits. The assumptions used by management
are discussed in Note 11 to the consolidated annual financial
statements.





As a
result of deteriorating economic conditions in the financial markets, which
impacted the trading value of the Company’s common stock, management engaged an
independent third party to test the Company’s goodwill for impairment as of
December 31, 2008.  Utilizing a three-step valuation approach, the
third party performed testing. Management re-evaluated the prior year testing
results from the valuation and based on the prior year determination and
improvements in Company metrics and general economic trends, management has
determined that the carrying value of goodwill was not impaired as of December
31, 2009.  The valuation approach is described in Note 8 to the
consolidated financial statements.





The
Company carries all of its investments at fair value with any unrealized gains
or losses reported net of deferred tax as an adjustment to shareholders' equity,
except for debt security impairment losses, which are charged to earnings when
the loss is credit-related and recognized in other comprehensive income when the
loss is noncredit-related and the security is not expected to be
sold.  The Company's ability to fully realize the value of its
investments in various debt securities is dependent on the underlying
creditworthiness of the issuing organization.  In evaluating the debt
security portfolio for other-than-temporary impairment losses, management
considers (1) if we intend to sell the security; (2) if it is “more likely than
not” we will be required to sell the security before recovery of its amortized
cost basis; or (3) the present value of expected cash flows is not








Page
16
 Table of Contents


sufficient
to recover the entire amortized cost basis.   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. Based on management's assessments
during the year ended December 31, 2009, the Company recorded
other-than-temporary impairment charges of $693,000, including a
$298,000 charge associated with its holdings in a senior unsecured note issued
by CIT Group, Inc. after the Company concluded that the liquidation of its
holding at a loss was prudent and the security was sold on July 16,
2009.  The remaining impairment charges were capital losses
taken on the AMF Large Cap Equity Fund in the amount of $104,000, $286,000 in
the AMF Ultra Short Mortgage Fund, $1,000 on a stock investment in The Phoenix
Companies and $4,000 on the stock investment in Alliance Financial
Corp.   In addition to the impairment charges, the Company’s
available for sale investment portfolio at December 31, 2009 includes unrealized
losses of $842,000.  See Note 3 to the consolidated financial
statements for further discussion of the unrealized losses.  Management continually
analyzes the portfolio to determine if further impairment has occurred that may
be deemed as other-than-temporary.  Further charges are possible
depending on future economic conditions.





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





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


EXECUTIVE
SUMMARY





Total
deposits for the Company increased 10.2%, to $296.8 million at December 31,
2009, while the average balance of deposits increased $22.7 million to $288.5
million for the year ended December 31, 2009.  The Company will
continue to focus on building market share in the Central Square and Fulton
markets.  Overall, in Oswego County, Pathfinder Bank has the majority
of the current deposit market share. Pathfinder continues to develop core
deposit relationships in all markets by developing demand deposit
relationships.  Efforts will also be focused on the expansion of
commercial deposit relationships with the Bank’s existing commercial lending
customers.





Total
assets increased 5.4% from December 31, 2008 to December 31, 2009, primarily in
the loan portfolio.  The loan portfolio increased 4.8% with net growth
primarily in the commercial loan categories. The Company expects to concentrate
on continued commercial mortgage and commercial loan portfolio growth during
2010. The ratio of non-performing assets to total assets was 0.67% at December
31, 2009 compared to 0.75% in the prior year.  The decrease reflects
lower levels of both foreclosed real estate and total non-performing loans
combined with an increase in assets.    Non-performing loans
decreased $10,000 and foreclosed real estate decreased $154,000 since December
31, 2008.


Net
income for 2009 was $1.6 million, as compared to $368,000 in
2008.  Net income available to common shareholders was $1.5 million,
or $0.61 per share, compared to $0.15 per share for the previous
year.   The improvement in income was primarily the result of the
Company recording impairment charges on investment security holdings totaling
$1.6 million, net of the related tax benefits in 2008 compared to 2009
impairment charges totaling $574,000, net of
the related tax benefits.  Net income in 2009 also includes $531,000
in net gains on the sale of investment securities after tax.







Page
17
 Table of Contents


RESULTS
OF OPERATIONS





Net
income for 2009 was $1.6 million, an increase of $1.2 million, or 339%, compared
to net income of $368,000 for 2008.  Basic and diluted earnings per
share increased to $0.61 per share for the year ended December 31, 2009 from
$0.15 per share, for the year ended December 31, 2008.  Return on
average equity increased to 7.04% in 2009 from 1.70% in 2008.





Net
interest income, on a tax equivalent basis, increased $1.0 million, or 9.5%,
resulting from the combination of volume increases in all loan categories and
rate decreases applied to all interest-earning liabilities.  The
provision for loan losses for the year ended December 31, 2009 increased
$56,000, or 6.8%. The elevated level of provisioning by the Company during the
prior two years reflects management’s assessment of the increased inherent risk
associated with increasing commercial lending activities, the overall growth in
the total loan portfolio and deteriorating economic conditions.  The
Company experienced a 425% increase in noninterest
income.  Noninterest income decreased 2%, exclusive of securities
gains and losses, primarily attributable to decreased earnings on bank-owned
life insurance.  The reduction in impairment charges on investment
securities was the most significant factor in noninterest income
improvement.  Noninterest expenses increased 12% primarily due to
increases in personnel expense and FDIC insurance assessments.





Net
Interest Income





Net
interest income is the Company's primary source of operating income for payment
of operating expenses and providing for possible loan losses.  It is
the amount by which interest earned on interest-earning deposits, loans and
investment securities, exceeds the interest paid on deposits and borrowed
money.  Changes in net interest income and the net interest margin
ratio result from the interaction between the volume and composition of earning
assets and interest-bearing liabilities, and their respective yields and funding
costs.





Net
interest income, on a tax-equivalent basis, increased $1.0 million, or 9.5%, to
$11.8 million for the year ended December 31, 2009, as compared to $10.8 million
for the year ended December 31, 2008.  The Company's net interest
margin for 2009 increased to 3.56% from 3.43% in 2008.  The increase
in net interest income is attributable to a decrease in the cost of
interest-bearing liabilities, partially offset by an increase in the average
balance of interest-bearing liabilities.  Although the average balance
of interest-earning assets increased, the decline in the yield on those assets
resulted in a reduction in the interest income earned.





The
average balance of interest-earning assets increased $17.2 million, or 5.4%,
during 2009 and the average balance of interest-bearing liabilities increased by
$14.2 million, or 4.9%.  The increase in the average balance of
interest earning assets primarily resulted from a $19.0 million increase in the
average balance of the loan portfolio and a $4.7 million increase in the average
balance of interest earning deposits, offset by a $6.5 million reduction in the
average balance of the security investment portfolio. The increase in the
average balance of interest-bearing liabilities primarily resulted from a $22.1
million, or 9.2%, increase in the average balance of deposits, offset by a $7.9
million, or 15.7%, decrease in the average balance of borrowed
funds.  Interest income, on a tax-equivalent basis, decreased
$620,000, or 3.4%, during 2009. The decrease in yield on interest earning assets
to 5.38% in 2009 from 5.87% in 2008 was partially offset by the 5.4% increase in
volume, but the volume increase was not enough to make up for the overall
reduction in yields.  Interest expense on deposits decreased $1.2
million, or 21.7%, as the cost of deposits dropped 67 basis points to 1.69% in
2009 from 2.36% in 2008.  Interest expense on borrowings decreased
$419,000, or 20.8%, during 2009 as the 15.7% decrease in the average balance of
borrowed funds was combined with a decrease in the cost of borrowed funds to
3.75% in 2009 from 4.00% in 2008.





Page
18
 Table of Contents








Average
Balances and Rates





The following
table sets forth information concerning average interest-earning assets and
interest-bearing liabilities and the yields and rates thereon. Interest income
and resultant yield information in the table is on a fully tax-equivalent basis
using marginal federal income tax rates of 34%. Averages are computed on the
daily average balance for each month in the period divided by the number of days
in the period. Yields and amounts earned include loan fees. Non-accrual loans
have been included in interest-earning assets for purposes of these
calculations.





For
      the Years Ended December 31,2009
            
            
            2008
            
            
            2007Average
            
            
            
            
            
            
            
            
            Average
            
            
            
            
            
            
            
            
            AverageAverage
            
            
            
            
            
            Yield
      /
            
            
            Average
            
            
            
            
            
            Yield
      /
            
            
            Average
            
            
            
            
            
            Yield
      /(Dollars
      in thousands)
            
            Balance
            
            
            Interest
            
            
            Cost
            
            
            Balance
            
            
            Interest
            
            
            Cost
            
            
            Balance
            
            
            Interest
            
            
            CostInterest-earning
      assets:Real
      estate loans residential
            
            $
            133,442
            
            
            $
            7,463
            
            
            
            5.59
            %
            
            $
            130,702
            
            
            $
            7,527
            
            
            
            5.76
            %
            
            $
            120,079
            
            
            $
            6,945
            
            
            
            5.78
            %Real
      estate loans commercial
            
            
            58,424
            
            
            
            4,024
            
            
            
            6.89
            %
            
            
            49,040
            
            
            
            3,620
            
            
            
            7.38
            %
            
            
            43,573
            
            
            
            3,309
            
            
            
            7.59
            %Commercial
      loans
            
            
            31,665
            
            
            
            1,607
            
            
            
            5.08
            %
            
            
            27,033
            
            
            
            1,751
            
            
            
            6.48
            %
            
            
            23,710
            
            
            
            1,976
            
            
            
            8.33
            %Consumer
      loans
            
            
            28,487
            
            
            
            1,767
            
            
            
            6.20
            %
            
            
            26,291
            
            
            
            1,915
            
            
            
            7.28
            %
            
            
            23,011
            
            
            
            1,894
            
            
            
            8.23
            %Taxable
      investment securities
            
            
            71,455
            
            
            
            2,942
            
            
            
            4.12
            %
            
            
            74,105
            
            
            
            3,365
            
            
            
            4.54
            %
            
            
            66,230
            
            
            
            2,881
            
            
            
            4.35
            %Tax-exempt
      investment securities
            
            
            1,464
            
            
            
            65
            
            
            
            4.44
            %
            
            
            5,252
            
            
            
            255
            
            
            
            4.86
            %
            
            
            5,446
            
            
            
            258
            
            
            
            4.74
            %Interest-earning
      deposits
            
            
            7,511
            
            
            
            6
            
            
            
            0.08
            %
            
            
            2,851
            
            
            
            61
            
            
            
            2.14
            %
            
            
            5,050
            
            
            
            211
            
            
            
            4.18
            %Total
      interest-earning assets
            
            
            332,448
            
            
            
            17,874
            
            
            
            5.38
            %
            
            
            315,274
            
            
            
            18,494
            
            
            
            5.87
            %
            
            
            287,099
            
            
            
            17,474
            
            
            
            6.08
            %Noninterest-earning
      assets:Other
      assets
            
            
            29,704
            
            
            
            
            
            
            
            
            
            
            
            30,274
            
            
            
            
            
            
            
            
            
            
            
            27,774Allowance
      for loan losses
            
            
            (2,731
            )
            
            
            
            
            
            
            
            
            
            
            (2,006
            )
            
            
            
            
            
            
            
            
            
            
            (1,583
            )Net
      unrealized losseson
      available for sale securities
            
            
            (620
            )
            
            
            
            
            
            
            
            
            
            
            (1,690
            )
            
            
            
            
            
            
            
            
            
            
            (1,372
            )Total
      assets
            
            $
            358,801
            
            
            
            
            
            
            
            
            
            
            $
            341,852
            
            
            
            
            
            
            
            
            
            
            $
            311,918Interest-bearing
      liabilities:NOW
      accounts
            
            $
            26,055
            
            
            $
            72
            
            
            
            0.28
            %
            
            $
            23,762
            
            
            $
            95
            
            
            
            0.40
            %
            
            $
            22,235
            
            
            $
            113
            
            
            
            0.51
            %Money
      management accounts
            
            
            11,037
            
            
            
            35
            
            
            
            0.32
            %
            
            
            10,574
            
            
            
            52
            
            
            
            0.49
            %
            
            
            11,348
            
            
            
            89
            
            
            
            0.78
            %MMDA
      accounts
            
            
            35,571
            
            
            
            246
            
            
            
            0.69
            %
            
            
            29,181
            
            
            
            570
            
            
            
            1.95
            %
            
            
            23,682
            
            
            
            937
            
            
            
            3.96
            %Savings
      and club accounts
            
            
            53,726
            
            
            
            87
            
            
            
            0.16
            %
            
            
            52,482
            
            
            
            168
            
            
            
            0.32
            %
            
            
            53,359
            
            
            
            279
            
            
            
            0.52
            %Time
      deposits
            
            
            135,965
            
            
            
            3,994
            
            
            
            2.94
            %
            
            
            124,267
            
            
            
            4,777
            
            
            
            3.84
            %
            
            
            122,333
            
            
            
            5,483
            
            
            
            4.48
            %Junior
      subordinated debentures
            
            
            5,155
            
            
            
            149
            
            
            
            2.89
            %
            
            
            5,155
            
            
            
            257
            
            
            
            4.99
            %
            
            
            6,454
            
            
            
            511
            
            
            
            7.81
            %Borrowings
            
            
            37,340
            
            
            
            1,446
            
            
            
            3.87
            %
            
            
            45,239
            
            
            
            1,756
            
            
            
            3.88
            %
            
            
            25,063
            
            
            
            1,230
            
            
            
            4.91
            %Total
      interest-bearing liabilities
            
            
            304,849
            
            
            
            6,029
            
            
            
            1.98
            %
            
            
            290,660
            
            
            
            7,675
            
            
            
            2.64
            %
            
            
            264,474
            
            
            
            8,642
            
            
            
            3.27
            %Noninterest-bearing
      liabilities:Demand
      deposits
            
            
            26,114
            
            
            
            
            
            
            
            
            
            
            
            25,493
            
            
            
            
            
            
            
            
            
            
            
            22,828Other
      liabilities
            
            
            4,888
            
            
            
            
            
            
            
            
            
            
            
            4,088
            
            
            
            
            
            
            
            
            
            
            
            3,338Total
      liabilities
            
            
            335,851
            
            
            
            
            
            
            
            
            
            
            
            320,241
            
            
            
            
            
            
            
            
            
            
            
            290,640Shareholders'
      equity
            
            
            22,950
            
            
            
            
            
            
            
            
            
            
            
            21,611
            
            
            
            
            
            
            
            
            
            
            
            21,278Total
      liabilities & shareholders' equity
            
            $
            358,801
            
            
            
            
            
            
            
            
            
            
            $
            341,852
            
            
            
            
            
            
            
            
            
            
            $
            311,918Net
      interest income
            
            
            
            
            
            $
            11,845
            
            
            
            
            
            
            
            
            
            
            $
            10,819
            
            
            
            
            
            
            
            
            
            
            $
            8,832Net
      interest rate spread
            
            
            
            
            
            
            
            
            
            
            3.40
            %
            
            
            
            
            
            
            
            
            
            
            3.23
            %
            
            
            
            
            
            
            
            
            
            
            2.81
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            3.56
            %
            
            
            
            
            
            
            
            
            
            
            3.43
            %
            
            
            
            
            
            
            
            
            
            
            3.07
            %Ratio
      of average interest-earning assetsto
      average interest-bearing liabilities
            
            
            
            
            
            
            
            
            
            
            109.05
            %
            
            
            
            
            
            
            
            
            
            
            108.47
            %
            
            
            
            
            
            
            
            
            
            
            108.55
            %


Page
19
 Table of Contents


Interest
Income





Changes
in interest income result from changes in the average balances of loans,
securities and interest-earning deposits and the related yields on those
balances.  Interest income on a tax-equivalent basis decreased
$620,000, or 3.4%.  Average loans increased 8.1% in 2009, with yields
decreasing 46 basis points to 5.90%. The Company's average residential mortgage
loan portfolio increased $2.7 million, or 2.1%, when comparing 2009 to
2008.  The average yield on the residential mortgage loan portfolio
decreased 17 basis points to 5.59% in 2009 from 5.76% in 2008. The average
balance of commercial real estate loans increased $9.4 million, or 19.1%, while
the yield decreased to 6.89% in 2009 from 7.38% in 2008. Average commercial
loans increased 17.1% and the tax-equivalent yield decreased to 5.08% in 2009
compared to 6.48%, in 2008.  The average balance of consumer loans
increased $2.2 million, or 8.4% when compared to 2008. The average yield
decreased 108 basis points, to 6.20% from 7.28% in 2008.





Interest
income on investment securities decreased 16.9% from 2008, resulting from a
decrease in the average balance of investment securities (taxable and
tax-exempt) of $6.5 million, or 8.1%, to $72.9 million in 2009 from $79.4
million in 2008.  The average yield decreased 43 basis points to 4.13%
in 2009 from 4.56% in 2008.





Interest
Expense





Changes
in interest expense result from changes in the average balances of deposits and
borrowings and the related interest costs on those balances.  Interest
expense decreased $1.6 million, or 21.5%, in 2009, when compared to
2008.  The decrease in the cost of funds resulted from a decrease in
the average cost of interest-bearing liabilities of 66 basis points, to 1.98% in
2009 from 2.64% in 2008, partially offset by a $14.2 million increase in the
average balance of interest-bearing liabilities during 2009.  The
average cost of deposits decreased 67 basis points to 1.69% during 2009 from
2.36% for 2008.  The average balance of interest-bearing deposits
increased $22.1 million to $262.4 million in 2009 from $240.3 million in
2008.  The increase in the average balance of deposits resulted from
increases in all deposit categories.   The largest increases in
average deposits came from a 9.6% increase in interest bearing demand deposit
accounts, a 21.9% increase in MMDA accounts and a 9.4% increase in time
deposits.  The cost of junior subordinated debentures underlying our
trust preferred securities decreased 210 basis points, decreasing interest
expense by $108,000, due to the subordinated debentures adjustable rate being
tied to LIBOR.  The average balance of borrowed funds decreased $7.9
million to $37.3 million in 2009 from $45.2 million in 2008.  The
average cost of borrowed funds decreased one basis point, to 3.87% in 2009 from
3.88% in 2008.














Page
20
 Table of Contents





Rate/Volume
Analysis





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





Years
      Ended December 31,2009
      vs. 2008
            
            
            2008
      vs. 2007Increase/(Decrease)
      Due to
            
            
            Increase/(Decrease)
      Due toTotal
            
            
            
            
            
            
            
            
            TotalIncrease
            
            
            
            
            
            
            
            
            Increase(In
      thousands)
            
            Volume
            
            
            Rate
            
            
            (Decrease)
            
            
            Volume
            
            
            Rate
            
            
            (Decrease)Interest
      Income:Real
      estate loans residential
            
            $
            158
            
            
            $
            (222
            )
            
            $
            (64
            )
            
            $
            606
            
            
            $
            (24
            )
            
            $
            582Real
      estate loans commercial
            
            
            657
            
            
            
            (253
            )
            
            
            404
            
            
            
            405
            
            
            
            (94
            )
            
            
            311Commercial
      loans
            
            
            281
            
            
            
            (425
            )
            
            
            (144
            )
            
            
            252
            
            
            
            (477
            )
            
            
            (225
            )Consumer
      loans
            
            
            151
            
            
            
            (299
            )
            
            
            (148
            )
            
            
            253
            
            
            
            (232
            )
            
            
            21Taxable
      investment securities
            
            
            (117
            )
            
            
            (304
            )
            
            
            (421
            )
            
            
            344
            
            
            
            140
            
            
            
            484Tax-exempt
      investment securities
            
            
            (170
            )
            
            
            (20
            )
            
            
            (190
            )
            
            
            (9
            )
            
            
            6
            
            
            
            (3
            )Interest-earning
      deposits
            
            
            40
            
            
            
            (97
            )
            
            
            (57
            )
            
            
            (71
            )
            
            
            (79
            )
            
            
            (150
            )Total
      interest income
            
            
            1,000
            
            
            
            (1,620
            )
            
            
            (620
            )
            
            
            1,780
            
            
            
            (760
            )
            
            
            1,020Interest
      Expense:NOW
      accounts
            
            
            8
            
            
            
            (31
            )
            
            
            (23
            )
            
            
            7
            
            
            
            (25
            )
            
            
            (18
            )Money
      management accounts
            
            
            2
            
            
            
            (19
            )
            
            
            (17
            )
            
            
            (6
            )
            
            
            (31
            )
            
            
            (37
            )MMDA
      accounts
            
            
            104
            
            
            
            (428
            )
            
            
            (324
            )
            
            
            184
            
            
            
            (551
            )
            
            
            (367
            )Savings
      and club accounts
            
            
            4
            
            
            
            (85
            )
            
            
            (81
            )
            
            
            (5
            )
            
            
            (106
            )
            
            
            (111
            )Time
      deposits
            
            
            417
            
            
            
            (1,200
            )
            
            
            (783
            )
            
            
            86
            
            
            
            (792
            )
            
            
            (706
            )Junior
      subordinated debentures
            
            
            -
            
            
            
            (108
            )
            
            
            (108
            )
            
            
            (90
            )
            
            
            (164
            )
            
            
            (254
            )Borrowings
            
            
            (305
            )
            
            
            (5
            )
            
            
            (310
            )
            
            
            828
            
            
            
            (302
            )
            
            
            526Total
      interest expense
            
            
            230
            
            
            
            (1,876
            )
            
            
            (1,646
            )
            
            
            1,004
            
            
            
            (1,971
            )
            
            
            (967
            )Net
      change in net interest income
            
            $
            770
            
            
            $
            256
            
            
            $
            1,026
            
            
            $
            776
            
            
            $
            1,211
            
            
            $
            1,987





Provision
for Loan Losses





The
provision for loan losses increased $56,000 to $876,000 for the year ended
December 31, 2009, as compared to the prior year.  The increased
provision is reflective of a growing loan portfolio that is more heavily
weighted to commercial term and commercial real estate loans, which have higher
inherent risk characteristics than a traditional consumer real estate
portfolio.  The current level of non-performing assets does not fall
significantly outside of the Bank’s historic trend levels, however, the
generally weak economic conditions nationally over the past two years, and the
current strain on consumer discretionary income have caused management to
carefully monitor and react to these trends by increasing the provision for loan
losses, maintaining the Company’s strict loan underwriting standards and
carefully monitoring the performance of the loan portfolio.




Page
21
 Table of Contents


Noninterest
Income





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





The
following table sets forth certain information on noninterest income for the
years indicated.








