SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549


_____________________________




FORM
10-Q





[X] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the quarterly period ending March 31, 2010





OR





[  ]TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934


For
the transition period from _______ to _______





Commission
File Number: 000-23601





PATHFINDER
BANCORP, INC.


(Exact
Name of Company as Specified in its Charter)





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





214 West First Street,
Oswego, NY 13126


(Address
of Principal Executive Office) (Zip Code)





(315)
343-0057


(Issuer's
Telephone Number including area code)








Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


YES T        NO
*





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T 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 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 *    NO
T





As of May
14, 2010, there were 2,972,119 shares issued and 2,484,832 shares outstanding of
the Registrant’s Common Stock.














</TABLE>


PATHFINDER
BANCORP, INC.


INDEX











PART
      I - FINANCIAL INFORMATION
            
            PAGE
      NO.Item
      1.
            Consolidated
      Financial Statements (Unaudited)Consolidated
      Statements of Condition
            
            3Consolidated
      Statements of Income
            
            4Consolidated
      Statements of Changes in Shareholders' Equity
            
            5Consolidated
      Statements of Cash Flows
            
            6Notes
      to Consolidated Financial Statements
            
            7Item
      2.
            Management's
      Discussion and Analysis of Financial Condition
            
            17and
      Results of OperationsItem
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            23Item
      4T.
            Controls
      and Procedures
            
            23PART
      II - OTHER INFORMATION
            
            24Item
      1.
            Legal
      proceedingsItem
      1A.
            Risk
      FactorsItem
      2.
            Unregistered
      sales of equity securities and use of proceedsItem
      3.
            Defaults
      upon senior securitiesItem
      4.
            Removed
      and ReservedItem
      5.
            Other
      informationItem
      6.
            ExhibitsSIGNATURES
            
            25EXHIBITS
            
            26










PART
I FINANCIAL INFORMATION


Item
1 – Consolidated Financial Statements





Pathfinder
Bancorp, Inc.


Consolidated
Statements of Condition


(Unaudited)


March
      31,
            
            
            December
      31,(In
      thousands, except share data)
            
            2010
            
            
            2009ASSETS:Cash
      and due from banks
            
            $
            8,258
            
            
            $
            8,678Interest
      earning deposits
            
            
            13,144
            
            
            
            5,953Total
      cash and cash equivalents
            
            
            21,402
            
            
            
            14,631Investment
      securities, at fair value
            
            
            80,072
            
            
            
            72,754Federal
      Home Loan Bank stock, at cost
            
            
            1,764
            
            
            
            1,899Loans
            
            
            262,214
            
            
            
            262,465Less:
      Allowance for loan losses
            
            
            3,280
            
            
            
            3,078Loans
      receivable, net
            
            
            258,934
            
            
            
            259,387Premises
      and equipment, net
            
            
            7,631
            
            
            
            7,173Accrued
      interest receivable
            
            
            1,588
            
            
            
            1,482Foreclosed
      real estate
            
            
            141
            
            
            
            181Goodwill
            
            
            3,840
            
            
            
            3,840Bank
      owned life insurance
            
            
            7,039
            
            
            
            6,956Other
      assets
            
            
            4,331
            
            
            
            3,389Total
      assets
            
            $
            386,742
            
            
            $
            371,692LIABILITIES AND SHAREHOLDERS'
      EQUITY:Deposits:Interest-bearing
            
            $
            285,541
            
            
            $
            269,539Noninterest-bearing
            
            
            29,055
            
            
            
            27,300Total
      deposits
            
            
            314,596
            
            
            
            296,839Long-term
      borrowings
            
            
            33,000
            
            
            
            36,000Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155Other
      liabilities
            
            
            3,876
            
            
            
            4,460Total
      liabilities
            
            
            356,627
            
            
            
            342,454Shareholders'
      equity:Preferred
      stock, par value $0.01 per share; $1,000 liquidation
      preference;1,000,000
      shares authorized; 6,771 shares issued and outstanding
            
            
            6,131
            
            
            
            6,101Common
      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
            
            
            
            8,615Retained
      earnings
            
            
            22,830
            
            
            
            22,419Accumulated
      other comprehensive loss
            
            
            (989
            )
            
            
            (1,425
            )Treasury
      stock, at cost; 487,287 shares
            
            
            (6,502
            )
            
            
            (6,502
            )Total
      shareholders' equity
            
            
            30,115
            
            
            
            29,238Total
      liabilities and shareholders' equity
            
            $
            386,742
            
            
            $
            371,692The
      accompanying notes are an integral part of the consolidated financial
      statements.








- 3
-





Pathfinder
Bancorp, Inc.


Consolidated
Statements of Income


(Unaudited)


For
      the three
            
            
            For
      the threemonths
      ended
            
            
            months
      ended(In
      thousands, except per share data)
            
            March
      31, 2010
            
            
            March
      31, 2009Interest
      and dividend income:Loans,
      including fees
            
            $
            3,783
            
            
            $
            3,627Debt
      securities:Taxable
            
            
            544
            
            
            
            711Tax-exempt
            
            
            48
            
            
            
            10Dividends
            
            
            83
            
            
            
            81Federal
      funds sold and interest earning deposits
            
            
            2
            
            
            
            1Total
      interest income
            
            
            4,460
            
            
            
            4,430Interest
      expense:Interest
      on deposits
            
            
            843
            
            
            
            1,297Interest
      on short-term borrowings
            
            