For
      the Years Ended December 31,(In
      thousands)
            
            2009
            
            
            2008Service
      charges on deposit accounts
            
            $
            1,496
            
            
            $
            1,492Earnings
      on bank owned life insurance
            
            
            226
            
            
            
            293Loan
      servicing fees
            
            
            233
            
            
            
            281Debit
      card interchange fees
            
            
            280
            
            
            
            275Other
      charges, commissions and fees
            
            
            489
            
            
            
            445Noninterest
      income before gains (losses)
            
            
            2,724
            
            
            
            2,786Net
      gains (losses) on sales and impairment of investment
      securities
            
            
            112
            
            
            
            (2,191
            )Net
      gains (losses) on sales of loans and foreclosed real
estate
            
            
            54
            
            
            
            (44
            )Total
      noninterest income
            
            $
            2,890
            
            
            $
            551








Noninterest income in 2009
increased 425%, when compared to 2008, primarily as a result of a net gain being
recorded on the sale and impairment of investment securities during 2009 as
compared to the net loss of $2.2 million recorded for the same in the prior
year.Noninterest income before gains and losses decreased $62,000, for
the year ended December 31, 2009. The decrease was comprised of a decrease in
earnings on bank owned life insurance and loan servicing fees, offset by an
increase in other charges, commissions and fees.   Earnings on
bank owned life insurance decreased 23%, which is based on the cash surrender
values of the insurance policies.  Loan servicing fees decreased 17%,
which is due to the combination of a drop in the volume of rate lock fees and
the collection of non-recurring one time fees during 2008 associated with
various commercial loans.  The reduction in fees was offset by
non-recurring administrative income recorded from the Company’s mutual holding
company parent that is not consolidated for financial statement reporting
purposes.  Revenue generated by service charges on deposit accounts
was consistent with the prior year, but may be significantly impacted in 2010 by
the implementation of new regulatory restrictions on the extended overdraft
program.  These changes apply to all financial institutions
participating in such programs.
 
 The small decrease in
noninterest income before gains and losses was offset by the significant change
from net losses on sales and impairment of investment securities and
loans in the prior year, to a net gain in the current year.  The net
gain in sales and impairment of investment securities is a result of gains
generated from the sales of securities through out the year, which were offset
by recording other-than-temporary impairment charges during the fourth quarter.
Net gains on the sale of loans and foreclosed real estate is the result of the
sale of fixed rate loans into the secondary market, offset by the sale of seven
foreclosed real estate properties at a loss and the adjustment to fair value of
one property.








Page
22





Noninterest
Expense





The
following table sets forth certain information on noninterest expense for the
years indicated.





For
      the Years Ended December 31,(In
      thousands)
            
            2009
            
            
            2008Salaries
      and employee benefits
            
            $
            5,577
            
            
            $
            5,172Building
      occupancy
            
            
            1,246
            
            
            
            1,322Data
      processing
            
            
            1,307
            
            
            
            1,330Professional
      and other services
            
            
            844
            
            
            
            771Regulatory
      assessments
            
            
            745
            
            
            
            53Other
      expenses
            
            
            1,407
            
            
            
            1,287Total
      noninterest expense
            
            $
            11,126
            
            
            $
            9,935





Noninterest
expenses increased $1.2 million, or 12%, for the year ended December 31, 2009
when compared to 2008.  Regulatory assessments increased $692,000 due
to the levying of a 5 basis point special assessment based on the bank’s assets,
the increase in regular assessment rates and the exhausting of available credits
that reduced assessment charges in 2008.  Salaries and employee
benefits increased 7.8% in 2009 primarily due to an increase in pension expense
caused by unfavorable plan asset performance in the prior year, combined with
annual merit-based
wage adjustments.  A 9.3% increase in other expenses was due to an
increase in both audits and exams combined with the recording of $40,000 in
expenses associated with the Company’s new debit card rewards
program.  These increases were offset by a decrease of $76,000 in
building occupancy, which is the result of a reduction in utilities, property
taxes and depreciation on bank facilities.





Income
Tax Expense





In 2009,
the Company reported income tax expense of $1.1 million compared with $103,000
in 2008.  The effective tax rate increased to 39% in 2009 compared to
a tax rate of 22% in 2008.  The increase in income tax expense
resulted from significantly higher pretax income, which increased $2.2 million,
and the higher tax rate.  The Company’s tax rate has increased
primarily as a result of deferred tax asset valuation allowance adjustments and
additional state tax.  The benefits from the ownership of tax-exempt
investment securities and bank owned life insurance have decreased from the
prior year due to a reduction of earnings on such assets.  See Note 13
to the consolidated financial statements for the reconciliation of the statutory
tax rate to the effective tax rate.





CHANGES
IN FINANCIAL CONDITION





Investment
Securities





The
investment portfolio represents 21% of the Company’s earning assets and is
designed to generate a favorable rate of return consistent with safety of
principal while assisting the Company in meeting its liquidity needs and
interest rate risk strategies.  All of the Company’s investments are
classified as available for sale.  The Company invests in securities
consisting primarily of securities issued by United States Government agencies
and sponsored enterprises, mortgage-backed securities, state and municipal
obligations, mutual funds, equity securities, investment grade corporate debt
instruments, and common stock issued by the Federal Home Loan Bank of New York
(FHLBNY).  By investing in these types of assets, the Company reduces
the credit risk of its asset base, but must accept lower yields than would
typically be available on loan products.  Our mortgage backed
securities portfolio is comprised predominantly of pass-through securities
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and does not, to our
knowledge, include any securities backed by sub-prime or other high-risk
mortgages.








Page
23
 Table of Contents





At
December 31, 2009, investment securities were held at the same level, $74.7
million, as they were at December 31, 2008.  There were no securities
that exceeded 10% of consolidated shareholders’ equity.  See note 3 to
the consolidated financial statements for further discussion on
securities.





The
following table sets forth the carrying value of the Company's investment
portfolio at December 31:





At
      December 31,(In
      Thousands)
            
            2009
            
            
            2008
            
            
            2007Investment
      Securities:US
      Treasury and agencies
            
            $
            14,528
            
            
            $
            9,126
            
            
            $
            18,672State
      and political subdivisions
            
            
            8,989
            
            
            
            5,020
            
            
            
            5,342Corporate
            
            
            5,333
            
            
            
            12,181
            
            
            
            6,392Other
            
            
            2,203
            
            
            
            2,100
            
            
            
            -Residential
      mortgage-backed
            
            
            36,124
            
            
            
            39,478
            
            
            
            28,615Equity
      securities and FHLB stock
            
            
            2,271
            
            
            
            2,861
            
            
            
            2,706Mutual
      funds
            
            
            4,790
            
            
            
            5,179
            
            
            
            6,514$
            74,238
            
            
            $
            75,945
            
            
            $
            68,241Net
      unrealized gains(losses) on available for sale portfolio
            
            
            415
            
            
            
            (1,258
            )
            
            
            (1,103
            )Total
      investments in securities
            
            $
            74,653
            
            
            $
            74,687
            
            
            $
            67,138





Certain
individual securities have been reclassified in the prior year table above to
conform to the current year presentation.  The reclassifications had
no effect on the total investment portfolios previously reported.





The
following table sets forth the scheduled maturities, amortized cost, fair values
and average yields for the Company's investment securities at December 31,
2009. Yield is calculated on the amortized cost to maturity and adjusted to a
fully tax-equivalent basis.




One
      Year or Less
            
            
            One
      to Five Years
            
            
            Five
      to Ten YearsAnnualized
            
            
            
            
            
            Annualized
            
            
            
            
            
            AnnualizedAmortized
            
            
            Weighted
            
            
            Amortized
            
            
            Weighted
            
            
            Amortized
            
            
            Weighted(Dollars
      in thousands)
            
            Cost
            
            
            Average
      Yield
            
            
            Cost
            
            
            Average
      Yield
            
            
            Cost
            
            
            Average
      YieldDebt
      investment securities:US
      Treasury and agencies
            
            $
            1,505
            
            
            
            3.88
            %
            
            $
            11,000
            
            
            
            2.00
            %
            
            $
            1,023
            
            
            
            3.01
            %State
      and political subdivisions
            
            
            96
            
            
            
            3.25
            %
            
            
            2,190
            
            
            
            3.32
            %
            
            
            2,644
            
            
            
            3.24
            %Corporate
            
            
            -
            
            
            
            -
            
            
            
            3,135
            
            
            
            5.53
            %
            
            
            -
            
            
            
            0.00
            %Other
            
            
            2,203
            
            
            
            4.68
            %
            
            
            -
            
            
            
            0.00
            %
            
            
            -
            
            
            
            -Total
            
            
            3,804
            
            
            
            4.32
            %
            
            
            16,325
            
            
            
            2.85
            %
            
            
            3,667
            
            
            
            3.17
            %Mortgage-backed
      securities:Residential
      mortgage-backed
            
            
            765
            
            
            
            4.14
            %
            
            
            1,650
            
            
            
            4.33
            %
            
            
            4,085
            
            
            
            4.89
            %Total
            
            
            765
            
            
            
            4.14
            %
            
            
            1,650
            
            
            
            4.33
            %
            
            
            4,085
            
            
            
            4.89
            %Other
      non-maturity investments:Mutual
      funds
            
            
            4,790
            
            
            
            2.73
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      securities and FHLB stock
            
            
            2,271
            
            
            
            4.94
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            7,061
            
            
            
            3.44
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      investment securities
            
            $
            11,630
            
            
            
            3.77
            %
            
            $
            17,975
            
            
            
            2.99
            %
            
            $
            7,752
            
            
            
            4.08
            %








Page
24
 Table of Contents


More
      Than Ten Years
            
            
            
            
            
            Total
      Investment SecuritiesAnnualized
            
            
            
            
            
            
            
            
            AnnualizedAmortized
            
            
            Weighted
            
            
            Amortized
            
            
            Fair
            
            
            Weighted(Dollars
      in thousands)
            
            Cost
            
            
            Average
      Yield
            
            
            Cost
            
            
            Value
            
            
            Average
      YieldDebt
      investment securities:US
      Treasury and agencies
            
            $
            1,000
            
            
            
            5.20
            %
            
            $
            14,528
            
            
            $
            14,532
            
            
            
            2.48
            %State
      and political subdivisions
            
            
            4,059
            
            
            
            4.39
            %
            
            
            8,989
            
            
            
            8,928
            
            
            
            3.78
            %Corporate
            
            
            2,198
            
            
            
            0.80
            %
            
            
            5,333
            
            
            
            4,965
            
            
            
            3.58
            %Other
            
            
            -
            
            
            
            -
            
            
            
            2,203
            
            
            
            2,203
            
            
            
            4.68
            %Total
            
            
            7,257
            
            
            
            3.42
            %
            
            
            31,053
            
            
            
            30,628
            
            
            
            3.20
            %Mortgage-backed
      securities:Residential
      mortgage-backed
            
            
            29,624
            
            
            
            4.87
            %
            
            
            36,124
            
            
            
            36,940
            
            
            
            4.83
            %Total
            
            
            29,624
            
            
            
            4.87
            %
            
            
            36,124
            
            
            
            36,940
            
            
            
            4.83
            %Other
      non-maturity investments:Mutual
      funds
            
            
            -
            
            
            
            -
            
            
            
            4,790
            
            
            
            4,814
            
            
            
            2.73
            %Equity
      securities and FHLB stock
            
            
            -
            
            
            
            -
            
            
            
            2,271
            
            
            
            2,271
            
            
            
            4.94
            %Total
            
            
            -
            
            
            
            -
            
            
            
            7,061
            
            
            
            7,085
            
            
            
            3.44
            %Total
      investment securities
            
            $
            36,881
            
            
            
            4.59
            %
            
            $
            74,238
            
            
            $
            74,653
            
            
            
            4.03
            %





The above
noted yield information does not give effect to changes in fair value that are
reflected in accumulated other comprehensive income in consolidated
shareholders’ equity.





Loans
Receivable





Loans
receivable represent 75% of the Company’s earning assets and account for the
greatest portion of total interest income.  The Company emphasizes
residential real estate financing and anticipates a continued commitment to
financing the purchase or improvement of residential real estate in its market
area.  The Company also extends credit to businesses within its
marketplace secured by commercial real estate, equipment, inventories, and
accounts receivable.  It is anticipated that small business lending in
the form of mortgages, term loans, leases, and lines of credit will provide the
most opportunity for balance sheet and revenue growth over the near
term.  Commercial and municipal loans comprise 14% of the total loan
portfolio.  At December 31, 2009, 75% of the Company’s total loan
portfolio consisted of loans secured by real estate, and 24% of the total loan
portfolio consisted of commercial real estate loans.





December
      31,(In
      thousands)
            
            2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Residential
      real estate (1)
            
            $
            135,102
            
            
            $
            136,218
            
            
            $
            126,666
            
            
            $
            118,494
            
            
            $
            119,707Commercial
      real estate
            
            
            62,250
            
            
            
            55,061
            
            
            
            45,490
            
            
            
            40,501
            
            
            
            31,845Commercial
      and municipal loans
            
            
            35,447
            
            
            
            30,685
            
            
            
            25,288
            
            
            
            23,001
            
            
            
            18,334Consumer
      loans
            
            
            29,666
            
            
            
            27,908
            
            
            
            25,305
            
            
            
            21,213
            
            
            
            19,682Total
      loans receivable
            
            $
            262,465
            
            
            $
            249,872
            
            
            $
            222,749
            
            
            $
            203,209
            
            
            $
            189,568





(1)
Includes loans held for sale. (None at December 31, 2009, 2008 and
2007.)





Page
25
 Table of Contents





The
following table shows the amount of loans outstanding as of December 31, 2009
which, based on remaining scheduled repayments of principal, are due in the
periods indicated.  Demand loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as one year or
less.  Adjustable and floating rate loans are included in the period
on which interest rates are next scheduled to adjust rather than the period in
which they contractually mature, and fixed rate loans are included in the period
in which the final contractual repayment is due.





Due
      Under
            
            
            Due
      1-5
            
            
            Due
      Over(In
      thousands)
            
            One
      Year
            
            
            Years
            
            
            Five
      Years
            
            
            TotalReal
      estate:Commercial
      real estate
            
            $
            10,459
            
            
            $
            45,089
            
            
            $
            6,702
            
            
            $
            62,250Residential
      real estate
            
            
            10,228
            
            
            
            33,417
            
            
            
            91,457
            
            
            
            135,10220,687
            
            
            
            78,506
            
            
            
            98,159
            
            
            
            197,352Commercial
      and municipal loans
            
            
            20,710
            
            
            
            12,022
            
            
            
            2,715
            
            
            
            35,447Consumer
            
            
            14,423
            
            
            
            4,082
            
            
            
            11,161
            
            
            
            29,666Total
      loans
            
            $
            55,820
            
            
            $
            94,610
            
            
            $
            112,035
            
            
            $
            262,465Interest
      rates:Fixed
            
            $
            3,734
            
            
            $
            13,849
            
            
            $
            103,766
            
            
            $
            121,349Variable
            
            
            52,086
            
            
            
            80,761
            
            
            
            8,269
            
            
            
            141,116Total
      loans
            
            $
            55,820
            
            
            $
            94,610
            
            
            $
            112,035
            
            
            $
            262,465





Total loans receivable
increased 5% when compared to the prior year.Residential real
estate loans decreased $1.1 million, or 1%, during 2009.  The
residential real estate portfolio consists of 68% fixed-rate mortgages and 32%
adjustable-rate mortgages.  There was a 4% shift to fixed rate
mortgages from adjustable rate mortgages when compared to the portfolio
composition as of December 31, 2008.  The increase in the fixed rate
mortgage portfolio resulted from increased demand for fixed rate products due to
the historically low interest rate environment that was prevalent during
2009.  The Company does not originate sub-prime, Alt-A, negative
amortizing or other higher risk structured residential mortgages.





Commercial
real estate loans increased $7.2 million, or 13%, from the prior year as new
loan products and relationships were added to the portfolio.





Commercial
loans, including loans to municipalities, increased 16% over the prior year to
$35.4 million at December 31, 2009.  The increase in commercial loans
was primarily the result of new lending relationships with an expanding
commercial customer base.  The Company has continued its efforts to
transform its more traditional thrift balance sheet, which emphasized
residential real estate lending, to a more diversified balance sheet, which
includes a greater proportion of commercial lending products.





Consumer
loans, which include second mortgage loans, home equity lines of credit, direct
installment and revolving credit loans, increased 6% to $29.7 million at
December 31, 2009.  The increase resulted from an increase in home
equity lines of credit.  The Company has promoted its home equity
products by offering the customer loans with no closing costs at competitive
market rates.





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26
 Table of Contents







Non-performing
Loans and Assets





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





December
      31,(In
      thousands)
            
            2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Nonaccrual
      loans:Commercial
      real estate and commercial
            
            $
            1,021
            
            
            $
            1,455
            
            
            $
            521
            
            
            $
            481
            
            
            $
            757Consumer
            
            
            111
            
            
            
            254
            
            
            
            150
            
            
            
            125
            
            
            
            89Residential
      real estate
            
            
            1,181
            
            
            
            614
            
            
            
            920
            
            
            
            566
            
            
            
            834Total
      nonaccrual loans
            
            
            2,313
            
            
            
            2,323
            
            
            
            1,591
            
            
            
            1,172
            
            
            
            1,680Total
      non-performing loans
            
            
            2,313
            
            
            
            2,323
            
            
            
            1,591
            
            
            
            1,172
            
            
            
            1,680Foreclosed
      real estate
            
            
            181
            
            
            
            335
            
            
            
            865
            
            
            
            471
            
            
            
            743Total
      non-performing assets
            
            $
            2,494
            
            
            $
            2,658
            
            
            $
            2,456
            
            
            $
            1,643
            
            
            $
            2,423Non-performing
      loans to total loans
            
            
            0.88
            %
            
            
            0.93
            %
            
            
            0.71
            %
            
            
            0.57
            %
            
            
            0.89
            %Non-performing
      assets to total assets
            
            
            0.67
            %
            
            
            0.75
            %
            
            
            0.77
            %
            
            
            0.54
            %
            
            
            0.82
            %Interest
      income that would have been recordedunder
      the original terms of the loans
            
            $
            113
            
            
            $
            131
            
            
            $
            71
            
            
            $
            53
            
            
            $
            34





The asset
quality of the Company has remained relatively unchanged when compared to the
prior year.  Total non-performing assets (non-performing loans and
foreclosed real estate) at December 31, 2009 were 0.67% of total assets as
compared to 0.75% of total assets at December 31, 2008.  The reduction
in non-performing assets was primarily due to the sale of foreclosed real
estate.  Total non-performing loans (past due 90 days or more)
decreased $10,000, or less than 1%, during 2009.  Although total
non-performing loans have remained fairly level, the mix in loan type has
shifted from being primarily commercial to being more evenly comprised of
commercial and residential real estate loans.  In 2008, approximately
63% of the Company’s non-performing loans were commercial real estate and
commercial loans.  At December 31, 2009, the non-performing loan
balance was 44% commercial and 51% residential real estate loans.Management believes the
financial strength of the individual borrowers, combined with the related value
of any underlying collateral, will not result in any significant loss beyond
currently established reserves.





Total
delinquent loans (those 30 days or more delinquent) as a percentage of total
loans were 3.2% at December 31, 2009 as compared to 2.16% at December 31,
2008.  Management believes that the increase is being driven by
general economic conditions in the market area.  Approximately 81% of
the outstanding delinquent loans are secured by real estate with loss potential
expected to be manageable within the currently established
reserves.





The
Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory and the loan is
past due 90 days or more.  The Company considers a loan impaired when,
based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan.





The
measurement of impaired loans is generally based upon the present value of
future cash flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based on the
fair value of the collateral.  The Company used the fair value of
collateral to measure impairment on commercial and commercial real estate
loans.  At December 31, 2009 and 2008, the Company had $3.2 million
and $2.4 million in loans, which were deemed to be impaired, having valuation
allowances of $79,000 and $141,000, respectively.







Page
27
 Table of Contents


Management
has identified additional potential problem loans totaling $5.0 million as of
December 31, 2009. These loans have been internally classified as special
mention or substandard, yet are not currently considered past due or in
nonaccrual status.  Management has identified potential credit
problems which may result in the borrowers not being able to comply with the
current loan repayment terms and which may result in it being included in
subsequent past due reporting. Management believes that the current allowance
for loan losses is adequate to cover probable credit losses in the current loan
portfolio.





Allowance
for Loan Losses





The
allowance for loan losses is a reserve established through charges to expense in
the form of a provision for loan losses and reduced by loan charge-offs net of
recoveries.  The allowance for loan losses represents the amount
available for probable credit losses in the Company’s loan portfolio as
estimated by management.  The Company maintains an allowance for loan
losses based upon a monthly evaluation of known and inherent risks in the loan
portfolio, which includes a review of the balances and composition of the loan
portfolio as well as analyzing the level of delinquencies in each segment of the
loan portfolio.  The Company uses a general allocation method for the
residential real estate and consumer loan pools based upon a methodology that
uses loss factors applied to loan balances and reflects actual loss experience,
delinquency trends and current economic conditions.  The Company
individually reviews commercial real estate and commercial loans greater than
$150,000 that are not accruing interest and that are risk rated under the
Company’s risk rating system as special mention, substandard, doubtful or loss
to determine if the loans require an impairment reserve.  Large
residential real estate loans may also be included in this individual loan
review.  If impairment is noted, the Company establishes a specific
reserve allocation.  The specific allocation is determined based on
the most recent valuation of the loan’s collateral and the customer’s ability to
pay.  For all other commercial real estate and commercial loans, the
Company uses the general allocation method that establishes a reserve for each
risk-rating category.  The general allocation method for commercial
real estate and commercial loans considers the same factors that are considered
when evaluating residential real estate and consumer loan pools.  The
allowance for loan losses reflects management’s best estimate of probable loan
losses at December 31, 2009.





The
allowance for loan losses was $3.1 million at December 31, 2009, a 25% increase
from December 31, 2008.  The allowance for loan losses as a percentage
of total loans increased to 1.17% at December 31, 2009 from 0.99% in the prior
year.  Net loan charge-offs were $270,000 during 2009 as compared to
$51,000 in 2008.  The majority of the current year charge-off activity
is the result of the write off of small consumer and commercial
relationships.





The
following table sets forth the allocation of allowance for loan losses by loan
category for the periods indicated.  The allocation of the allowance
by category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.







2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005%
      Gross
            
            
            
            
            
            %
      Gross
            
            
            
            
            
            %
      Gross
            
            
            
            
            
            %
      Gross
            
            
            
            
            
            %
      Gross(Dollars
      in thousands)
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            LoansCommercial
      real estate and loans
            
            $
            1,699
            
            
            
            37.2
            %
            
            $
            1,412
            
            
            
            34.3
            %
            
            $
            956
            
            
            
            31.8
            %
            
            $
            985
            
            
            
            31.3
            %
            
            $
            1,282
            
            
            
            26.5
            %Consumer
      loans
            
            
            479
            
            
            
            11.3
            %
            
            
            381
            
            
            
            11.2
            %
            
            
            283
            
            
            
            11.3
            %
            
            
            339
            
            
            
            10.4
            %
            
            
            289
            
            
            
            10.4
            %Residential
      real estate
            
            
            900
            
            
            
            51.5
            %
            
            
            679
            
            
            
            54.5
            %
            
            
            464
            
            
            
            56.9
            %
            
            
            172
            
            
            
            58.3
            %
            
            
            108
            
            
            
            63.1
            %Total
            
            $
            3,078
            
            
            
            100.0
            %
            
            $
            2,472
            
            
            
            100.0
            %
            
            $
            1,703
            
            
            
            100.0
            %
            
            $
            1,496
            
            
            
            100.0
            %
            
            $
            1,679
            
            
            
            100.0
            %








Page
28
 Table of Contents








The
following table sets forth the allowance for loan losses for the periods
indicated, and related ratios.





(In
      thousands)
            
            2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Balance
      at beginning of year
            
            $
            2,472
            
            
            $
            1,703
            
            
            $
            1,496
            
            
            $
            1,679
            
            
            $
            1,827Provisions
      charged to operating expenses
            
            
            876
            
            
            
            820
            
            
            
            365
            
            
            
            23
            
            
            
            311Recoveries
      of loans previously charged-off:Commercial
      real estate and loans
            
            
            -
            
            
            
            17
            
            
            
            -
            
            
            
            -
            
            
            
            25Consumer
            
            
            20
            
            
            
            30
            
            
            
            27
            
            
            
            18
            
            
            
            14Residential
      real estate
            
            
            3
            
            
            
            -
            
            
            
            23
            
            
            
            4
            
            
            
            10Total
      recoveries
            
            
            23
            
            
            
            47
            
            
            
            50
            
            
            
            22
            
            
            
            49Loans
      charged-off:Commercial
      real estate and loans
            
            
            (74
            )
            
            
            (46
            )
            
            
            (85
            )
            
            
            (114
            )
            
            
            (284
            )Consumer
            
            
            (134
            )
            
            
            (52
            )
            
            
            (77
            )
            
            
            (89
            )
            
            
            (137
            )Residential
      real estate
            
            
            (85
            )
            
            
            -
            
            
            
            (46
            )
            
            
            (25
            )
            
            
            (87
            )Total
      charged-off
            
            
            (293
            )
            
            
            (98
            )
            
            
            (208
            )
            
            
            (228
            )
            
            
            (508
            )Net
      charge-offs
            
            
            (270
            )
            
            
            (51
            )
            
            
            (158
            )
            
            
            (206
            )
            
            
            (459
            )Balance
      at end of year
            
            $
            3,078
            
            
            $
            2,472
            
            
            $
            1,703
            
            
            $
            1,496
            
            
            $
            1,679Net
      charge-offs to average loans outstanding
            
            
            0.11
            %
            
            
            0.02
            %
            
            
            0.08
            %
            
            
            0.11
            %
            
            
            0.24
            %Allowance
      for loan losses to year-end loans
            
            
            1.17
            %
            
            
            0.99
            %
            
            
            0.76
            %
            
            
            0.74
            %
            
            
            0.89
            %





Deposits





The
Company’s deposit base is drawn from seven full-service offices in its market
area.  The deposit base consists of demand deposits, money management
and money market deposit accounts, savings and time deposits. During 2009, 53%
of the Company's average deposit base of $288.5 million consisted of core
deposits.  Core deposits, which exclude time deposits, are considered
to be more stable and provide the Company with a lower cost source of funds than
time deposits.  The Company will continue to emphasize retail core
deposits by maintaining its network of full service offices and providing
depositors with a full range of deposit product offerings.  In
addition, Pathfinder Commercial Bank, our commercial bank subsidiary, will seek
business growth by focusing on its local identification and service
excellence.  Pathfinder Commercial Bank had an average balance of
$40.3 million in municipal deposits in 2009, primarily concentrated in money
market deposit accounts.





Average
deposits increased $22.7 million, or 9%, when compared to 2008.  The
increase in average deposits primarily related to a $9.4 million increase in the
average balance of municipal deposits and a $13.3 million increase in retail
deposits.





The
Company's average deposit mix in 2009, as compared to 2008, reflected a similar
product line composition.   The Company's average demand
deposits, both interest and noninterest bearing accounts, represented 18% of
total average deposits for 2009 and 19% of total average deposits for
2008.  The Company's average MMDA accounts, which grew 22% in 2009,
represented 12% of total deposits for 2009 and 11% for 2008. The Company’s time
deposit accounts represented 47% of total deposits in both 2009 and 2008. The
Company promotes its MMDA and time deposit accounts by offering competitive
rates to retain existing and attract new customers.





At
December 31, 2009, time deposits in excess of $100,000 totaled $53.4 million, or
38%, of time deposits and 18% of total deposits.  At December 31,
2008, these deposits totaled $40.7 million, or 31% of time deposits and 15% of
total deposits.








Page
29
 Table of Contents





The
following table indicates the amount of the Company’s certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31,
2009:





(In
      thousands)Remaining
      Maturity:Three
      months or less
            
            $
            22,362Three
      through six months
            
            
            9,391Six
      through twelve months
            
            
            7,631Over
      twelve months
            
            
            14,037Total
            
            $
            53,421





Borrowings





Short-term
borrowings are comprised primarily of advances and overnight borrowing at the
FHLBNY.  There were no short-term borrowings outstanding at December
31, 2009.  At December 31, 2008, there were $17.6 million in
short-term borrowings outstanding.





The
following table represents information regarding short-term borrowings during
2009, 2008 and 2007:





(Dollars
      in thousands)
            
            2009
            
            
            2008
            
            
            2007Maximum
      outstanding at any month end
            
            $
            1,400
            
            
            $
            23,795
            
            
            $
            18,400Average
      amount outstanding during the year
            
            
            1,724
            
            
            
            14,151
            
            
            
            4,528Average
      interest rate during the year
            
            
            1.84
            %
            
            
            2.85
            %
            
            
            5.05
            %





Long-term
borrowed funds consist of advances and repurchase agreements from the FHLBNY,
Citi Group repurchase agreements and junior subordinated
debentures.  Long-term borrowed funds and junior subordinated
debentures totaled $41.2 million at December 31, 2009 as compared to $39.6
million at December 31, 2008.





Capital





Shareholders'
equity at December 31, 2009, was $29.2 million as compared to $19.5 million at
December 31, 2008.  The Company added $1.6 million to retained
earnings through net income.  The increase to retained earnings was
combined with a decrease of $1.7 million in accumulated other comprehensive
loss, which decreased to $1.4 million from $3.1 million at December 31, 2008.
Net unrealized holding gains on securities, net of tax, resulted in a decrease
in accumulated other comprehensive loss of $1.3 million.  In addition,
$413,000 of amortization of retirement plan losses and transition obligation,
net of tax expense, decreased accumulated other comprehensive loss during
2009.  The current common stock dividend level represents an
approximately 71% reduction as compared to 2008 dividend
levels.  Common stock dividends declared reduced capital by
$298,000.  The Board of Directors and management of the Company
believe it is in the best interest of the shareholders to conserve capital at
this time.  The remaining increase to capital was the result of the
Company entering into an agreement with the United States Department of Treasury
pursuant to which Pathfinder Bancorp, Inc. issued and sold 6,771 shares of
preferred stock and warrants to purchase the Company’s common stock for a total
price of $6,771,000.  The increase is offset by dividends paid on the
Series A Preferred Stock, described below, of $60,000.





On
September 11, 2009, the Company, entered into a Letter Agreement (the “Purchase
Agreement”), with the United States Department of the Treasury (“Treasury
Department”) pursuant to which the Company has issued and sold to Treasury:
(i) 6,771 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, par value $0.01 per share (the “Series A Preferred
Stock”), having a liquidation amount per share equal to $1,000, for a total
price of $6,771,000; and (ii) a Warrant (the “Warrant”) to purchase 154,354
shares of the Company’s common stock, par value $0.01 per share (the “Common
Stock”), at an exercise price per share of $6.58.  The Company
contributed to Pathfinder Bank, its subsidiary, $5,500,000 or 81.23% of the
proceeds of the sale of the Series A Preferred Stock.





Page
30
 Table of Contents


The
$6,771,000 of proceeds was allocated to the Series A Preferred Stock and the
Warrant based on their relative fair values at issuance ($6,065,000 was
allocated to the Series A Preferred Stock and $706,000 to the
Warrant).  The difference between the initial value allocated to the
Series A Preferred Stock and the liquidation value of $6,771,000, i.e. the
preferred discount, will be charged to retained earnings over the first five
years of the contract as an adjustment to the dividend yield using the effective
yield method.





The
Series A Preferred Stock pays cumulative dividends at a rate of 5% per
annum for the first five years and thereafter at a rate of 9% per
annum.  The Series A Preferred Stock is generally
non-voting.  Prior to September 11, 2012, and unless the Company has
redeemed all of the Series A Preferred Stock or the Treasury Department has
transferred all of the Series A Preferred Stock to a third party, the
approval of the Treasury Department will be required for the Company to increase
its common stock dividend or repurchase its common stock or other equity or
capital securities, other than in certain circumstances specified in the
Purchase Agreement.





The
Warrant has a ten-year term and is immediately exercisable.  The
Warrant provides for the adjustment of the exercise price and the number of
shares of the Company’s common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions
of securities or other assets to holders of the Company’s common stock, and upon
certain issuances of the Company’s common stock at or below a specified price
relative to the then current market price of the Company’s common
stock.  Pursuant to the Purchase Agreement, the Treasury Department
has agreed not to exercise voting power with respect to any shares of common
stock issued upon exercise of the Warrant.





The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.  The Company has agreed to register for resale the
Series A Preferred Stock, the Warrant and the shares of common stock
underlying the Warrant (the “Warrant Shares”), as soon as practicable after the
date of the issuance of the Series A Preferred Stock and the
Warrant.  Neither the Series A Preferred Stock nor the Warrant
will be subject to any contractual restrictions on transfer.





Risk-based
capital provides the basis for which all banks are evaluated in terms of capital
adequacy.  Capital adequacy is evaluated primarily by the use of
ratios which measure capital against total assets, as well as against total
assets that are weighted based on defined risk characteristics.  The
Company’s goal is to maintain a strong capital position, consistent with the
risk profile of its subsidiary banks that supports growth and expansion
activities while at the same time exceeding regulatory standards.  At
December 31, 2009, Pathfinder Bank exceeded all regulatory required minimum
capital ratios and met the regulatory definition of a “well-capitalized”
institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6% and a total risk-based capital ratio exceeding
10%.





LIQUIDITY





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





The
Company's liquidity has been enhanced by its membership in the Federal Home Loan
Bank of New York, whose competitive advance programs and lines of credit provide
the Company with a safe, reliable and convenient source of funds.  A
significant decrease in deposits in the future








Page
31
 Table of Contents


could
result in the Company having to seek other sources of funds for liquidity
purposes.  Such sources could include, but are not limited to,
additional borrowings, trust preferred security offerings, brokered deposits,
negotiated time deposits, the sale of "available-for-sale" investment
securities, the sale of securitized loans, or the sale of whole
loans.  Such actions could result in higher interest expense costs
and/or losses on the sale of securities or loans.





The
Company has a number of existing credit facilities.  Total credit
available under the existing lines is approximately $73 million.  At
December 31, 2009, the Company had $36 million outstanding under existing credit
facilities with $37 million available.





The Asset
Liability Management Committee of the Company is responsible for implementing
the policies and guidelines for the maintenance of prudent levels of
liquidity.  As of December 31, 2009, management reported to the Board
of Directors that the Company is in compliance with its liquidity policy
guidelines.





OFF-BALANCE
SHEET ARRANGEMENTS





The
Company is also a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and standby letters of credit.  At December 31, 2009, the
Company had $25.2 million in outstanding commitments to extend credit and
standby letters of credit.  See Note 15 in the accompanying
consolidated financial statements.








ITEM
7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
required of a smaller reporting company.

















Page
32
 Table of Contents








ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Index
to Consolidated Financial Statements


Pathfinder Bancorp,
Inc.


PageManagement’s
      Report On Internal Control Over Financial Reporting
              
              
              34Report
      of Independent Registered Public Accounting Firm
              
              
              35Consolidated
      Statements of Condition – December 31, 2009 and 2008
              
              
              36Consolidated
      Statements of Income – Years ended December 31, 2009 and
    2008
              
              
              37Consolidated
      Statements of Changes in Shareholders’ Equity – Years ended December 31,
      2009 and 2008
              
              
              38Consolidated
      Statements of Cash Flows – Years ended December 31, 2009 and
      2008
              
              
              39Notes
      to Consolidated Financial Statements
              
              
              41

















Page
33
 Table of Contents







MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s
principal executive officer and principal financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external reporting
purposes in accordance with United States generally accepted accounting
principles.





Under the
supervision and with the participation of management, including the Company’s
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of its internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its evaluation under that framework, management
concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2009. In addition, based on our assessment,
management has determined that there were no material weaknesses in the
Company’s internal controls over financial reporting.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.








/s/
      Thomas W. Schneider
            
            
            
            /s/
      James A. DowdThomas
      W. Schneider
            
            
            
            James
      A. DowdPresident &
      Chief Executive Officer
            
            
            
            Senior
      Vice President and Chief Financial Officer




Oswego,
New York


March 24,
2010

















Page
34
 Table of Contents













Report
of Independent Registered Public Accounting Firm












To the
Board of Directors and Shareholders




Pathfinder
Bancorp, Inc.




Oswego,
New York




We have
audited the accompanying consolidated statements of condition of Pathfinder
Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows for each of the years in the two-year period ended December 31,
2009.  Pathfinder Bancorp, Inc.’s management is responsible for these
consolidated financial statements.  Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pathfinder
Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.






















ParenteBeard
LLC


Syracuse,
New York


March 24,
2010







Page
35
 Table of Contents


CONSOLIDATED STATEMENTS OF
      CONDITION


December
      31,


(In
      thousands, except share data)
            
            2009
            
            
            2008ASSETS:Cash
      and due from banks
            
            $
            8,678
            
            
            $
            7,365Interest
      earning deposits
            
            
            5,953
            
            
            
            313Total
      cash and cash equivalents
            
            
            14,631
            
            
            
            7,678Investment
      securities, at fair value
            
            
            72,754
            
            
            
            72,138Federal
      Home Loan Bank stock, at cost
            
            
            1,899
            
            
            
            2,549Loans
            
            
            262,465
            
            
            
            249,872Less:
      Allowance for loan losses
            
            
            3,078
            
            
            
            2,472Loans
      receivable, net
            
            
            259,387
            
            
            
            247,400Premises
      and equipment, net
            
            
            7,173
            
            
            
            7,450Accrued
      interest receivable
            
            
            1,482
            
            
            
            1,678Foreclosed
      real estate
            
            
            181
            
            
            
            335Goodwill
            
            
            3,840
            
            
            
            3,840Bank
      owned life insurance
            
            
            6,956
            
            
            
            6,731Other
      assets
            
            
            3,389
            
            
            
            2,961Total
      assets
            
            $
            371,692
            
            
            $
            352,760LIABILITIES AND SHAREHOLDERS'
      EQUITY:Deposits:Interest-bearing
            
            $
            269,539
            
            
            $
            243,288Noninterest-bearing
            
            
            27,300
            
            
            
            26,150Total
      deposits
            
            
            296,839
            
            
            
            269,438Short-term
      borrowings
            
            
            -
            
            
            
            17,575Long-term
      borrowings
            
            
            36,000
            
            
            
            34,400Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155Other
      liabilities
            
            
            4,460
            
            
            
            6,697Total
      liabilities
            
            
            342,454
            
            
            
            333,265Shareholders'
      equity:Preferred
      stock, par value $0.01 per share; $1,000 liquidation
      preference;1,000,000
      shares authorized; 6,771 shares issued and outstanding as of December
      31,2009;
      0 shares issued and outstanding as of December 31, 2008
            
            
            6,101
            
            
            
            -Common
      stock, par value $0.01; authorized 10,000,000 shares;2,972,119
      and 2,484,832 shares issued and outstanding respectively
            
            
            30
            
            
            
            30Additional
      paid in capital
            
            
            8,615
            
            
            
            7,909Retained
      earnings
            
            
            22,419
            
            
            
            21,198Accumulated
      other comprehensive loss
            
            
            (1,425
            )
            
            
            (3,140
            )Treasury
      stock, at cost; 487,287 shares
            
            
            (6,502
            )
            
            
            (6,502
            )Total
      shareholders' equity
            
            
            29,238
            
            
            
            19,495Total
      liabilities and shareholders' equity
            
            $
            371,692
            
            
            $
            352,760The
      accompanying notes are an integral part of the consolidated financial
      statements.





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36
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CONSOLIDATED
      STATEMENTS OF INCOME


Years
      Ended December 31,


(In
      thousands, except per share data)
            
            2009
            
            
            2008Interest
      and dividend income:Loans,
      including fees
            
            $
            14,815
            
            
            $
            14,756Debt
      securities:Taxable
            
            
            2,603
            
            
            
            2,956Tax-exempt
            
            
            43
            
            
            
            171Dividends
            
            
            339
            
            
            
            406Federal
      funds sold and interest earning deposits
            
            
            6
            
            
            
            61Total
      interest income
            
            
            17,806
            
            
            
            18,350Interest
      expense:Interest
      on deposits
            
            
            4,434
            
            
            
            5,661Interest
      on short-term borrowings
            
            
            32
            
            
            
            403Interest
      on long-term borrowings
            
            
            1,563
            
            
            
            1,611Total
      interest expense
            
            
            6,029
            
            
            
            7,675Net
      interest income
            
            
            11,777
            
            
            
            10,675Provision
      for loan losses
            
            
            876
            
            
            
            820Net
      interest income after provision for loan losses
            
            
            10,901
            
            
            
            9,855Noninterest
      income:Service
      charges on deposit accounts
            
            
            1,496
            
            
            
            1,492Earnings
      on bank owned life insurance
            
            
            225
            
            
            
            293Loan
      servicing fees
            
            
            233
            
            
            
            281Losses
      on impairment of investment securities
            
            
            (693
            )
            
            
            (2,253
            )Net
      gains (losses) on sales of investment securities
            
            
            805
            
            
            
            62Net
      gains (losses) on sales of loans and foreclosed real
estate
            
            
            54
            
            
            
            (44
            )Debit
      card interchange fees
            
            
            280
            
            
            
            275Other
      charges, commissions & fees
            
            
            490
            
            
            
            445Total
      noninterest income
            
            
            2,890
            
            
            
            551Noninterest
      expense:Salaries
      and employee benefits
            
            
            5,577
            
            
            
            5,172Building
      occupancy
            
            
            1,246
            
            
            
            1,322Data
      processing expenses
            
            
            1,307
            
            
            
            1,330Professional
      and other services
            
            
            844
            
            
            
            771FDIC
      assessment
            
            
            745
            
            
            
            53Other
      expenses
            
            
            1,407
            
            
            
            1,287Total
      noninterest expenses
            
            
            11,126
            
            
            
            9,935Income
      before income taxes
            
            
            2,665
            
            
            
            471Provision
      for income taxes
            
            
            1,050
            
            
            
            103Net
      income
            
            
            1,615
            
            
            
            368Preferred
      stock dividends and discount accretion
            
            
            96
            
            
            
            -Net
      income available to common shareholders
            
            $
            1,519
            
            
            $
            368Earnings
      per common share - basic
            
            $
            0.61
            
            
            $
            0.15Earnings
      per common share - diluted
            
            $
            0.61
            
            
            $
            0.15Dividends
      per common share
            
            $
            0.12
            
            
            
            0.41The
      accompanying notes are an integral part of the consolidated financial
      statements.








Page
37
 Table of Contents





CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY





AccumulatedAdditional
            
            
            
            
            
            Other
      Com-Preferred
            
            
            Common
            
            
            Paid
      in
            
            
            Retained
            
            
            prehensive
            
            
            Treasury(In
      thousands, except share data)
            
            Stock
            
            
            Stock
            
            
            Capital
            
            
            Earnings
            
            
            Loss
            
            
            Stock
            
            
            TotalBalance,
      January 1, 2009
            
            
            -
            
            
            $
            30
            
            
            $
            7,909
            
            
            $
            21,198
            
            
            $
            (3,140
            )
            
            $
            (6,502
            )
            
            $
            19,495Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,615
            
            
            
            
            
            
            
            
            
            
            
            1,615Other
      comprehensive income, net of tax:Unrealized
      holding gains on securitiesavailable
      for sale (net of $371 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,302
            
            
            
            
            
            
            
            1,302Retirement
      plan net gains and transitionobligation
      not recognized in plan expenses(net
      of $275 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            413
            
            
            
            
            
            
            
            413Total
      Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,330Preferred
      stock andcommon
      stock warrants issued
            
            
            6,065
            
            
            
            
            
            
            
            706
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,771Preferred
      stock discount accretion
            
            
            36
            
            
            
            
            
            
            
            
            
            
            
            (36
            )
            
            
            
            
            
            
            
            
            
            
            -Preferred
      stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (60
            )
            
            
            
            
            
            
            
            
            
            
            (60
            )Common
      stock dividends declared ($0.12 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (298
            )
            
            
            
            
            
            
            
            
            
            
            (298
            )Balance,
      December 31, 2009
            
            $
            6,101
            
            
            $
            30
            
            
            $
            8,615
            
            
            $
            22,419
            
            
            $
            (1,425
            )
            
            $
            (6,502
            )
            
            $
            29,238Balance,
      January 1, 2008
            
            
            -
            
            
            $
            30
            
            
            $
            7,899
            
            
            $
            21,734
            
            
            $
            (1,457
            )
            
            $
            (6,502
            )
            
            $
            21,704Cumulative
      effect of a change in accountingprinciple
      upon the change in definedemployee
      benefit plans' measurement date(net
      of $8 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48
            )
            
            
            13
            
            
            
            
            
            
            
            (35
            )Comprehensive
      loss:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            368
            
            
            
            
            
            
            
            
            
            
            
            368Other
      comprehensive loss, net of tax:Unrealized
      holding losses on securitiesavailable
      for sale (net of $237 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (392
            )
            
            
            
            
            
            
            (392
            )Retirement
      plan net losses and transitionobligation
      not recognized in plan expenses(net
      of $869 tax benefit)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,304
            )
            
            
            
            
            
            
            (1,304
            )Total
      Comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,328
            )Stock
      options exercised
            
            
            
            
            
            
            
            
            
            
            10
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10Common
      stock dividends declared ($0.41 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (856
            )
            
            
            
            
            
            
            
            
            
            
            (856
            )Balance,
      December 31, 2008
            
            
            -
            
            
            $
            30
            
            
            $
            7,909
            
            
            $
            21,198
            
            
            $
            (3,140
            )
            
            $
            (6,502
            )
            
            $
            19,495





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







Page
38
 Table of Contents




CONSOLIDATED
      STATEMENTS OF CASH FLOWSYears
      Ended December 31,(In
      thousands)
              
              2009
              
              
              2008OPERATING
      ACTIVITIESNet
      income
              
              $
              1,615
              
              
              $
              368Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
              
              
              876
              
              
              
              820Deferred
      income tax expense (benefit)
              
              
              441
              
              
              
              (388
              )Proceeds
      from sales of loans
              
              
              9,659
              
              
              
              174Originations
      of loans held-for-sale
              
              
              (9,540
              )
              
              
              (172
              )Realized
      losses (gains) on sales of:Real
      estate acquired through foreclosure
              
              
              65
              
              
              
              46Premises
      and equipment
              
              
              2
              
              
              
              -Loans
              
              
              (119
              )
              
              
              (2
              )Available-for-sale
      investment securities
              
              
              (805
              )
              
              
              (62
              )Impairment
      write-down on available-for-sale securities
              
              
              693
              
              
              
              2,253Depreciation
              
              
              657
              
              
              
              698Amortization
      of mortgage servicing rights
              
              
              32
              
              
              
              28Amortization
      of deferred loan costs
              
              
              240
              
              
              
              218Earnings
      on bank owned life insurance
              
              
              (225
              )
              
              
              (293
              )Net
      amortization of premiums and discounts on investment
      securities
              
              
              254
              
              
              
              112Decrease
      (increase) in accrued interest receivable
              
              
              196
              
              
              
              (5
              )Net
      change in other assets and liabilities
              
              
              (2,940
              )
              
              
              (299
              )Net
      cash provided by operating activities
              
              
              1,101
              
              
              
              3,496INVESTING
      ACTIVITIESPurchase
      of investment securities available-for-sale
              
              
              (43,666
              )
              
              
              (31,756
              )Net
      proceeds from the redemption of (purchase of) Federal Home Loan Bank
      stock
              
              
              650
              
              
              
              (421
              )Proceeds
      from maturities and principal reductions ofinvestment
      securities available-for-sale
              
              
              22,151
              
              
              
              18,633Proceeds
      from sale of:Available-for-sale
      investment securities
              
              
              22,430
              
              
              
              3,531Real
      estate acquired through foreclosure
              
              
              498
              
              
              
              979Premises
      and equipment
              
              
              1
              
              
              
              -Net
      increase in loans
              
              
              (13,488
              )
              
              
              (27,890
              )Purchase
      of premises and equipment
              
              
              (383
              )
              
              
              (341
              )Net
      cash used in investing activities
              
              
              (11,807
              )
              
              
              (37,265
              )FINANCING
      ACTIVITIESNet
      increase in demand deposits, NOW accounts, savings
    accounts,money
      management deposit accounts, MMDA accounts and escrow
    deposits
              
              
              18,129
              
              
              
              6,003Net
      increase in time deposits
              
              
              9,272
              
              
              
              12,350Net
      repayments on short-term borrowings
              
              
              (17,575
              )
              
              
              (825
              )Payments
      on long-term borrowings
              
              
              (5,400
              )
              
              
              (11,610
              )Proceeds
      from long-term borrowings
              
              
              7,000
              
              
              
              26,000Proceeds
      from the issuance of preferred stock and common stock
    warrants
              
              
              6,771
              
              
              
              -Proceeds
      from exercise of stock options
              
              
              -
              
              
              
              10Cash
      dividends paid to preferred shareholders
              
              
              (60
              )
              
              
              -Cash
      dividends paid to common shareholders
              
              
              (478
              )
              
              
              (694
              )Net
      cash provided by financing activities
              
              
              17,659
              
              
              
              31,234




Page
39
 Table of Contents


CONSOLIDATED
      STATEMENTS OF CASH FLOWSYears
      Ended December 31,(In
      thousands)
            
            2009
            
            
            2008




Increase
      (decrease) in cash and cash equivalents
            
            
            6,953
            
            
            
            (2,535
            )Cash
      and cash equivalents at beginning of period
            
            
            7,678
            
            
            
            10,213Cash
      and cash equivalents at end of period
            
            $
            14,631
            
            
            $
            7,678CASH
      PAID DURING THE PERIOD FOR:Interest
            
            $
            6,051
            
            
            $
            7,714Income
      taxes
            
            
            524
            
            
            
            162NON-CASH
      INVESTING ACTIVITYTransfer
      of loans to foreclosed real estate
            
            
            385
            
            
            
            498The
      accompanying notes are an integral part of the consolidated financial
      statements.


Page
40
 Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Operations





The
accompanying consolidated financial statements include the accounts of
Pathfinder Bancorp, Inc. (the “Company”) and its wholly owned subsidiary,
Pathfinder Bank (the “Bank”). The Bank has three wholly owned operating
subsidiaries, Pathfinder Commercial Bank, Whispering Oaks Development Corp. and
Pathfinder REIT, Inc. All inter-company accounts and activity have been
eliminated in consolidation.  The Company has seven offices located in
Oswego County.  The Company is primarily engaged in the business of
attracting deposits from the general public in the Company’s market area, and
investing such deposits, together with other sources of funds, in loans secured
by one-to-four family residential real estate, commercial real estate, business
assets and in investment securities.





Pathfinder
Bancorp, M.H.C., (the “Holding Company”) a mutual holding company whose activity
is not included in the accompanying financial statements, owns approximately
63.7% of the outstanding common stock of the Company.  Salaries and
employee benefits approximating $113,000 and $152,000 were allocated from the
Company to the Holding Company during 2009 and 2008,
respectively.  The Holding Company recorded $15,000 as rental income
from the Bank for each year presented.  As of December 31, 2009, the
Bank had a loan receivable from the Holding Company of $1,274,000.





Use
of Estimates in the Preparation of Financial Statements





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  Management has identified the allowance for loan losses,
deferred income taxes, pension obligations, the evaluation of goodwill for
impairment and the evaluation of investment securities for other than temporary
impairment to be the accounting areas that require the most subjective and
complex judgments, and as such, could be the most subject to revision as new
information becomes available.





The
Company is subject to the regulations of various governmental
agencies.  The Company also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with respect to
asset valuations, amounts of required loss allowances, and operating
restrictions resulting from the regulators' judgments based on information
available to them at the time of their examinations.





Significant
Group Concentrations of Credit Risk





Most of
the Company’s activities are with customers located primarily in Oswego and
parts of Onondaga counties of New York State.  Note 3 discusses the
types of securities that the Company invests in.  Note 4 discusses the
types of lending that the Company engages in.  The Company does not
have any significant concentrations to any one industry or
customer.





Advertising





The
Company follows the policy of charging the costs of advertising to expense as
incurred.  Advertising costs included in other operating expenses were
$353,000 and $264,000 for the years ended December 31, 2009 and 2008,
respectively.  The increase in advertising expenses is directly
attributable to marketing efforts associated with the Bank’s celebration of 150
years of operation.








Page
41
 Table of Contents


Cash
and Cash Equivalents





Cash and
cash equivalents include cash on hand, amounts due from banks and
interest-bearing deposits (with original maturity of three months or
less).





Investment
Securities





The
Company classifies investment securities as
available-for-sale.  Available-for-sale securities are reported at
fair value, with net unrealized gains and losses reflected as a separate
component of shareholders’ equity, net of the applicable income tax effect. None
of the Company’s investment securities have been classified as trading or
held-to-maturity.





Gains or
losses on investment security transactions are based on the amortized cost of
the specific securities sold.  Premiums and discounts on securities
are amortized and accreted into income using the interest method over the period
to maturity.





Note 3 to
the consolidated financial statements includes additional information about the
Company’s accounting policies with respect to the impairment of investment
securities.





Federal
Home Loan Bank Stock





Federal
law requires a member institution of the Federal Home Loan Bank (“FHLB”) system
to hold stock of its district FHLB according to a predetermined
formula.  The stock is carried at cost.





Mortgage
Loans Held-for-Sale





Mortgage
loans held-for-sale are carried at the lower of cost or fair
value.  Fair value is determined in the aggregate.  There
were no loans held-for-sale or forward commitments outstanding as of December
31, 2009 and 2008.





Transfers
of Financial Assets





Transfers
of financial assets, including sales of loans and loan participations, are
accounted for as sales when control over the assets has been
surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.





Loans





The
Company grants mortgage, commercial and consumer loans to
customers.  Loans that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off, generally are stated at
unpaid principal balances, less the allowance for loan losses and plus net
deferred loan origination costs. The ability of the Company’s debtors to honor
their contracts is dependent upon the real estate and general economic
conditions in the market area.  Interest income is generally
recognized when income is earned using the interest method. Nonrefundable loan
fees received and related direct origination costs incurred are deferred and
amortized over the life of the loan using the interest method, resulting in a
constant effective yield over the loan term. Deferred fees are recognized into
income and deferred costs are charged to income immediately upon prepayment of
the related loan.





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Allowance
for Loan Losses





The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings.  Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed.  Subsequent recoveries, if any, are credited to the
allowance.  The Company periodically evaluates the adequacy of the
allowance for loan losses in order to maintain the allowance at a level that is
sufficient to absorb probable and estimable credit losses.





The
allowance consists of specific, general and unallocated
components.  It includes amounts specifically allocated to impaired
loans.  A loan is considered impaired, based on current information
and events, if it is probable the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement.  Specific reserves are
established based on the fair value of underlying collateral or discounted cash
flows, as appropriate, when those values are lower than the carrying value of
the loan.  The allowance is also comprised of general reserves, which
are established by applying loss factors to the aggregate balance of major loan
categories or pools of smaller balance homogeneous loans.  The loss
factors are determined by management based on an evaluation of historical loss
experience, delinquency trends, volume and type of lending conducted, and the
impact of current economic conditions in the market area.  An
unallocated component of the allowance may be maintained to cover uncertainties
that could affect management’s estimate of probable losses.  The
unallocated component reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.  While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if conditions differ substantially from the assumptions used in
making the evaluation.





Income
Recognition on Impaired and Non-accrual Loans





Loans,
including impaired loans, are generally classified as non-accrual if they are
past due as to maturity or payment of principal or interest for a period of more
than 90 days. When a loan is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal
outstanding.





When
future collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis. In the case where a non-accrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.





Off-Balance
Sheet Credit Related Financial Instruments





In the
ordinary course of business, the Company has entered into commitments to extend
credit, including commitments under standby letters of credit.  Such
financial instruments are recorded when they are funded.





Premises
and Equipment





Premises
and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets, ranging up to 40 years for premises and 10 years for equipment.
Maintenance and repairs are charged to operating expenses as
incurred.  The asset cost and accumulated depreciation are removed
from the accounts for assets sold or retired and any resulting gain or loss is
included in the determination of income.





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Foreclosed
Real Estate





Properties
acquired through foreclosure, or by deed in lieu of foreclosure, are recorded at
their fair value less estimated disposal costs. Fair value is determined based
on a current appraisal and inspection.  Costs incurred in connection
with preparing the foreclosed real estate for disposition are capitalized to the
extent that they enhance the overall fair value of the property. Write downs of,
and expenses related to, foreclosed real estate holdings are included in
noninterest expense and were $90,000 and $133,000 in 2009 and 2008,
respectively.





Goodwill





Goodwill
represents the excess cost of an acquisition over the fair value of the net
assets acquired.  Goodwill is not amortized but is evaluated annually
for impairment.





Mortgage
Servicing Rights





Originated
mortgage servicing rights are recorded at their fair value at the time of
transfer and are amortized in proportion to and over the period of estimated net
servicing income or loss.  The carrying value of the originated
mortgage servicing rights is periodically evaluated for impairment.





Stock-Based
Compensation





Compensation
costs related to share-based payment transactions are recognized based on the
grant-date fair value of the stock-based compensation issued. Compensation costs
are recognized over the period that an employee provides service in exchange for
the award.  No options were granted during 2009 or 2008, and all
outstanding options were fully vested on January 1, 2006 and, accordingly, there
was no impact on the Company’s results of operations for the periods
presented.





Retirement
Benefits





The
Company has established tax qualified retirement plans covering substantially
all full-time employees and certain part-time employees.  Pension
expense under these plans is charged to current operations and consists of
several components of net pension cost based on various actuarial assumptions
regarding future experience under the plans.





Gains and
losses, prior service costs and credits, and any remaining transition amounts
that have not yet been recognized through net periodic benefit cost are
recognized in accumulated other comprehensive loss, net of tax effects, until
they are amortized as a component of net periodic cost.  On January 1,
2008, the Company recorded a $48,000 charge to retained earnings, representing
the cumulative effect adjustment upon adopting the measurement date transition
rule for the Company’s pension plan and post retirement benefit
plan.  Plan assets and obligations are to be measured as of the
employer’s balance sheet date.  The Company previously measured its
pension plan as of October 1 of each year.  As a result of the
measurement date provisions, the Company decreased its pension plan asset with a
corresponding charge to retained earnings, representing the net periodic benefit
cost for the period between the October 1, 2007 measurement date and January 1,
2008.





In
addition, the Company has unfunded deferred compensation and supplemental
executive retirement plans for selected current and former employees and
officers that provide benefits that cannot be paid from a qualified retirement
plan due to Internal Revenue Code restrictions. These plans are nonqualified
under the Internal Revenue Code, and assets used to fund benefit payments are
not segregated from other assets of the Company, therefore, in general, a
participant's or beneficiary's claim to benefits under these plans is as a
general creditor.





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 Derivative
Financial Instruments


Derivatives
are recorded on the statement of condition as assets and liabilities measured at
their fair value. The accounting for increases and decreases in the value of
derivatives depends upon the use of derivatives and whether the derivatives
qualify for hedge accounting.  The Company currently has one interest
rate swap, which has been determined to be a cash flow hedge.  The
fair value of cash-flow hedging instruments (“Cash Flow Hedge”) is recorded in
either other assets or other liabilities. On an ongoing basis, the statement of
condition is adjusted to reflect the then current fair value of the Cash Flow
Hedge. The related gains or losses are reported in other comprehensive income
and are subsequently reclassified into earnings, as a yield adjustment in the
same period in which the related interest on the hedged item (primarily a
variable-rate debt obligation) affect earnings. To the extent that the Cash Flow
Hedge is not effective, the ineffective portion of the Cash Flow Hedge is
immediately recognized as interest expense.





Income
Taxes





Provisions
for income taxes are based on taxes currently payable or refundable and deferred
income taxes on temporary differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements.
Deferred tax assets and liabilities are reported in the consolidated financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.





Earnings
per Common Share





Basic
earnings per common share are computed by dividing net income, after the
preferred stock dividends and preferred stock discount accretion, by the
weighted average number of common shares outstanding throughout each
year.  Diluted earnings per share gives effect to weighted average
shares that would be outstanding assuming the exercise of issued stock options
using the treasury stock method.





Other
Comprehensive (Loss) Income





Accounting
principles generally accepted in the United States of America, require that
recognized revenue, expenses, gains and losses be included in net
income.  Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, the effective
portion of cash-flow hedges, and unrecognized gains and losses, prior service
costs and transition assets or obligations for defined benefit pension and
post-retirement plans are reported as a separate component of the shareholders’
equity section of the consolidated statements of condition, such items, along
with net income, are components of comprehensive (loss) income.











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The
components of other comprehensive income (loss) and the related tax effect at
and for the years ended December 31, are as follows:





(In
      thousands)
            
            2009
            
            
            2008Unrealized
      holding gains (losses) on securities available for sale:Unrealized
      holding gains (losses) arising during the year
            
            $
            1,785
            
            
            $
            (2,346
            )Reclassification
      adjustment for (gains) losses included in net income
            
            
            (112
            )
            
            
            2,191Net
      unrealized gains (losses) on securities available for sale
            
            
            1,673
            
            
            
            (155
            )Defined
      benefit pension and post retirement plans:Additional
      plan gains (losses)
            
            
            409
            
            
            
            (2,257
            )Reclassification
      adjustment for amortization of benefit plans'net
      loss and prior service liability recognized in netperiodic
      expense
            
            
            279
            
            
            
            84Net
      change in defined benefit plan assets and obligations
            
            
            688
            
            
            
            (2,173
            )Other
      comprehensive income (loss) before tax
            
            
            2,361
            
            
            
            (2,328
            )Tax
      effect
            
            
            (646
            )
            
            
            632Other
      comprehensive income (loss)
            
            $
            1,715
            
            
            $
            (1,696
            )





The
components of accumulated other comprehensive loss, net of related tax effects,
at December 31, are as follows:





(In
      thousands)
            
            2009
            
            
            2008Unrealized
      gains (losses) on securities available for sale (net of
taxexpense
      2009 - $166; and tax benefit 2008 - $205)
            
            $
            249
            
            
            $
            (1,053
            )Net
      pension losses and past service liability (net of taxbenefit
      2009 - $1,100; 2008 - $1,352)
            
            
            (1,649
            )
            
            
            (2,027
            )Net
      post-retirement losses and past service liability (net of
    taxbenefit
      2009 - $17; 2008 - $40)
            
            
            (25
            )
            
            
            (60
            )$
            (1,425
            )
            
            $
            (3,140
            )





Reclassifications





Certain
amounts in the 2008 consolidated financial statements have been reclassified to
conform to the current year presentation.  These reclassifications had
no effect on net income as previously reported.





NOTE
2:  NEW ACCOUNTING PRONOUNCEMENTS





In April
2009, the FASB issued ASC 320-10-65-1 (formerly FASB Staff Position (“FSP”)
No. 115-2 and No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”). This standard amends existing guidance for
determining whether impairment is other-than-temporary for debt securities and
requires an entity to assess whether it intends to sell, or it is more likely
than not that it will be required to sell a security in an unrealized loss
position before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost and fair value is
recognized in earnings. For debt securities that do not meet the aforementioned
criteria, the amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to other factors is
recognized in other comprehensive income.








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Additionally,
this standard expands and increases the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities. This standard
was effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this standard did not result in a change to
the amounts recorded for OTTI in earnings or other comprehensive
income.  The only OTTI charges recorded on debt securities in 2009
were based on a sale that subsequently occurred and therefore the entire amount
was recorded against earnings.





In April
2009, the FASB issued ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset and Liability
Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”). This standard emphasizes that even if there has been a significant
decrease in the volume and level of activity, the objective of a fair value
measurement remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants.
This standard provides a number of factors to consider when evaluating whether
there has been a significant decrease in the volume and level of activity for an
asset or liability in relation to normal market activity. In addition, when
transactions or quoted prices are not considered orderly, adjustments to those
prices based on the weight of available information may be needed to determine
the appropriate fair value. This standard was effective for interim and annual
reporting periods ending after June 15, 2009. The adoption of this standard
did not have a material effect on our consolidated financial statements.





In May
2009, the FASB issued ASC 855 “Subsequent Events” (formerly
SFAS No. 165, “Subsequent Events”). This standard establishes general
standards of accounting for and disclosure of events that occur after the
statement of condition date but before financial statements are issued or are
available to be issued. This standard was effective for financial statements
issued for interim or annual periods ending after June 15, 2009. We adopted
this statement during the second quarter of 2009. The Company has evaluated
subsequent events and transactions occurring through the date of issuance of the
financial data included herein.





In June
2009, the FASB issued ASC 860 –“Accounting for Transfers of Financial
Assets”.This
statement prescribes the information that a reporting entity must provide in its
financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
transferor’s continuing involvement in transferred financial
assets.  Specifically, among other aspects, Topic 860 amends the
previous Statement of Financial Standard No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, by
removing the concept of a qualifying special-purpose entity and removing the
exception from applying FIN 46(R) to variable interest entities that are
qualifying special-purpose entities.  It also modifies the
financial-components approach previously used. FASB ASC 860 is effective for
fiscal years beginning after November 15, 2009 and will not have a material
impact on the Company’s consolidated financial position.





The FASB
issued ASU 2009-5, “Fair Value Measurements and Disclosures (Topic 820) –
Measuring Liabilities at Fair Value” in August 2009, to provide guidance when
estimating the fair value of a liability.  When a quoted price in an
active market for the identical liability is not available, fair value should be
measured using (a) the quoted price of an identical liability when traded as an
asset; (b) quoted prices for similar liabilities or similar liabilities traded
as assets; or (c) another valuation technique consistent with the principles of
Topic 820 such as an income approach or a market approach.  If a
restriction exists that prevents the transfer of the liability, a separate
adjustment related to the restriction is not required when estimating fair
value.  The ASU was effective October 1, 2009 and does not have a
material impact on the Company’s consolidated financial position.





ASU
2009-12, “Fair Value Measurements and Disclosure (Topic 820) – Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),”
issued in September 2009, allows a company to measure the fair value of an
investment that has no readily determinable fair market value on the basis of
the investee’s net asset value per share as provided by the
investee.  This allowance assumes that the investee has calculated net
asset value in accordance with the GAAP measurement principles of Topic 946 as
of the reporting entity’s measurement date.  Examples of such
investments include investments in hedge funds, private equity funds, real
estate funds and venture capital funds.  The update also provides
guidance on how the investment should be classified within the fair value
hierarchy based on the value for which the investment can be
redeemed.  The amendment is effective for interim and annual periods
after December 15, 2009 with early adoption permitted.  The Company
does not expect this guidance to have a material impact to our consolidated
financial statements.





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In
October 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing” was issued to
amend ASC Topic 470 and provides guidance for accounting and reporting for
own-share lending arrangements issued in contemplation of a convertible debt
issuance.  At the date of issuance, a share-lending arrangement
entered into on an entity’s own shares should be measured at fair value in
accordance with Topic 820 and recognized as an issuance cost, with an offset to
additional paid in capital.  Loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs.  The amendment also requires several disclosures including a
description and the terms of the arrangement and the reason for entering into
the arrangement.  The effective dates of the amendment are dependent
upon the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009.  The Company has
no plans to issue convertible debt and, therefore, does not expect the update to
have an impact on its consolidated financial statements.





NOTE
3: INVESTMENT SECURITIES – AVAILABLE-FOR-SALE





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





December
      31, 2009Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair(In
      thousands)
              
              Cost
              
              
              Gains
              
              
              Losses
              
              
              ValueBond investment securities:US
      Treasury and agencies
              
              $
              14,528
              
              
              $
              30
              
              
              $
              (26
              )
              
              $
              14,532State
      and political subdivisions
              
              
              8,989
              
              
              
              20
              
              
              
              (81
              )
              
              
              8,928Corporate
              
              
              5,333
              
              
              
              194
              
              
              
              (562
              )
              
              
              4,965Residential
      mortgage-backed
              
              
              36,124
              
              
              
              989
              
              
              
              (173
              )
              
              
              36,940Total
              
              
              64,974
              
              
              
              1,233
              
              
              
              (842
              )
              
              
              65,365Equity investment
    securities:Mutual
      funds
              
              
              4,790
              
              
              
              24
              
              
              
              -
              
              
              
              4,814Common
      stock
              
              
              372
              
              
              
              -
              
              
              
              -
              
              
              
              372Total
              
              
              5,162
              
              
              
              24
              
              
              
              -
              
              
              
              5,186Other
      investments
              
              
              2,203
              
              
              
              -
              
              
              
              -
              
              
              
              2,203Total
      investment securities
              
              $
              72,339
              
              
              $
              1,257
              
              
              $
              (842
              )
              
              $
              72,754





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December
      31, 2008Gross
                
                
                Gross
                
                
                EstimatedAmortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                Fair(In
      thousands)
                
                Cost
                
                
                Gains
                
                
                Losses
                
                
                ValueBond investment
      securities:US
      Treasury and agencies
                
                $
                9,126
                
                
                $
                342
                
                
                $
                -
                
                
                $
                9,468State
      and political subdivisions
                
                
                5,020
                
                
                
                23
                
                
                
                (70
                )
                
                
                4,973Corporate
                
                
                12,181
                
                
                
                117
                
                
                
                (1,472
                )
                
                
                10,826Residential
      mortgage-backed
                
                
                39,478
                
                
                
                707
                
                
                
                (155
                )
                
                
                40,030Total
                
                
                65,805
                
                
                
                1,189
                
                
                
                (1,697
                )
                
                
                65,297Equity investment
    securities:Mutual
      funds
                
                
                5,179
                
                
                
                -
                
                
                
                (744
                )
                
                
                4,435Common
      stock
                
                
                312
                
                
                
                -
                
                
                
                (6
                )
                
                
                306Total
                
                
                5,491
                
                
                
                -
                
                
                
                (750
                )
                
                
                4,741Other
      investments
                
                
                2,100
                
                
                
                -
                
                
                
                -
                
                
                
                2,100Total
      investment securities
                
                $
                73,396
                
                
                $
                1,189
                
                
                $
                (2,447
                )
                
                $
                72,138





The
amortized cost and estimated fair value of debt investments at December 31, 2009
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
            
            
            EstimatedCost
            
            
            Fair
      Value(In
      thousands)Due
      in one year or less
            
            $
            1,601
            
            
            $
            1,607Due
      after one year through five years
            
            
            16,325
            
            
            
            16,526Due
      after five years through ten years
            
            
            3,667
            
            
            
            3,659Due
      after ten years
            
            
            7,257
            
            
            
            6,633Residential
      mortgage-backed
            
            
            36,124
            
            
            
            36,940Totals
            
            $
            64,974
            
            
            $
            65,365





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, is as follows:





December
      31, 2009Less
      than Twelve Months
              
              
              Twelve
      Months or More
              
              
              TotalUnrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              FairLosses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value(In
      thousands)US
      Treasury and Agencies
              
              $
              (26
              )
              
              $
              4,996
              
              
              $
              -
              
              
              $
              -
              
              
              $
              (26
              )
              
              $
              4,996State
      and political subdivisions
              
              
              (81
              )
              
              
              2,988
              
              
              
              -
              
              
              
              -
              
              
              
              (81
              )
              
              
              2,988Corporate
              
              
              -
              
              
              
              -
              
              
              
              (562
              )
              
              
              1,402
              
              
              
              (562
              )
              
              
              1,402Mortgage-backed
              
              
              (149
              )
              
              
              9,665
              
              
              
              (24
              )
              
              
              545
              
              
              
              (173
              )
              
              
              10,210Equity
      and other investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              (256
              )
              
              $
              17,649
              
              
              $
              (586
              )
              
              $
              1,947
              
              
              $
              (842
              )
              
              $
              19,596





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December
      31, 2008Less
      than Twelve Months
              
              
              Twelve
      Months or More
              
              
              TotalUnrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              FairLosses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value(In
      thousands)State
      and political subdivisions
              
              $
              (70
              )
              
              $
              2,134
              
              
              $
              -
              
              
              $
              -
              
              
              $
              (70
              )
              
              $
              2,134Corporate
              
              
              (327
              )
              
              
              5,349
              
              
              
              (1,145
              )
              
              
              2,805
              
              
              
              (1,472
              )
              
              
              8,154Mortgage-backed
              
              
              (150
              )
              
              
              7,491
              
              
              
              (5
              )
              
              
              734
              
              
              
              (155
              )
              
              
              8,225Equity
      and other investments
              
              
              (744
              )
              
              
              4,251
              
              
              
              (6
              )
              
              
              21
              
              
              
              (750
              )
              
              
              4,272$
              (1,291
              )
              
              $
              19,225
              
              
              $
              (1,156
              )
              
              $
              3,560
              
              
              $
              (2,447
              )
              
              $
              22,785





We
conduct a formal review of investment securities on a quarterly basis for the
presence of other-than-temporary impairment (“OTTI”). In the second quarter of
2009, we adopted the updated guidance on determining OTTI on debt securities. We
assess whether OTTI is present when the fair value of a debt security is less
than its amortized cost basis at the balance sheet 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 sufficient to recover the entire amortized cost
basis. The “more likely than not” criteria is a lower threshold than the
“probable” criteria used under previous guidance.  The guidance
requires that credit-related OTTI is recognized in earnings while
noncredit-related OTTI on securities not expected to be sold is recognized in
other comprehensive income (“OCI”). Noncredit-related OTTI is based on other
factors, including illiquidity. Presentation of OTTI is made in the statement of
income on a gross basis, including both the portion recognized in earnings as
well as the portion recorded in OCI. Normally, the gross OTTI would then be
offset by the amount of noncredit-related OTTI, showing the net as the impact on
earnings.  All OTTI charges have been credit-related to date, and
therefore no offset or cumulative effect adjustment was presented on the
financial statements.  Additional disclosures are also required by
this guidance.





For debt
security types discussed below, where no OTTI is considered necessary at
December 31, 2009, we do not intend to sell the securities and it is not “more
likely than not” that we will be required to sell the securities before recovery
of their amortized cost basis.





At
December 31, 2009, 2 corporate securities were in unrealized loss
positions.  The two securities in unrealized loss positions represent
trust-preferred issuances from large money center financial
institutions.  The JP Morgan Chase floating rate trust-preferred
security has a carrying value of $984,000 and a fair value of $712,000. The Bank
of America floating rate trust-preferred security has a carrying value of
$980,000 and a fair value of $690,000.  The securities are rated A1
and Baa3 by Moody’s respectively.  The securities are both floating
rate notes that adjust quarterly to LIBOR.  These securities reflect
net unrealized losses due to the fact that current similar issuances are being
originated at higher spreads to LIBOR, as the market currently demands a greater
pricing premium for the associated risk in the current economic
environment.  Management has performed a detailed credit analysis on
the underlying companies and has concluded that each issue is not credit
impaired.  Due to the fact that each security has approximately 18
years until final maturity, and management has determined that there is no
related credit impairment, the associated pricing risk is managed similar to
long-term, low yielding, 15 and 30 year fixed rate residential mortgages carried
in the Company’s loan portfolio.  The risk is managed through the
Company’s extensive interest rate risk management procedures.  The
Company expects the present value of expected cash flows will be sufficient to
recover the amortized cost basis.  Thus, the securities are not deemed
to be other-than-temporarily impaired.





At
December 31, 2009, a total of 4 Government Agency Bonds are in unrealized loss
positions.  All losses are 1% or less of the current carrying value
and each holding has been in an unrealized loss position for only one
month.  No other-than-temporary impairment is deemed present on these
securities.





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A total
of 12 residential mortgage-backed security holdings have unrealized losses as of
December 31, 2009.  Seven of these securities were issued by
government agencies or government sponsored enterprises.  All seven
securities are currently “AAA” rated by Moody’s and S&P.  These
unrealized losses relate principally to changes in interest rates subsequent to
the acquisition of the specific securities.  None of the seven
securities have unrealized losses that exceed 4%.  No
other-than-temporary impairment is deemed present on these
securities.  The remaining 5 securities in this classification
represent private label CMO’s, all of which have current unrealized losses of
less than $10,000 each. All five securities are currently “AAA” rated by Moody’s
or S&P. Management reviewed the underlying credit score information and the
concentration risk associated with the states that the majority of the
underlying mortgage collateral resides in.  No other-than-temporary
impairment is deemed present on these securities.





At
December 31, 2009, 9 state and political subdivision securities are in
unrealized loss positions.  All 9 holdings have unrealized losses that
are less than 4% of their related book values.  None of the securities
have been in unrealized loss positions for more than 5 months. These unrealized
losses relate principally to changes in interest rates subsequent to the
acquisition of the specific securities.  All of the securities are AA
rated or better by S&P, with the exception of 4 securities issued by the
Oswego, NY City School District, which are unrated. No other-than-temporary
impairment is deemed present on these securities.





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 however, due to the amount
of time the fair value has been below the carrying value, the Company recorded
other-than-temporary impairment charges during 2009.





The
Company presently holds a no-load mutual fund, which invests primarily in
mortgage-related instruments.  The fund holds mortgage-backed bonds
and securities issued by government-sponsored mortgage entities and by private
companies.  The underlying assets are comprised of variable rate,
adjustable rate and fixed-rate residential mortgage and home equity
loans.  As a result of the recent problems in the real estate and
mortgage securities markets, the fair value of the fund had declined and,
accordingly, the Company’s recorded other-than-temporary impairment charges of
18% of the value during 2008.  Although the overall value of the fund
has continued to improve since early 2009, the value of the investment in the
fund was still below its cost basis by approximately $286,000 as of December 31,
2009.  Based on the length of time the equity security’s value was
less than the carrying value, an other-than-temporary charge for $286,000 was
recorded.





The
Company also holds an investment in a mutual fund consisting of investment
grade, dividend paying common stocks of large capitalization companies
(companies with market capitalization in excess of $5
billion).  Management recorded an other-than-temporary impairment
charge of 24% of the Fund’s value in 2008.  Although the overall value
of the fund has continued to improve since early 2009, the value of the
investment in the fund was still below its cost basis by approximately $104,000
as of December 31, 2009.  Based on the length of time the equity
security’s value was less than the carrying value, an other-than-temporary
charge for $104,000 was recorded.





The
Company held two other equity securities that had fair values less than the
carrying value and, due to the length of time they remained in this position,
were written down with other-than-temporary impairment charges during the fourth
quarter.  A small common stock investment in Alliance Financial Corp
was written down $4,000 and a small common stock investment in The Phoenix
Companies was similarly written down by $1,000.  The Phoenix stock
investment had also been adjusted as a result of other-than-temporary impairment
in 2008.





During
the second quarter of 2009, the Company recorded an other than temporary
impairment charge of $298,000 associated with its holdings in a senior unsecured
note issued by CIT Group, Inc. (“CIT”). As current concerns grew relating to
CIT’s ability to meet its current short-term obligations, combined with the
belief that other government programs were not going to be made available to
CIT, the Company concluded that the liquidation of its current holding at a loss
was prudent, and the security was sold on July 16, 2009.  The
impairment charge recorded in the second quarter was based on the sale proceeds
as compared to the amortized cost basis of the security.





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The
following table presents a roll-forward of the amount related to credit losses
on debt securities recognized in earnings for the year ended December 31,
2009.





(In
      thousands)
            
            TotalBeginning
      balance – January 1, 2009
            
            $
            875Initial
      credit impairment
            
            
            298Subsequent
      credit impairments
            
            
            -Reductions
      for amounts recognized in earnings due to intent or requirement to
      sell
            
            
            -Reductions
      for securities sold
            
            
            (298
            )Reductions
      for increases in cash flows expected to be collected
            
            
            -Ending
      balance - December 31, 2009
            
            $
            875





Gross
realized gains (losses) on sales of available-for-sale securities and
other-than-temporary impairment charges for the year ended December 31 are
detailed below:





(In
      thousands)
            
            2009
            
            
            2008Realized
      gains
            
            $
            814
            
            
            $
            85Realized
      losses
            
            
            (9
            )
            
            
            (23
            )Other
      than temporary impairment
            
            
            (693
            )
            
            
            (2,253
            )$
            112
            
            
            $
            (2,191
            )





As of
December 31, 2009 and December 31, 2008, securities with an amortized cost of
$45.7 million and $37.8 million, respectively, were pledged to collateralize
certain deposit and borrowing arrangements.





Management
has reviewed its mortgage-backed securities portfolio 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 these types of loans.








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NOTE
4: LOANS





Major
classifications of loans at December 31, are as follows:





(In
      thousands)
            
            2009
            
            
            2008Real
      estate mortgages:Residential
            
            $
            131,929
            
            
            $
            132,825Construction
            
            
            2,399
            
            
            
            2,508Commercial
            
            
            62,229
            
            
            
            55,061196,557
            
            
            
            190,394Other
      loans:Consumer
            
            
            3,580
            
            
            
            3,516Home
      equity/second mortgage
            
            
            26,086
            
            
            
            24,392Lease
      financing
            
            
            3,711
            
            
            
            2,308Commercial
            
            
            28,082
            
            
            
            25,215Municipal
      loans
            
            
            3,654
            
            
            
            3,16265,113
            
            
            
            58,593Total
      loans
            
            
            261,670
            
            
            
            248,987Net
      deferred loan costs
            
            
            795
            
            
            
            885Less
      allowance for loan losses
            
            
            (3,078
            )
            
            
            (2,472
            )Loans
      receivable, net
            
            $
            259,387
            
            
            $
            247,400





The
Company grants mortgage and consumer loans to customers throughout Oswego and
parts of Onondaga counties. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors’ abilities to honor their
contracts is dependent upon the counties’ employment and economic
conditions.





The
following represents the activity associated with loans to executive officers
and directors and their affiliated entities during the year ended December 31,
2009:





(In
      thousands)Balance
      at the beginning of the year
            
            $
            6,270Originations
            
            
            709Principal
      payments
            
            
            (1,097
            )Balance
      at the end of the year
            
            $
            5,882





Management
has reviewed its loan portfolio 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
originating these types of loans.








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NOTE
5: ALLOWANCE FOR LOAN LOSSES





Changes
in the allowance for loan losses for the years ended December 31, are summarized
as follows:





(In
      thousands)
            
            2009
            
            
            2008Balance
      at beginning of year
            
            $
            2,472
            
            
            $
            1,703Recoveries
      credited:Commercial
            
            
            -
            
            
            
            17Mortgage
            
            
            3
            
            
            
            -Consumer
            
            
            20
            
            
            
            30Total
      recoveries
            
            
            23
            
            
            
            47Loans
      charged-off:Commercial
            
            
            (74
            )
            
            
            (46
            )Mortgage
            
            
            (85
            )
            
            
            -Consumer
            
            
            (134
            )
            
            
            (52
            )Total
      charged-off
            
            
            (293
            )
            
            
            (98
            )Net
      charge-offs
            
            
            (270
            )
            
            
            (51
            )Provision
      for loan losses
            
            
            876
            
            
            
            820Balance
      at end of year
            
            $
            3,078
            
            
            $
            2,472Ratio
      of net charge-offs to average loans outstanding
            
            
            0.11
            %
            
            
            0.02
            %





The
following is a summary of information pertaining to impaired loans for the years
ended December 31:





(In
      thousands)
            
            2009
            
            
            2008Impaired
      loans without a valuation allowance
            
            $
            2,254
            
            
            $
            2,020Impaired
      loans with a valuation allowance
            
            
            986
            
            
            
            436Total
      impaired loans
            
            $
            3,240
            
            
            $
            2,456Valuation
      allowance related to impaired loans
            
            $
            79
            
            
            $
            141Average
      investment in impaired loans
            
            $
            2,921
            
            
            $
            2,252Interest
      income recognized on impaired loans
            
            $
            159
            
            
            $
            176Interest
      income recognized on a cash basis onimpaired
      loans
            
            $
            -
            
            
            $
            -


The
amount of loans on which the Company has ceased accruing interest aggregated
approximately $2,313,000 and $2,323,000 at December 31, 2009 and 2008,
respectively.  There were no loans past due ninety days or more and
still accruing interest at December 31, 2009 or 2008.





NOTE
6: SERVICING





Loans
serviced for others are not included in the accompanying consolidated statements
of condition.  The unpaid principal balances of mortgage and other
loans serviced for others were $46,225,000 and $46,095,000 at December 31, 2009
and 2008, respectively.






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The
balance of capitalized servicing rights included in other assets at December 31,
2009 and 2008, was $61,000 and $15,000, respectively.





The
following summarizes mortgage-servicing rights capitalized and
amortized:





(In
      thousands)
            
            2009
            
            
            2008Mortgage
      servicing rights capitalized
            
            $
            78
            
            
            $
            -Mortgage
      servicing rights amortized
            
            $
            32
            
            
            $
            28





NOTE
7: PREMISES AND EQUIPMENT





A summary
of premises and equipment at December 31, is as follows:





(In
      thousands)
            
            2009
            
            
            2008Land
            
            $
            1,226
            
            
            $
            1,226Buildings
            
            
            7,100
            
            
            
            7,007Furniture,
      fixture and equipment
            
            
            7,342
            
            
            
            7,090Construction
      in progress
            
            
            155
            
            
            
            13415,823
            
            
            
            15,457Less:
      Accumulated depreciation
            
            
            8,650
            
            
            
            8,007$
            7,173
            
            
            $
            7,450





NOTE
8: GOODWILL





As a
result of deteriorating economic conditions in the financial markets, which
impacted the trading value of the Company’s common stock, management engaged an
independent third party to test the Company’s goodwill for impairment as of
December 31, 2008.  Management considers the Company, which includes
all banking operations on a consolidated basis, as the “reporting unit” for the
purpose of testing for goodwill impairment.  Testing was performed by
utilizing a three-step valuation approach using a measurement date of December
31, 2008:





(1)
            The
      estimated fair value of the Company as of the measurement date was
      determined utilizing three valuation methodologies including the
      Comparable Transactions approach, the Control Premium approach and the
      Discounted Cash Flow approach.  All approaches were considered
      in the final estimate of fair value, with the results of the approaches
      weighted based upon their level within the fair value hierarchy and
      management’s comfort level with each approach. In the final determination,
      the greatest emphasis was placed on approaches utilizing primarily Level 2
      inputs (the Comparable Transaction and Control Premium approaches), and
      less weight was placed on the Discounted Cash Flow approach due to the
      number of Level 3 inputs that were
utilized.





(2)
            The
      amount of goodwill that would be generated if the Company were to be sold
      at a price equal to its estimated fair value was
    calculated.





(3)
            A
      comparison of the estimated fair value of goodwill, determined in steps
      (1) and (2) above, to the current carrying value of goodwill on the
      Company’s books as of the measurement date was
  performed.





The
resulting calculations determined the estimated fair value of the goodwill to be
$6.8 million, which greatly exceeded the Company’s carrying value of
approximately $3.8 million and thus, there was no goodwill impairment at
December 31, 2008.





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Since the
date of the third party evaluation, the Company has experienced improvement in
its book value per common share and tangible book value per common
share.  Total assets, total deposits, and the percentage of core
deposits to total deposits have all increased since the prior valuation
date.  There has been no significant deterioration in the fair value
of the Company’s stock and projected future earnings levels and dividend paying
capacity have both significantly improved since the last valuation
period.  Given its evaluation of goodwill, which considered these
factors, management has determined that the current carrying value of goodwill
is not impaired at December 31, 2009.





NOTE
9: DEPOSITS





A summary
of deposits at December 31, is as follows:





(In
      thousands)
            
            2009
            
            
            2008Savings
      accounts
            
            $
            52,663
            
            
            $
            49,550Time
      accounts
            
            
            87,805
            
            
            
            91,223Time
      accounts over $100,000
            
            
            53,421
            
            
            
            40,731Money
      management accounts
            
            
            11,327
            
            
            
            10,300MMDA
      accounts
            
            
            35,788
            
            
            
            27,594Demand
      deposit interest-bearing
            
            
            25,367
            
            
            
            20,916Demand
      deposit noninterest-bearing
            
            
            27,300
            
            
            
            26,150Mortgage
      escrow funds
            
            
            3,168
            
            
            
            2,974$
            296,839
            
            
            $
            269,438





At
December 31, 2009, the scheduled maturities of time deposits are as
follows:




(In
      thousands)Year
      of Maturity:2010
            
            $
            96,2812011
            
            
            19,5002012
            
            
            7,5652013
            
            
            11,7122014
            
            
            2,623Thereafter
            
            
            3,545$
            141,226








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NOTE
10: BORROWED FUNDS





The
composition of borrowings (excluding junior subordinated debentures) at December
31, is as follows:





(In
      thousands)
            
            2009
            
            
            2008Short-term:FHLB
      Advances
            
            $
            -
            
            
            $
            4,000Overnight
      Line of Credit with FHLB
            
            
            -
            
            
            
            13,575Total
      short-term borrowings
            
            $
            -
            
            
            $
            17,575Long-term:FHLB
      repurchase agreements
            
            $
            -
            
            
            $
            2,400FHLB
      advances
            
            
            31,000
            
            
            
            27,000Citigroup
      Repurchase agreements
            
            
            5,000
            
            
            
            5,000Total
      long-term borrowings
            
            $
            36,000
            
            
            $
            34,400





The
principal balances, interest rates and maturities of the above fixed rate
borrowings at December 31, 2009 is as follows:




Term
            
            Principal
            
            
            Rates(Dollars
      in thousands)Long-term:Repurchase
      agreements (due in 2013)
            
            
            5,000
            
            
            
            2.95
            %Advances
      with FHLBdue
      within 1 year
            
            
            12,000
            
            
            
            2.42%-4.39
            %due
      within 2 years
            
            
            6,000
            
            
            
            2.33%-4.19
            %due
      within 3 years
            
            
            4,000
            
            
            
            2.70%-4.91
            %due
      within 4 years
            
            
            4,000
            
            
            
            4.46%-4.53
            %due
      within 5 years
            
            
            5,000
            
            
            
            2.85%-3.07
            %Total
      advances with FHLB
            
            $
            31,000Total
      long-term borrowings
            
            $
            36,000





The
repurchase agreement with Citi Group is collateralized by certain investment
securities having a carrying value of $6,148,000 at December 31,
2009.  The collateral is under the Company’s control.  The
overnight line of credit agreement with the FHLB is used for liquidity
purposes.   Interest on this line is determined at the time of
borrowing.  The average rate paid on the overnight line during 2009
approximated 0.52%.    As a companion to the overnight line
with the FHLB, the Company also has access to a One-Month Overnight Repricing
Line of Credit.  This allows the Company to borrow funds for a term of
one month, which reprices daily over the term, thus freeing up the overnight
line for daily liquidity needs.  The Company has $36,148,000 available
under this facility, yet has never accessed the one-month overnight repricing
line. In addition to the overnight line of credit program, the Company also has
access to the FHLB’s Term Advance Program under which it can borrow at various
terms and interest rates.  Residential mortgage loans with a carrying
value of $65,406,000 and FHLB stock with a carrying value of $1,899,400 have
been pledged by the Company under a blanket collateral agreement to secure the
Company’s line of credit and term borrowings.  The total outstanding
indebtedness under all three borrowing facilities with the FHLB cannot exceed
the total value of the assets pledged under the blanket collateral
agreement.  The








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Company
also has a $6.5 million line of credit available at December 31, 2009 with
the Federal Reserve Bank of New York through its Discount Window and has pledged
various corporate and municipal securities against the line. The Company has an
$11.0 million line of credit available with three other correspondent banks.
$4.0 million of that line of credit is available on an unsecured basis and the
remaining $7.0 million must be collateralized with marketable investment
securities. Interest on the lines is determined at the time of
borrowing.





The
Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II,
of which the Company owns 100% of the common equity.  The Trust issued
$5,000,000 of 30 year floating rate Company-obligated pooled capital securities
of Pathfinder Statutory Trust II.  The Company borrowed the proceeds
of the capital securities from its subsidiary by issuing floating rate junior
subordinated deferrable interest debentures having substantially similar
terms.  The capital securities mature in 2037 and are treated as Tier
1 capital by the Federal Deposit Insurance Corporation and the Office of Thrift
Supervision.  The capital securities of the trust are a pooled trust
preferred fund of Preferred Term Securities VI, Ltd. and are tied to the 3-month
LIBOR plus 1.65% (1.90% at December 31, 2009) with a five-year call
provision.  The Company guarantees all of these
securities.





The
Company's equity interest in the trust subsidiary of $155,000 is reported in
"Other assets".  For regulatory reporting purposes, the Federal
Reserve Board has indicated that the preferred securities will continue to
qualify as Tier 1 Capital subject to previously specified limitations, until
further notice. If regulators make a determination that Trust Preferred
Securities can no longer be considered in regulatory capital, the securities
become callable and the Company may redeem them.





NOTE
11:  EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND
SUPPLEMENTAL     RETIREMENT PLANS





The
Company has a noncontributory defined benefit pension plan covering
substantially all employees. The plan provides defined benefits based on years
of service and final average salary. 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
following tables set forth the changes in the plans’ benefit obligations, fair
value of plan assets and the plans’ funded status as of December
31:


Pension
      Benefits
            
            
            Postretirement
      Benefits(In
      thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Change
      in benefit obligations:Benefit
      obligations at beginning of year
            
            $
            5,493
            
            
            $
            4,843
            
            
            $
            369
            
            
            $
            335Adjustment
      for measurement date change
            
            
            -
            
            
            
            132
            
            
            
            -
            
            
            
            6Service
      cost
            
            
            228
            
            
            
            214
            
            
            
            3
            
            
            
            3Interest
      cost
            
            
            332
            
            
            
            316
            
            
            
            22
            
            
            
            21Actuarial
      loss (gain)
            
            
            188
            
            
            
            174
            
            
            
            (38
            )
            
            
            32Benefits
      paid
            
            
            (146
            )
            
            
            (186
            )
            
            
            (24
            )
            
            
            (28
            )Benefit
      obligations at end of year
            
            
            6,095
            
            
            
            5,493
            
            
            
            332
            
            
            
            369Change
      in plan assets:Fair
      value of plan assets at beginning of year
            
            
            3,461
            
            
            
            4,977
            
            
            
            -
            
            
            
            -Actual
      return on plan assets
            
            
            937
            
            
            
            (1,493
            )
            
            
            -
            
            
            
            -Benefits
      paid
            
            
            (146
            )
            
            
            (186
            )
            
            
            (24
            )
            
            
            (28
            )Employer
      contributions
            
            
            2,000
            
            
            
            163
            
            
            
            24
            
            
            
            28Fair
      value of plan assets at end of year
            
            
            6,252
            
            
            
            3,461
            
            
            
            -
            
            
            
            -Funded
      Status - asset (liability)
            
            $
            157
            
            
            $
            (2,032
            )
            
            $
            (332
            )
            
            $
            (369
            )





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Amounts
recognized in accumulated other comprehensive loss as of December
31:





(In
      thousands)
            
            
            2009
            2008Unrecognized
      transition obligation
            
            $
            38
            $             56Net
      loss
            
            
            2,753
            3,4232,791
            3,479Tax
      Effect
            
            
            1,117
            1,392$
            1,674
            $         2,087





The
accumulated benefit obligation for the defined benefit pension plan was
$5,026,000 and $4,537,000 at December 31, 2009 and 2008,
respectively.  The postretirement plan had an accumulated benefit
obligation of $332,000 and $369,000 at December 31, 2009 and 2008,
respectively.





The
significant assumptions used in determining the benefit obligations as of
December 31, 2009 and 2008 are as follows:




Pension
      Benefits
            
            
            Postretirement
      Benefits2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted
      average discount rate
            
            
            6.25
            %
            
            
            6.13
            %
            
            
            6.25
            %
            
            
            6.13
            %Rate
      of increase in future compensation levels
            
            
            3.50
            %
            
            
            3.50
            %
            
            
            -
            
            
            
            -





Assumed
health care cost trend rates have a significant effect on the amounts reported
for the postretirement health care plan.   The annual rates of
increase in the per capita cost of covered medical and prescription drug
benefits for year-end calculations were assumed to be 9.00% for each
year.  The rates were assumed to decrease gradually to 5.00% in 2014
and remain at that level thereafter.  A one-percentage point change in
the health care cost trend rates would have the following effects:




1
      Percentage
            
            
            1
      PercentagePoint
            
            
            Point(In
      thousands)
            
            Increase
            
            
            DecreaseEffect
      on total of service and interestcost
      components
            
            $
            1
            
            
            $
            (1
            )Effect
      on post retirement benefit obligation
            
            
            7
            
            
            
            (7
            )











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The
composition of the net periodic benefit plan cost for the years ended December
31, 2009 and 2008 is as follows:


Pension
      Benefits
            
            
            Postretirement
      Benefits2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Service
      cost
            
            $
            228
            
            
            $
            214
            
            
            $
            3
            
            
            $
            3Interest
      cost
            
            
            332
            
            
            
            316
            
            
            
            22
            
            
            
            21Amortization
      of transition obligation
            
            
            -
            
            
            
            -
            
            
            
            18
            
            
            
            18Amortization
      of net losses
            
            
            260
            
            
            
            66
            
            
            
            1
            
            
            
            -Expected
      return on plan assets
            
            
            (378
            )
            
            
            (447
            )
            
            
            -
            
            
            
            -Net
      periodic benefit plan cost
            
            $
            442
            
            
            $
            149
            
            
            $
            44
            
            
            $
            42





The
significant assumptions used in determining the net periodic benefit plan cost
for years ended December 31 were as follows:




Pension
      Benefits
            
            
            Postretirement
      Benefits2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted
      average discount rate
            
            
            6.13
            %
            
            
            6.63
            %
            
            
            6.13
            %
            
            
            6.63
            %Expected
      long term rate of return on plan assets
            
            
            8.00
            %
            
            
            9.00
            %
            
            
            -
            
            
            
            -Rate
      of increase in future compensation levels
            
            
            3.50
            %
            
            
            4.00
            %
            
            
            -
            
            
            
            -





The
long-term rate-of-return-on-assets assumption was set based on historical
returns earned by equities and fixed income securities, adjusted to reflect
expectations of future returns as applied to the plan’s target allocation of
asset classes.  Equities and fixed income securities were assumed to
earn real rates of return in the ranges of 5.0%-9.0% and 2.0%-6.0%,
respectively.  The long-term inflation rate was estimated to be
3.0%.  When these overall return expectations are applied to the
plan’s target allocation, the expected rate of return was determined to be in
the range of 7.0% to 11.0%.  Management has chosen to use an 8%
expected long-term rate of return to reflect current economic conditions and
expected returns.





The
expected long-term rate of return for 2010 will continue to be
8.0%.  The estimated net actuarial loss that will be amortized from
accumulated other comprehensive loss into net periodic benefit plan cost during
2010 is $200,000.  The estimated amortization of the unrecognized
transition obligation in 2010 is $18,000.  Based on these factors, and
a lower expected rate of return on plan assets, the expected net periodic
benefit plan cost for 2010 is estimated at $371,000.





Plan
assets are invested in diversified investment funds of the RSI Retirement Trust
(the “Trust”), a private placement investment fund.  The investment
funds include a series of equity and bond mutual funds or commingled trust
funds, each with its own investment objectives, investment strategies and risks,
as detailed in the Statement of Investment Objectives and
Guidelines.  The Trust has been given discretion by the Plan Sponsor
to determine the appropriate strategic asset allocation versus plan liabilities,
as governed by the Trust’s Statement of Investment Objectives and Guidelines
(the “Guidelines”).





The
long-term investment objectives are to maintain plan assets at a level that will
sufficiently cover long-term obligations and to generate a return on plan assets
that will meet or exceed the rate at which long-term obligations will
grow.  A broadly diversified combination of equity and fixed income
portfolios and various risk management techniques are used to help achieve these
objectives.





In
addition, significant consideration is paid to the plan’s funding levels when
determining the overall asset allocation.  If the plan is considered
to be well-funded, approximately 65% of the plan’s assets are allocated to
equities and approximately 35% allocated to fixed-income.  If the
plan





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does not
satisfy the criteria for a well-funded plan, approximately 50% of the plan’s
assets are allocated to equities and approximately 50% allocated to
fixed-income.  Asset rebalancing normally occurs when the equity and
fixed-income allocations vary by more than 10% from their respective targets
(i.e., a 20% policy range guideline).





The
investment goal is to achieve investment results that will contribute to the
proper funding of the pension plan by exceeding the rate of inflation over the
long-term.  In addition, investment managers for the Trust are
expected to provide above average performance when compared to their peer
managers.  Performance volatility is also
monitored.  Risk/volatility is further managed by the distinct
investment objectives of each of the Trust funds and the diversification within
each fund.





Beginning
in 2009, disclosures for the plan must include increased detail on the major
categories of assets, including a disclosure of which fair values are based on
assets traded in active markets (Level 1), determined using significant
observable inputs (Level 2), or are estimated based on significant unobservable
inputs (Level 3).





Pension
plan assets measured at fair value are summarized below:


At
      December 31, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueAsset
      Category:Mutual
      funds - equityLarge-cap
      value (a)
            
            $
            556
            
            
            $
            -
            
            
            $
            -
            
            
            $
            556Small-cap
      Core (b)
            
            
            657
            
            
            
            -
            
            
            
            -
            
            
            
            657Common/collective
      trusts - equityLarge-cap
      core (c)
            
            
            -
            
            
            
            625
            
            
            
            -
            
            
            
            625Large-cap
      value (d)
            
            
            -
            
            
            
            311
            
            
            
            -
            
            
            
            311Large-cap
      growth (e)
            
            
            -
            
            
            
            915
            
            
            
            -
            
            
            
            915International
      Core (f)
            
            
            -
            
            
            
            884
            
            
            
            -
            
            
            
            884Common/collective
      trusts - fixed incomeMarket
      duration fixed (g)
            
            
            -
            
            
            
            2,304
            
            
            
            -
            
            
            
            2,304Total
            
            $
            1,213
            
            
            $
            5,039
            
            
            $
            -
            
            
            $
            6,252





(a)
            This
      category contains large-cap stocks with above average
      yield.  The portfolio typically holds between 60 and 70
      stocks.


(b)
            This
      category contains stocks whose sector weightings are maintained within a
      narrow band around those of the Russell 2000 index.  The
      portfolio will typically hold more than 150
  stocks.


(c)
            This
      fund tracks the performance of the S&P 500 Index by purchasing the
      securities represented in the Index in approximately the same weightings
      as the Index.


(d)
            This
      category consists of investments whose sector and industry exposures are
      maintained within a narrow band around Russell 1000 index.  The
      portfolio holds approximately 150
stocks.


(e)
            This
      category consists of a portfolio of between 45 and 65 stocks that will
      typically overweight technology and health
care.


(f)
            This
      category consists of a broadly diversified portfolio of non-U.S. domiciled
      stocks.  The portfolio will typically hold more than 200 stocks,
      with 0% - 35% invested in emerging markets
  securities.


(g)
            This
      category consists of an index fund that tracks the Lehman Brothers U.S.
      Aggregate Bond Index.  The fund invests in Treasury,
      agency,  corporate, mortgage-backed and asset-backed
      securities.





For the
fiscal year ending December 31, 2010, the Bank expects to contribute
approximately $258,000 to the pension plan and $24,000 to the postretirement
plan.








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The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:





Years
      ending December 31:(In
      thousands)2010
            
            $
            1762011
            
            
            1842012
            
            
            1982013
            
            
            2152014
            
            
            248Years
      2015 - 2019
            
            
            1,536





The
Company also offers a 401(k) plan to its employees.  Contributions to
this plan by the Company were $188,000 and $116,000 for 2009 and 2008,
respectively.





The
Company maintains optional deferred compensation plans for its directors, and
certain executive officers, whereby fees and income normally received are
deferred and paid by the Company based upon a payment schedule commencing at age
65 and continuing monthly for 10 years. Directors must serve on the board for a
minimum of 5 years to be eligible for the Plan. At December 31, 2009 and 2008,
other liabilities include approximately $1,806,000 and $1,741,000, respectively,
relating to deferred compensation. Deferred compensation expense for the years
ended December 31, 2009 and 2008 amounted to approximately $209,000 and
$225,000, respectively.





The
Company has a supplemental executive retirement plan for the benefit of certain
executive officers.  At December 31, 2009 and 2008, other liabilities
included approximately $298,000 and $333,000 accrued under this plan.
Compensation expense includes approximately $50,000 relating to the supplemental
executive retirement plan for the year ended December 31, 2009 and $49,000 for
the year ended December 31, 2008.





To fund
the benefits under these plans, the Company is the owner of single premium life
insurance policies on participants in the non-qualified retirement
plans.  At December 31, 2009 and 2008, the cash surrender values of
these policies were $6,956,000 and $6,731,000, respectively.





NOTE
12:  STOCK BASED COMPENSATION PLAN





In
February 1997, the Board of Directors approved an option plan and granted
options thereunder with an exercise price equal to the market value of the
Company’s shares at the date of grant.  Under the Stock Option Plan,
up to 132,249 options had been authorized for grant of incentive stock options
and nonqualified stock options.  None of the original options granted
remain at December 31, 2009.





In July
2001, the Board approved the issuance of 38,499 stock options remaining in the
1997 Stock Option Plan.  The exercise price was equal to the market
value of the Company's shares at the date of grant ($8.34).  The
options granted under the issuance have a 10-year term with one-third vesting
upon grant date and the remaining vesting and becoming exercisable ratably over
a 2-year period.





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Activity
in the Stock Option Plan is as follows:




WeightedOptions
            
            
            Average
            
            
            Shares(Shares
      in thousands)
            
            Outstanding
            
            
            Exercise
      Price
            
            
            ExercisableOutstanding
      at January 1, 2008
            
            
            20
            
            
            $
            8.34
            
            
            
            20Exercised
            
            
            (1
            )
            
            
            8.34Expired
            
            
            -
            
            
            
            -Outstanding
      at December 31, 2008
            
            
            19
            
            
            $
            8.34
            
            
            
            19Exercised
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -Outstanding
      at December 31, 2009
            
            
            19
            
            
            $
            8.34
            
            
            
            19





The
aggregate intrinsic value of a stock option represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the option) that would have been received by
the option holders had all option holders exercised their options on December
31, 2009.  The intrinsic value changes based on fluctuations in the
market value of the Company’s stock.  At December 31, 2009, the market
value of the Company’s stock was less than the stock option price, and
therefore, the outstanding and exercisable stock options had no aggregate
intrinsic value.





There
were no stock options exercised during 2009.





At
December 31, 2009, the 18,850 options outstanding all had an exercise price of
$8.34 and an average remaining contractual life of 1.5 years.





NOTE
13: INCOME TAXES





The
provision for income taxes for the years ended December 31, is as
follows:





(In
      thousands)
            
            2009
            
            
            2008Current
            
            $
            346
            
            
            $
            491Deferred
            
            
            704
            
            
            
            (388
            )$
            1,050
            
            
            $
            103





The
provision for income taxes includes the following:





(In
      thousands)
            
            2009
            
            
            2008Federal
      Income Tax
            
            $
            993
            
            
            $
            191New
      York State Franchise Tax
            
            
            57
            
            
            
            (88
            )$
            1,050
            
            
            $
            103











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The
components of the net deferred tax asset, included in other assets as of
December 31, are as follows:





(In
      thousands)
            
            2009
            
            
            2008Assets:Deferred
      compensation
            
            $
            814
            
            
            $
            802Allowance
      for loan losses
            
            
            1,191
            
            
            
            956Postretirement
      benefits
            
            
            128
            
            
            
            144Pension
      liability
            
            
            -
            
            
            
            786Mortgage
      recording tax credit carryforward
            
            
            417
            
            
            
            417Investment
      securities
            
            
            -
            
            
            
            503Impairment
      losses on investment securities
            
            
            686
            
            
            
            505Other
            
            
            245
            
            
            
            3363,481
            
            
            
            4,449Liabilities:Pension
      asset
            
            
            (61
            )
            
            
            -Depreciation
            
            
            (420
            )
            
            
            (475
            )Accretion
            
            
            (48
            )
            
            
            (45
            )Loan
      origination fees
            
            
            (308
            )
            
            
            (349
            )Intangible
      assets
            
            
            (1,030
            )
            
            
            (841
            )Investment
      securities
            
            
            (166
            )
            
            
            -Prepaid
      expenses
            
            
            (318
            )
            
            
            (177
            )(2,351
            )
            
            
            (1,887
            )1,130
            
            
            
            2,562Less:
      deferred tax asset valuation allowance
            
            
            (458
            )
            
            
            (540
            )Net
      deferred tax asset
            
            $
            672
            
            
            $
            2,022





Realization
of deferred tax assets is dependent upon the generation of future taxable income
or the existence of sufficient taxable income within the carry back
period.  A valuation allowance is provided when it is more likely than
not that some portion, or all of the deferred tax assets, will not be
realized.  In assessing the need for a valuation allowance, management
considers the scheduled reversal of the deferred tax liabilities, the level of
historical taxable income and the projected future level of taxable income over
the periods in which the temporary differences comprising the deferred tax
assets will be deductible.  The judgment about the level of future
taxable income is inherently subjective and is reviewed on a continual basis as
regulatory and business factors change. The valuation allowance of $458,000
represents the portion of the deferred tax asset that  management
believes may not be realizable, as the Company may not generate sufficient
capital gains to offset its capital loss carry forward.











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A
reconciliation of the federal statutory income tax rate to the effective income
tax rate for the years ended December 31, is as follows:


2009
            
            
            2008Federal
      statutory income tax rate
            
            
            34.0
            %
            
            
            34.0
            %State
      tax, net of federal benefit
            
            
            2.1
            
            
            
            (12.5
            )Tax-exempt
      interest income, net of TEFRA
            
            
            (1.5
            )
            
            
            (17.7
            )Increase
      in value of life insurance
            
            
            (2.5
            )
            
            
            (19.2
            )Deferred
      tax valuation allowance
            
            
            7.1
            
            
            
            45.2Other
            
            
            0.2
            
            
            
            (7.9
            )Effective
      income tax rate
            
            
            39.4
            %
            
            
            21.9
            %





At
December 31, 2009 and 2008, the Company did not have any uncertain tax
positions.  The Company’s policy is to recognize interest and
penalties on unrecognized tax benefits, if any, in income tax expense in the
Consolidated Statements of Income.  The tax years subject to
examination by the taxing authorities are the years ended December 31, 2009,
2008, 2007 and 2006.





NOTE
14: EARNINGS PER SHARE





The
following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:





(In
      thousands, except per share data)
            
            Earnings
            
            
            Shares
            
            
            EPS2009  Net
      income
            
            $
            1,615Preferred
      stock dividends and discount accretion
            
            
            96Net
      income available to common shareholders
            
            
            1,519Basic
      EPS
            
            
            1,519
            
            
            
            2,485
            
            
            $
            0.61Effect
      of dilutive securitiesStock
      options
            
            
            -
            
            
            
            -
            
            
            
            -Diluted
      EPS
            
            $
            1,519
            
            
            
            2,485
            
            
            $
            0.612008  Net
      income
            
            $
            368Basic
      EPS
            
            
            368
            
            
            
            2,484
            
            
            $
            0.15Effect
      of dilutive securitiesStock
      options
            
            
            -
            
            
            
            1
            
            
            
            -Diluted
      EPS
            
            $
            368
            
            
            
            2,485
            
            
            $
            0.15





NOTE
15: COMMITMENTS AND CONTINGENCIES





The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit.  Such commitments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated statement of
condition. The contractual amount of those commitments to extend credit reflects
the extent of involvement the Company has in this particular class of financial
instrument. The Company’s exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of the instrument.  The
Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments.








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At
December 31, 2009 and 2008, the following financial instruments were outstanding
whose contract amounts represent credit risk:




Contract
      Amount(In
      thousands)
            
            2009
            
            
            2008Commitments
      to grant loans
            
            $
            7,187
            
            
            $
            8,723Unfunded
      commitments under lines of credit
            
            
            16,411
            
            
            
            15,710Standby
      letters of credit
            
            
            1,606
            
            
            
            1,639





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitment amounts are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management’s credit
evaluation of the counter party. Collateral held varies but may include
residential real estate and income-producing commercial
properties.  Loan commitments outstanding at December 31, 2009 with
fixed interest rates amounted to approximately $2.3 million. Loan commitments,
including unused lines of credit and standby letters of credit, outstanding at
December 31, 2009 with variable interest rates amounted to approximately $22.9
million.  These outstanding loan commitments carry current market
rates.





Unfunded
commitments under standby letters of credit, revolving credit lines and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers.  These lines of credit usually do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.





Outstanding
letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.  The
majority of these standby letters of credit expire within the next twelve
months.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan
commitments.  The Bank requires collateral supporting these letters of
credit as deemed necessary.  Management believes that the proceeds
obtained through a liquidation of such collateral would be sufficient to cover
the maximum potential amount of future payments required under the corresponding
guarantees.  The amount of the liability as of December 31, 2009 and
2008 for guarantees under standby letters of credit issued is not
material.





The
Company leases land and leasehold improvements under agreements that expire in
various years with renewal options over the next 30 years.  Rental
expense, included in building occupancy expense, amounted to $66,000 for each
year presented.  In October 2002, the Company entered into a land
lease with one of its directors on an arms-length basis. In January 2006, the
Company entered into a lease with Pathfinder Bancorp, MHC for the use of a
training facility.  This lease was also executed on an arms-length
basis.  The rent expense paid to the related parties during 2009 and
2008 was $45,000 for each year. Approximate minimum rental commitments for
noncancelable operating leases are as follows:








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Years
      Ending December 31:(In
      thousands)2010
            
            $
            662011
            
            
            522012
            
            
            432013
            
            
            212014
            
            
            -Thereafter
            
            
            -Total
      minimum lease payments
            
            $
            182





NOTE
16: DIVIDENDS AND RESTRICTIONS





The Board
of Directors of Pathfinder Bancorp, M.H.C., determines whether the Holding
Company will waive or receive dividends declared by the Company each time the
Company declares a dividend, which is expected to be on a quarterly basis. The
Holding Company may elect to receive dividends and utilize such funds to pay
expenses or for other allowable purposes. The Office of Thrift Supervision
(“OTS”) has indicated that (i) the Holding Company shall provide the OTS
annually with written notice of its intent to waive its dividends prior to the
proposed date of the dividend and the OTS shall have the authority to approve or
deny any dividend waiver request; (ii) if a waiver is granted, dividends waived
by the Holding Company will be excluded from the Company’s capital accounts for
purposes of calculating dividend payments to minority
shareholders.  During 2009, the Company paid or accrued dividends
totaling $190,000 to the Holding Company. The Holding Company did not waive the
right to receive its portion of the cash dividends declared during
2009.  During 2008, the Holding Company waived one quarter’s dividends
totaling $163,000.





The
Company's ability to pay dividends to its shareholders is largely dependent on
the Bank's ability to pay dividends to the Company.  In addition to
state law requirements and the capital requirements discussed in Note 17,
federal statutes, regulations and policies limit the circumstances under which
the Bank may pay dividends.  The amount of retained earnings legally
available under these regulations approximated $1,494,000 as of December 31,
2009.  Dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank’s capital to be reduced below
applicable minimum capital requirements.  The Company is prohibited
from accepting or directing Pathfinder Bank to declare or pay a dividend or
other capital distributions without prior written approval of the
OTS.





NOTE
17: REGULATORY MATTERS





The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of its assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain amounts and ratios (set forth in the table below) of total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).





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As of
December 31, 2009, the Bank’s most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as “well-capitalized”, under the
regulatory framework for prompt corrective action.  To be categorized
as “well-capitalized”, the Bank must maintain total risk based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the tables below. There
are no conditions or events since that notification that management believes
have changed the Bank’s category.





The
Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are
presented in the following table.


MinimumTo
      Be "Well-Minimum
            
            
            Capitalized"For
      Capital
            
            
            Under
      PromptActual
            
            
            Adequacy
      Purposes
            
            
            Corrective
      Provisions(Dollars
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of December 31, 2009:Total
      Core Capital (to Risk-Weighted Assets)
            
            $
            33,405
            
            
            
            14.0
            %
            
            $
            19,163
            
            
            
            8.0
            %
            
            $
            23,954
            
            
            
            10.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            30,399
            
            
            
            12.7
            %
            
            $
            9,582
            
            
            
            4.0
            %
            
            $
            14,372
            
            
            
            6.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            30,399
            
            
            
            8.4
            %
            
            $
            14,517
            
            
            
            4.0
            %
            
            $
            18,146
            
            
            
            5.0
            %As
      of December 31, 2008:Total
      Core Capital (to Risk-Weighted Assets)
            
            $
            25,625
            
            
            
            10.8
            %
            
            $
            18,944
            
            
            
            8.0
            %
            
            $
            23,680
            
            
            
            10.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            23,152
            
            
            
            9.8
            %
            
            $
            9,472
            
            
            
            4.0
            %
            
            $
            14,208
            
            
            
            6.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            23,152
            
            
            
            6.8
            %
            
            $
            13,702
            
            
            
            4.0
            %
            
            $
            17,128
            
            
            
            5.0
            %








On
September 11, 2009, the Company entered into the Purchase Agreement with the
United States Department of the Treasury pursuant to which the Company has
issued and sold to Treasury: (i) 6,771 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share,
having a liquidation amount per share equal to $1,000, for a total price of
$6,771,000; and (ii) a Warrant to purchase 154,354 shares of the Company’s
common stock, par value $0.01 per share, at an exercise price per share of
$6.58.  The Company contributed to Pathfinder Bank, its subsidiary,
$5,500,000 or 81.23% of the proceeds of the sale of the Series A Preferred
Stock.





The
$6,771,000 of proceeds was allocated to the Series A Preferred Stock and the
Warrant based on their relative fair values at issuance ($6,065,000 was
allocated to the Series A Preferred Stock and $706,000 to the
Warrant).  The difference between the initial value allocated to the
Series A Preferred Stock and the liquidation value of $6,771,000, i.e. the
preferred discount, will be charged to retained earnings over the first five
years of the contract as an adjustment to the dividend yield using the effective
yield method.





The
Series A Preferred Stock pays cumulative dividends at a rate of 5% per
annum for the first five years and thereafter at a rate of 9% per
annum.  The Series A Preferred Stock is generally
non-voting.  Prior to September 11, 2012, and unless the Company has
redeemed all of the Series A Preferred Stock or the Treasury Department has
transferred all of the Series A Preferred Stock to a third party, the
approval of the Treasury Department will be required for the Company to increase
its common stock dividend or repurchase its common stock or other equity or
capital securities, other than in certain circumstances specified in the
Purchase Agreement.





The
Warrant has a ten-year term and is immediately exercisable.  The
Warrant provides for the adjustment of the exercise price and the number of
shares of the Company’s common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions
of securities or other assets to holders of the Company’s common stock, and upon
certain issuances of the Company’s common stock at or below a specified price
relative to the then current market price of the Company’s common
stock.  Pursuant to the Purchase Agreement, the Treasury Department
has agreed not to exercise voting power with respect to any shares of common
stock issued upon exercise of the Warrant.







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The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.  The Company has agreed to register for resale the
Series A Preferred Stock, the Warrant and the shares of common stock
underlying the Warrant (the “Warrant Shares”), as soon as practicable after the
date of the issuance of the Series A Preferred Stock and the
Warrant.  Neither the Series A Preferred Stock nor the Warrant
will be subject to any contractual restrictions on transfer.





The
Company’s goal is to maintain a strong capital position, consistent with the
risk profile of its subsidiary banks that supports growth and expansion
activities while at the same time exceeding regulatory standards.  At
December 31, 2009, Pathfinder Bank exceeded all regulatory required minimum
capital ratios and met the regulatory definition of a “well-capitalized”
institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6% and a total risk-based capital ratio exceeding
10%.





The Bank
is required to maintain average balances on hand or with the Federal Reserve
Bank.  At December 31, 2009 and 2008, these reserve balances amounted
to $2,070,000 and $2,306,000, respectively.





NOTE 18: INTEREST RATE
DERIVATIVE





Derivative
instruments are entered into primarily as a risk management tool of the Company.
Financial derivatives are recorded at fair value as other assets and other
liabilities. The accounting for changes in the fair value of a derivative
depends on whether it has been designated and qualifies as part of a hedging
relationship. For a fair value hedge, changes in the fair value of the
derivative instrument and changes in the fair value of the hedged asset or
liability are recognized currently in earnings. For a cash flow hedge, changes
in the fair value of the derivative instrument, to the extent that it is
effective, are recorded in other comprehensive income and subsequently
reclassified to earnings as the hedged transaction impacts net income. Any
ineffective portion of a cash flow hedge is recognized currently in
earnings.





During
the fourth quarter of fiscal 2009, the Company entered into an interest rate
swap agreement with a $2 million notional amount to convert a portion of the
variable-rate junior subordinated debentures to a fixed rate for a term of
approximately 7 years at a rate of 4.96%.  The derivative is designated as
a cash flow hedge. The fair value of the derivative instrument was approximately
$1,000 at December 31, 2009, and is included in other assets.





No gain
or loss was recognized in earnings for the year ended December 31, 2009
related to the interest rate swap.  The Company posted cash, of $100,000,
under collateral arrangements to satisfy collateral requirements associated with
the interest rate swap contract.





NOTE
19: FAIR VALUE MEASUREMENTS AND DISCLOSURES





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





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









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





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





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





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





Investment
securities:  The fair values of securities available for sale are
obtained from an independent third party and are based on quoted prices on
nationally recognized exchange (Level 1), where available.  If quoted
prices are not available, fair values are measured by utilizing matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for specific securities
but rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2).  Management made no adjustment to the fair value
quotes that were received from the independent third party pricing
service.





Impaired
loans: Impaired loans are those loans in which the Company has measured
impairment generally based on the fair value of the loan’s
collateral.  Fair value is generally determined based upon independent
third party appraisals of the properties, or discounted cash flows based upon
expected proceeds.  These assets are included as Level 3 fair values,
based upon the lowest level of input that is significant to the fair value
measurements.  The fair value consists of loan balances less their
valuation allowances.





Foreclosed
real estate:  Properties acquired through foreclosure, or by deed in
lieu of foreclosure, are initially recorded at their fair value less estimated
disposal costs.  Subsequent to foreclosure, foreclosed real estate is
carried at the lower of carrying value or fair value, with the difference
charged to earnings.  Fair value is generally determined based upon
independent third party appraisals of the properties, or discounted cash flows
based upon expected proceeds.   These assets are included as
Level 3 fair values, based upon the lowest level of input that is significant to
the fair value measurements.





The
following tables summarize assets measured at fair value on a recurring basis as
of December 31,  segregated by the level of valuation inputs within
the hierarchy utilized to measure fair value:





At
      December 31, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueInvestment
      securities available for sale
            
            $
            2,088
            
            
            $
            70,666
            
            
            $
            -
            
            
            $
            72,754At
      December 31, 2008Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueInvestment
      securities available for sale
            
            $
            1,918
            
            
            $
            70,220
            
            
            $
            -
            
            
            $
            72,138





Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).






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The
following tables summarize assets measured at fair value on a nonrecurring basis
as of December 31, segregated by the level of valuation inputs within the
hierarchy utilized to measure fair value:


At
      December 31, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            907
            
            
            $
            907At
      December 31, 2008Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            295
            
            
            $
            295Foreclosed
      real estate
            
            
            -
            
            
            
            -
            
            
            
            26
            
            
            
            26





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





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





The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities.  Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful.  The Company, in estimating its fair
value disclosures for financial instruments, used the following methods and
assumptions:





Cash and cash equivalents –
The carrying amounts of these assets approximate their fair value.





Investment securities – The
fair values of securities available for sale are obtained from an independent
third party and are based on quoted prices on nationally recognized exchange
(Level 1), where available.  If quoted prices are not available, fair
values are measured by utilizing matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities without relying
exclusively on quoted prices for specific securities, but rather by relying on
the securities’ relationship to other benchmark quoted securities (Level
2).  Management made no adjustment to the fair value quotes that were
received from the independent third party pricing service.





Loans – The fair values of
portfolio loans, excluding impaired loans, are estimated using an option
adjusted discounted cash flow model that discounts future cash flows using
recent market interest rates, market volatility and credit spread
assumptions.





Federal Home Loan Bank stock –
The carrying amount of these assets approximates their fair value.





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Mortgage servicing rights -
The carrying amount of these assets approximates their fair value.





Accrued interest receivable and
payable – The carrying amount of these assets approximates their fair
value.





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





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





Junior subordinated debentures
– Current economic conditions have rendered the market for this liability
inactive.  As such, we are unable to determine a good estimate of fair
value.  Since the rate paid on the debentures held is lower than what
would be required to secure an interest in the same debt at year end, and we are
unable to obtain a current fair value, we have disclosed that the carrying value
approximates the fair value.





Off-balance sheet instruments
– Fair values for the Company’s off-balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit
standing.  Such fees were not material at December 31, 2009 and
2008.





The
carrying amounts and fair values of the Company’s financial instruments as of
December 31 are presented in the following table:







2009
            
            
            2008Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimated(Dollars
      in thousands)
            
            Amounts
            
            
            Fair
      Values
            
            
            Amounts
            
            
            Fair
      ValuesFinancial
      assets:Cash
      and cash equivalents
            
            $
            14,631
            
            
            $
            14,631
            
            
            $
            7,678
            
            
            $
            7,678Investment
      securities
            
            
            72,754
            
            
            
            72,754
            
            
            
            72,138
            
            
            
            72,138Net
      loans
            
            
            259,387
            
            
            
            266,290
            
            
            
            247,400
            
            
            
            250,020Federal
      Home Loan Bank stock
            
            
            1,899
            
            
            
            1,899
            
            
            
            2,549
            
            
            
            2,549Accrued
      interest receivable
            
            
            1,482
            
            
            
            1,482
            
            
            
            1,678
            
            
            
            1,678Mortgage
      servicing rights
            
            
            61
            
            
            
            61
            
            
            
            15
            
            
            
            15Interest
      rate swap derivative
            
            
            1
            
            
            
            1
            
            
            
            -
            
            
            
            -Financial
      liabilities:Deposits
            
            $
            296,839
            
            
            $
            299,613
            
            
            $
            269,438
            
            
            $
            272,207Borrowed
      funds
            
            
            36,000
            
            
            
            37,116
            
            
            
            51,975
            
            
            
            53,777Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155
            
            
            
            5,155
            
            
            
            5,155Accrued
      interest payable
            
            
            189
            
            
            
            189
            
            
            
            211
            
            
            
            211Off-balance
      sheet instruments:Standby
      letters of credit
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Commitments
      to extend credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -








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72
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NOTE
20: PARENT COMPANY – FINANCIAL INFORMATION





The
following represents the condensed financial information of Pathfinder Bancorp,
Inc. as of and for the years ended December 31:





Statements
      of Condition
            
            2009
            
            
            2008(In
      thousands)AssetsCash
      and cash equivalents
            
            $
            1,242
            
            
            $
            10Investments
            
            
            20
            
            
            
            18Investment
      in bank subsidiary
            
            
            32,820
            
            
            
            24,603Investment
      in non-bank subsidiary
            
            
            155
            
            
            
            155Other
      assets
            
            
            257
            
            
            
            149Total
      assets
            
            $
            34,494
            
            
            $
            24,935Liabilities
      and Shareholders' EquityAccrued
      liabilities
            
            $
            101
            
            
            $
            285Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155Shareholders'
      equity
            
            
            29,238
            
            
            
            19,495Total
      liabilities and shareholders' equity
            
            $
            34,494
            
            
            $
            24,935Statements
      of Income
            
            
            2009
            
            
            
            2008(In
      thousands)IncomeDividends
      from bank subsidiary
            
            $
            825
            
            
            $
            900Dividends
      from non-bank subsidiary
            
            
            5
            
            
            
            7Losses
      on impairment of investment security
            
            
            (4
            )
            
            
            -Total
      income
            
            
            826
            
            
            
            907ExpensesInterest
            
            
            157
            
            
            
            257Operating
            
            
            162
            
            
            
            126Total
      expenses
            
            
            319
            
            
            
            383Income
      before taxes and equity in (excess of) undistributednet
      income of subsidiaries
            
            
            507
            
            
            
            524Tax
      benefit
            
            
            101
            
            
            
            100Income
      before equity in (excess of) undistributed net incomeof
      subsidiaries
            
            
            608
            
            
            
            624Equity
      in (excess of) undistributed net income of subsidiaries
            
            
            1,007
            
            
            
            (256
            )Net
      income
            
            $
            1,615
            
            
            $
            368











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Statements
      of Cash Flows
            
            2009
            
            
            2008(In
      thousands)Operating
      ActivitiesNet
      income
            
            $
            1,615
            
            
            $
            368(Equity
      in) excess of undistributed earnings of subsidiaries
            
            
            (1,007
            )
            
            
            256Impairment
      write-down on investment security
            
            
            4
            
            
            
            -Other
      operating activities
            
            
            (113
            )
            
            
            (108
            )Net
      cash provided by operating activities
            
            
            499
            
            
            
            516Investing
      ActivitiesCapital
      contributed to wholly owned bank subsidiary
            
            
            (5,500
            )
            
            
            -Net
      cash used in investing activities
            
            
            (5,500
            )
            
            
            -Financing
      activitiesProceeds
      from exercise of stock options
            
            
            -
            
            
            
            10Proceeds
      from the issuance of preferred stock and common stock
    warrants
            
            
            6,771
            
            
            
            -Cash
      dividends paid to preferred shareholders
            
            
            (60
            )
            
            
            -Cash
      dividends paid to common shareholders
            
            
            (478
            )
            
            
            (694
            )Net
      cash provided by (used in) financing activities
            
            
            6,233
            
            
            
            (684
            )Increase
      (decrease) in cash and cash equivalents
            
            
            1,232
            
            
            
            (168
            )Cash
      and cash equivalents at beginning of year
            
            
            10
            
            
            
            178Cash
      and cash equivalents at end of year
            
            $
            1,242
            
            
            $
            10





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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





None.








ITEM
9A(T): CONTROLS AND PROCEDURES





REPORT
OF MANAGEMENT’S RESPONSIBILITY





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.





MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Management’s
report on internal control over financial reporting is contained in “Item 8 –
Financial Statements and Supplementary Data” in this annual report in Form
10-K.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.





CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.








ITEM
9B: OTHER INFORMATION





None





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PART III








ITEM
10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE, COMPLIANCE WITH SECTIONS 16 (A) OF EXCHANGE ACT





(a)
            Information
      concerning the directors of the Company is incorporated by reference
      hereunder in the Company's Proxy Materials for the Annual Meeting of
      Stockholders.


(b)
            Set
      forth below is information concerning the Executive Officers of the
      Company at December 31, 2009.





Name
            Age
            Positions
      Held With the CompanyThomas
      W. Schneider
            48
            President
      and Chief Executive OfficerJames
      A. Dowd, CPA
            42
            Senior
      Vice President, Chief Financial OfficerEdward
      A. Mervine
            53
            Senior
      Vice President, General CounselMelissa
      A. Miller
            52
            Senior
      Vice President, Chief Operating OfficerRonald
      Tascarella
            51
            Senior
      Vice President, Chief Credit
Officer


ITEM
11: EXECUTIVE COMPENSATION





Information
with respect to management compensation and transactions required under this
item is incorporated by reference hereunder in the Company's Proxy Materials for
the Annual Meeting of Stockholders under the caption "Compensation
Committee".








ITEM
12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





The
information required by this item is incorporated by reference hereunder in the
Company’s Proxy Materials for the Annual Meeting of Stockholders under the
caption "Voting Securities and Principal Holders Thereof".








ITEM
13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information required by this item is incorporated by reference hereunder in the
Company’s Proxy Materials for the Annual Meeting of Stockholders under the
caption "Transactions with Certain Related Persons".








ITEM
14: PRINCIPAL ACCOUNTING FEES AND SERVICES





The
information required by this item is incorporated by reference hereunder in the
Company’s Proxy Materials for the Annual Meeting of Stockholders under the
caption "Audit and Related Fees".








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PART IV








ITEM
15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a)(1)
            Financial
      Statements - The Company’s consolidated financial statements, for the
      years ended December 31, 2009 and 2008, together with the Report of
      Independent Registered Public Accounting Firm are filed as part of this
      Form 10-K report.  See “Item 8: Financial Statements and
      Supplementary Data.”(a)(2)
            Financial
      Statement Schedules - All financial statement schedules have been omitted
      as the required information is inapplicable or has been included in “Item
      7: Management Discussion and Analysis.”(b)
            Exhibits3.1
            Certificate
      of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by
      reference to the Company's Current Report on Form 8-K filed on June 25,
      2001)3.2
            Bylaws
      of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the
      Company's Quarterly Report on Form 10-Q filed on August 15, 2005 and
      November 28, 2007)4
            Form
      of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by
      reference to the Company's Current Report on Form 8-K dated June 25,
      2001)10.1
            Form
      of Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by
      reference to the Company's S-8 file no. 333-53027)10.2
            Form
      of Pathfinder Bank 1997 Recognition and Retention Plan (Incorporated by
      reference to the Company's S-8 file no. 333-53027)10.3
            2003
      Executive Deferred Compensation Plan (Incorporated herein by reference to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2008 file no. 000-23601)10.4
            2003
      Trustee Deferred Fee Plan (Incorporated herein by reference to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008
      file no. 000-23601)10.5
            Employment
      Agreement between the Bank and Thomas W. Schneider, President and Chief
      Executive Officer (Incorporated by reference to the Company's Annual
      Report on Form 10-K for the year ended December 31, 2008 file no.
      000-23601)10.6
            Employment
      Agreement between the Bank and Edward A. Mervine, Vice President, General
      Counsel and Secretary (Incorporated by reference to the Company's Annual
      Report on Form 10-K for the year ended December 31, 2008 file no.
      000-23601)10.7
              
              10.8
            Change
      of Control Agreement between the Bank and Ronald Tascarella (Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2008 file no. 000-23601)
              
              Change
      of Control Agreement between the Bank and James A. Dowd (Incorporated by
      reference to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2008 file no. 000-23601)










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10.9
              
              10.10
              
              10.11
            Change
      of Control Agreement between the Bank and Melissa A. Miller (Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2008 file no. 000-23601)
              
              Executive
      Supplemental Retirement Agreement between the Bank and Chris C. Gagas
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2008 file no. 000-23601)
              
              Executive
      Supplemental Retirement Agreement between the Bank and Thomas W. Schneider
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2008 file no. 000-2360114
            Code
      of Ethics (Incorporated by reference to the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2003)21
            Subsidiaries
      of Company23
            Consent
      of ParenteBeard LLC31.1
            Rule
      13a-14(a) / 15d-14(a) Certification of the Chief Executive
      Officer31.2                             
      Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial
      Officer


32.1                             
Section 1350 Certification of the Chief Executive and Chief Financial
Officer





99.1
            Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of
      the Emergency Economic


Stabilization
Act of 2008





99.2
            Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of
      the Emergency Economic Stabilization Act of
2008


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Signatures





Pursuant
      to the requirements of Section 13 of the Securities Exchange Act of 1934,
      the Company has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.Pathfinder
      Bancorp, Inc.Date:
            March
      24, 2010
            By:
            /s/
      Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive OfficerPursuant
      to the requirements of the Securities Exchange of 1934, this report has
      been signed below by the following persons on behalf of the Registrant and
      in the capacities and on the dates indicated.





By:
            
            /s/
      Thomas W. Schneider
            By:
            
            /s/
      James A. DowdThomas
      W. Schneider, President and
            
            
            James
      A. Dowd, Senior Vice President andChief
      Executive Officer
            
            
            Chief
      Financial Officer(Principal
      Executive Officer)
            
            
            (Principal
      Financial Officer)Date:
            
            March
      24, 2010
            Date:
            
            March
      24, 2010By:
            
            /s/
      Janette Resnick
            By:
            
            /s/
      Shelley J. TafelJanette
      Resnick, Director
            
            
            Shelley
      J. Tafel, Vice President andChairman
      of the Board
            
            
            Controller(Principal
      Accounting Officer)Date:
            
            March
      24, 2010
            Date:
            
            March
      24, 2010By:
            
            /s/
      Bruce E. Manwaring
            By:
            
            /s/
      Steven W. ThomasBruce
      E. Manwaring, Director
            
            
            Steven
      W. Thomas, DirectorDate:
            
            March
      24, 2010
            Date:
            
            March
      24, 2010By:
            
            /s/
      L. William Nelson
            By:
            
            /s/
      Chris R. BurrittL.
      William Nelson, Director
            
            
            Chris
      R. Burritt, DirectorDate:
            
            March
      24, 2010
            Date:
            
            March
      24, 2010By:
            
            /s/
      Corte J. Spencer
            By:
            
            /s/
      George P. JoyceCorte
      J. Spencer, Director
            
            
            George
      P. Joyce, DirectorDate:
            
            March
      24, 2010
            Date:
            
            March
      24, 2010By:
            
            /s/
      Lloyd StempleLloyd
      Stemple, DirectorDate:
            
            March
      24, 2010





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EXHIBIT
21:  SUBSIDIARIES OF THE COMPANY





Company
            Percent
      Owned
            Jurisdiction
      or State of IncorporationPathfinder
      Bank
            100%
            New
      YorkPathfinder
      Statutory Trust II
            100%
            DelawarePathfinder
      Commercial Bank (1)
            100%
            New
      YorkPathfinder
      REIT, Inc. (1)
            100%
            New
      YorkWhispering
      Oaks Development Corp. (1)
            100%
            New
      York





(1)
Wholly owned subsidiary of Pathfinder Bank.











EXHIBIT
23: CONSENT OF PARENTEBEARD LLC





CONSENT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPathfinder
      Bancorp, Inc.
              Oswego,
      New YorkWe
      hereby consent to the incorporation by reference in the Registration
      Statement on Form S-8 (No. 333-53027) of Pathfinder Bancorp, Inc. of our
      report dated March 24, 2010, relating to the consolidated financial
      statements, which appear in this Form 10-K.ParenteBeard
      LLC
              Syracuse,
      New York
              March
      24, 2010
            /s/
      PARENTEBEARD LLC





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EXHIBIT
31.1: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive
Officer





Certification
      of Chief Executive Officer
              
              Pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002I,
      Thomas W. Schneider, President and Chief Executive Officer, certify
      that:1.I
      have reviewed this Annual report on Form 10-K of Pathfinder Bancorp,
      Inc.;2.Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;3.Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;4.The
      registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;
              (b)Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting, to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;(c)Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation; and(d)Disclosed
      in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant's internal control over financial
      reporting; and5.The
      registrant's other certifying officer and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant's auditors and the audit committee of the registrant's
      board of directors:(a)All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information;
and(b)Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.March
      24, 2010
            /s/
      Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive Officer





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EXHIBIT
31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial
Officer





Certification
      of Chief Financial Officer
              
              Pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002I,  James
      A. Dowd, Senior Vice President and Chief Financial Officer, certify
      that:1.I
      have reviewed this Annual report on Form 10-K of Pathfinder Bancorp,
      Inc.;2.Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a   material fact necessary
      to make the statements made, in light of the circumstances under which
      such statements were made, not misleading with respect to the period
      covered by this report;3.Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;4.The
      registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;
              (b)Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting, to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;(c)Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation; and(d)Disclosed
      in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant's internal control over financial
      reporting; and5.The
      registrant's other certifying officer and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant's auditors and the audit committee of the registrant's
      board of directors:(a)All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information;
and(b)Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.March
      24, 2010
            /s/
      James A. Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial Officer





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EXHIBIT
32.1  Section 1350 Certification of the Chief Executive and Chief
Financial Officer





Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002Thomas
      W. Schneider, President and Chief Executive Officer, and James A. Dowd,
      Senior Vice President and Chief Financial Officer of Pathfinder Bancorp,
      Inc. (the "Company"), each certify in his capacity as an officer of the
      Company that he has reviewed the Annual Report of the Company on Form 10-K
      for the year ended December 31, 2009 and that to the best of his
      knowledge:1.the
      report fully complies with the requirements of Sections 13(a) of the
      Securities Exchange Act of 1934; and2.the
      information contained in the report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.The
      purpose of this statement is solely to comply with Title 18, Chapter 63,
      Section 1350 of the United States Code, as amended by Section 906 of the
      Sarbanes-Oxley Act of 2002.March
      24, 2010
            /s/
      Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive OfficerMarch
      24, 2010
            /s/
      James A. Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial
Officer




















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EXHIBIT
99.1  Certification of Chief Executive Officer Pursuant to Section
111(b)(4) of the Emergency Economic Stabilization Act of 2008





I, Thomas
W. Schneider, certify, based on my knowledge, that:





(i) The
compensation committee of Pathfinder Bancorp, Inc. has discussed, reviewed, and
evaluated with senior risk officers at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, senior executive
officer (SEO) compensation plans and employee compensation plans and the risks
these plans pose to Pathfinder Bancorp, Inc.;





(ii) The
compensation committee of Pathfinder Bancorp, Inc. has identified and limited
during the period beginning on the later of the closing date of the agreement
between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with
the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the
features in the SEO compensation plans that could lead SEOs to take unnecessary
and excessive risks that could threaten the value of Pathfinder Bancorp, Inc.
and identified any features in the employee compensation plans that pose risks
to Pathfinder Bancorp, Inc. and limited those features to ensure that Pathfinder
Bancorp, Inc. is not unnecessarily exposed to risks;





(iii) The
compensation committee has reviewed at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, the terms of each
employee compensation plan and identified the features in the plan that could
encourage the manipulation of reported earnings of Pathfinder Bancorp, Inc. to
enhance the compensation of an employee and has limited those
features;





(iv) The
compensation committee of Pathfinder Bancorp, Inc. will certify to the reviews
of the SEO compensation plans and employee compensation plans required under (i)
and (iii) above;





(v) The
compensation committee of Pathfinder Bancorp, Inc. will provide a narrative
description of how it limited during any part of the most recently completed
fiscal year that included a TARP period the features in (A) SEO compensation
plans that could lead SEOs to take unnecessary and excessive risks that could
threaten the value of Pathfinder Bancorp, Inc.; (B) Employee compensation plans
that unnecessarily expose Pathfinder Bancorp, Inc. to risks; and (C) Employee
compensation plans that could encourage the


manipulation
of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of
an employee;





(vi)
Pathfinder Bancorp, Inc. has required that bonus payments, as defined in the
regulations and guidance established under section 111 of EESA (bonus payments),
of the SEOs and twenty next most highly compensated employees be subject to a
recovery or ‘‘clawback’’ provision during any part of the most recently
completed fiscal year that was a TARP period if the bonus payments were based on
materially inaccurate financial statements or any other materially inaccurate
performance metric criteria;





(vii)
Pathfinder Bancorp, Inc. has prohibited any golden parachute payment, as defined
in the regulations and guidance established under section 111 of EESA, to an SEO
or any of the next five most highly compensated employees during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date;





(viii)
Pathfinder Bancorp, Inc. has limited bonus payments to its applicable employees
in accordance with section 111 of EESA and the regulations and guidance
established thereunder during the period beginning on the later of the closing
date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15,
2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year
containing that date;





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(ix) The
board of directors of Pathfinder Bancorp, Inc. has established an excessive or
luxury expenditures policy, as defined in the regulations and guidance
established under section 111 of EESA, has provided this policy to Treasury and
its primary regulatory agency, and Pathfinder Bancorp, Inc. and its employees
have complied with this policy during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date, and that any expenses requiring approval of the board
of directors, a committee of the board of directors, an SEO, or an executive
officer with a similar level of responsibility, were properly
approved;





(x)
Pathfinder Bancorp, Inc. will permit a non-binding shareholder resolution in
compliance with any applicable Federal securities rules and regulations on the
disclosures provided under the Federal securities laws related to SEO
compensation paid or accrued during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date;





(xi)
Pathfinder Bancorp, Inc. will disclose the amount, nature, and justification for
the offering during the period beginning on the later of the closing date of the
agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and
ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing
that date of any perquisites, as defined in the regulations and guidance
established under section 111 of EESA, whose total value exceeds $25,000 for
each employee subject to the bonus payment limitations identified in paragraph
(vii);





(xii)
Pathfinder Bancorp, Inc. will disclose whether Pathfinder Bancorp, Inc., the
board of directors of Pathfinder Bancorp, Inc., or the compensation committee of
Pathfinder Bancorp, Inc. has engaged during the period beginning on the later of
the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury
or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s
fiscal year containing that date, a compensation consultant; and the services
the compensation consultant or any affiliate of the compensation consultant
provided during this period;





(xiii)
Pathfinder Bancorp, Inc. has prohibited the payment of any grossups, as defined
in the regulations and established under section 111 of EESA, to the SEOs and
the next twenty most highly compensated employees during the period beginning on
the later of the closing date of the agreement between Pathfinder Bancorp, Inc.
and Treasury or June 15, 2009 and ending with the last day of Pathfinder
Bancorp, Inc.’s fiscal year containing that date;





(xiv)
Pathfinder Bancorp, Inc. has substantially complied with all other requirements
related to employee compensation that are provided in the agreement between
Pathfinder Bancorp, Inc. and Treasury, including any amendments;


(xv) The
following employees are the SEOs and the twenty next most highly compensated
employees for the current fiscal year and the most recently completed fiscal
year, with the non-SEOs ranked in order of level of annual compensation starting
with the greatest amount:


Name
              Title
              EmployerSEOs:Thomas
      Schneider
              President
      & Chief Executive Officer
              Pathfinder
      BankEdward
      Mervine
              Senior
      Vice President,  General Counsel & Corporate
      Secretary
              Pathfinder
      BankJames
      Dowd
              Senior
      Vice President & Chief Financial Officer
              Pathfinder
      BankRon
      Tascarella
              Senior
      Vice President & Chief Credit Officer
              Pathfinder
      BankMelissa
      Miller
              Senior
      Vice President & Chief Operating Officer
              Pathfinder
      Bank


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Name
            Title
            EmployerNon-SEOs:Daniel
      Phillips
            Vice
      President & Chief Information Officer
            Pathfinder
      BankShelley
      Tafel
            Vice
      President & Controller
            Pathfinder
      BankMichael
      Quenville
            Vice
      President & Business Development Officer
            Pathfinder
      BankRhonda
      Hutchins
            Vice
      President, Compliance
            Pathfinder
      BankWilliam
      O'Brien
            Vice
      President & Business Relationship Manager
            Pathfinder
      BankCraig
      Nessel
            Branch
      Manager
            Pathfinder
      BankLaurie
      Lockwood
            Assistant
      Vice President & Assistant Controller
            Pathfinder
      BankMichele
      Torbitt
            Assistant
      Vice President & Electronic Commerce Manager
            Pathfinder
      BankJoseph
      McManus
            Computer
      Operation Manager
            Pathfinder
      BankRoberta
      Davis
            Assistant
      Vice President & Financial Analyst
            Pathfinder
      BankCynthia
      Claflin
            Assistant
      Vice President & Branch Manager
            Pathfinder
      BankBarbara
      Cowles
            Branch
      Manager
            Pathfinder
      BankDenise
      Lyga
            Branch
      Manager
            Pathfinder
      BankPamela
      Knox
            Assistant
      Vice President & Building Loan Specialist
            Pathfinder
      BankDeana
      Michaels
            Branch
      Manager
            Pathfinder
      BankLisa
      Kimball
            Assistant
      Vice President & Internal Audit Manager
            Pathfinder
      BankBeth
      Alfieri
            Assistant
      Vice President & Account Manager
            Pathfinder
      BankAnita
      Austin
            Internal
      Auditor
            Pathfinder
      BankReyne
      Pierce
            Assistant
      Vice President & Retail Lending Manager
            Pathfinder
      BankCrystal
      Rafte
            Assistant
      Vice President & Operations Manager
            Pathfinder
      BankSusan
      Cahill
            Branch
      Manager
            Pathfinder
      Bank





(xvi) I
understand that a knowing and willful false or fraudulent statement made in
connection with this certification may be punished by fine, imprisonment, or
both. (See,for
example, 18 U.S.C. 1001.)











Date:  March
24,
2010                                                           /s/
Thomas W. Schneider


Thomas W. Schneider,


President and Chief Executive
Officer

















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EXHIBIT
99.2 Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of
the Emergency Economic Stabilization Act of 2008





I, James
A. Dowd, certify, based on my knowledge, that:





(i) The
compensation committee of Pathfinder Bancorp, Inc. has discussed, reviewed, and
evaluated with senior risk officers at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, senior executive
officer (SEO) compensation plans and employee compensation plans and the risks
these plans pose to Pathfinder Bancorp, Inc.;





(ii) The
compensation committee of Pathfinder Bancorp, Inc. has identified and limited
during the period beginning on the later of the closing date of the agreement
between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with
the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the
features in the SEO compensation plans that could lead SEOs to take unnecessary
and excessive risks that could threaten the value of Pathfinder Bancorp, Inc.
and identified any features in the employee compensation plans that pose risks
to Pathfinder Bancorp, Inc. and limited those features to ensure that Pathfinder
Bancorp, Inc. is not unnecessarily exposed to risks;





(iii) The
compensation committee has reviewed at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, the terms of each
employee compensation plan and identified the features in the plan that could
encourage the manipulation of reported earnings of Pathfinder Bancorp, Inc. to
enhance the compensation of an employee and has limited those
features;





(iv) The
compensation committee of Pathfinder Bancorp, Inc. will certify to the reviews
of the SEO compensation plans and employee compensation plans required under (i)
and (iii) above;





(v) The
compensation committee of Pathfinder Bancorp, Inc. will provide a narrative
description of how it limited during any part of the most recently completed
fiscal year that included a TARP period the features in (A) SEO compensation
plans that could lead SEOs to take unnecessary and excessive risks that could
threaten the value of Pathfinder Bancorp, Inc.; (B) Employee compensation plans
that unnecessarily expose Pathfinder Bancorp, Inc. to risks; and (C) Employee
compensation plans that could encourage the


manipulation
of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of
an employee;





(vi)
Pathfinder Bancorp, Inc. has required that bonus payments, as defined in the
regulations and guidance established under section 111 of EESA (bonus payments),
of the SEOs and twenty next most highly compensated employees be subject to a
recovery or ‘‘clawback’’ provision during any part of the most recently
completed fiscal year that was a TARP period if the bonus payments were based on
materially inaccurate financial statements or any other materially inaccurate
performance metric criteria;





(vii)
Pathfinder Bancorp, Inc. has prohibited any golden parachute payment, as defined
in the regulations and guidance established under section 111 of EESA, to an SEO
or any of the next five most highly compensated employees during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date;





(viii)
Pathfinder Bancorp, Inc. has limited bonus payments to its applicable employees
in accordance with section 111 of EESA and the regulations and guidance
established thereunder during the period beginning on the later of the closing
date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15,
2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year
containing that date;





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(ix) The
board of directors of Pathfinder Bancorp, Inc. has established an excessive or
luxury expenditures policy, as defined in the regulations and guidance
established under section 111 of EESA, has provided this policy to Treasury and
its primary regulatory agency, and Pathfinder Bancorp, Inc. and its employees
have complied with this policy during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date, and that any expenses requiring approval of the board
of directors, a committee of the board of directors, an SEO, or an executive
officer with a similar level of responsibility, were properly
approved;





(x)
Pathfinder Bancorp, Inc. will permit a non-binding shareholder resolution in
compliance with any applicable Federal securities rules and regulations on the
disclosures provided under the Federal securities laws related to SEO
compensation paid or accrued during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date;





(xi)
Pathfinder Bancorp, Inc. will disclose the amount, nature, and justification for
the offering during the period beginning on the later of the closing date of the
agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and
ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing
that date of any perquisites, as defined in the regulations and guidance
established under section 111 of EESA, whose total value exceeds $25,000 for
each employee subject to the bonus payment limitations identified in paragraph
(vii);





(xii)
Pathfinder Bancorp, Inc. will disclose whether Pathfinder Bancorp, Inc., the
board of directors of Pathfinder Bancorp, Inc., or the compensation committee of
Pathfinder Bancorp, Inc. has engaged during the period beginning on the later of
the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury
or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s
fiscal year containing that date, a compensation consultant; and the services
the compensation consultant or any affiliate of the compensation consultant
provided during this period;





(xiii)
Pathfinder Bancorp, Inc. has prohibited the payment of any grossups, as defined
in the regulations and established under section 111 of EESA, to the SEOs and
the next twenty most highly compensated employees during the period beginning on
the later of the closing date of the agreement between Pathfinder Bancorp, Inc.
and Treasury or June 15, 2009 and ending with the last day of Pathfinder
Bancorp, Inc.’s fiscal year containing that date;





(xiv)
Pathfinder Bancorp, Inc. has substantially complied with all other requirements
related to employee compensation that are provided in the agreement between
Pathfinder Bancorp, Inc. and Treasury, including any amendments;





(xv) The
following employees are the SEOs and the twenty next most highly compensated
employees for the current fiscal year and the most recently completed fiscal
year, with the non-SEOs ranked in order of level of annual compensation starting
with the greatest amount:







Name
            Title
            EmployerSEOs:Thomas
      Schneider
            President
      & Chief Executive Officer
            Pathfinder
      BankEdward
      Mervine
            Senior
      Vice President,  General Counsel & Corporate
      Secretary
            Pathfinder
      BankJames
      Dowd
            Senior
      Vice President & Chief Financial Officer
            Pathfinder
      BankRon
      Tascarella
            Senior
      Vice President & Chief Credit Officer
            Pathfinder
      BankMelissa
      Miller
            Senior
      Vice President & Chief Operating Officer
            Pathfinder
      Bank







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Name
              Title
              EmployerNon-SEOs:Daniel
      Phillips
              Vice
      President & Chief Information Officer
              Pathfinder
      BankShelley
      Tafel
              Vice
      President & Controller
              Pathfinder
      BankMichael
      Quenville
              Vice
      President & Business Development Officer
              Pathfinder
      BankRhonda
      Hutchins
              Vice
      President, Compliance
              Pathfinder
      BankWilliam
      O'Brien
              Vice
      President & Business Relationship Manager
              Pathfinder
      BankCraig
      Nessel
              Branch
      Manager
              Pathfinder
      BankLaurie
      Lockwood
              Assistant
      Vice President & Assistant Controller
              Pathfinder
      BankMichele
      Torbitt
              Assistant
      Vice President & Electronic Commerce Manager
              Pathfinder
      BankJoseph
      McManus
              Computer
      Operation Manager
              Pathfinder
      BankRoberta
      Davis
              Assistant
      Vice President & Financial Analyst
              Pathfinder
      BankCynthia
      Claflin
              Assistant
      Vice President & Branch Manager
              Pathfinder
      BankBarbara
      Cowles
              Branch
      Manager
              Pathfinder
      BankDenise
      Lyga
              Branch
      Manager
              Pathfinder
      BankPamela
      Knox
              Assistant
      Vice President & Building Loan Specialist
              Pathfinder
      BankDeana
      Michaels
              Branch
      Manager
              Pathfinder
      BankLisa
      Kimball
              Assistant
      Vice President & Internal Audit Manager
              Pathfinder
      BankBeth
      Alfieri
              Assistant
      Vice President & Account Manager
              Pathfinder
      BankAnita
      Austin
              Internal
      Auditor
              Pathfinder
      BankReyne
      Pierce
              Assistant
      Vice President & Retail Lending Manager
              Pathfinder
      BankCrystal
      Rafte
              Assistant
      Vice President & Operations Manager
              Pathfinder
      BankSusan
      Cahill
              Branch
      Manager
              Pathfinder
      Bank


(xvi) I
understand that a knowing and willful false or fraudulent statement made in
connection with this certification may be punished by fine, imprisonment, or
both. (See,for
example, 18 U.S.C. 1001.)











Date:  March
24,
2010                                                          /s/
James A. Dowd


James A. Dowd,


Senior Vice President and Chief
Financial Officer





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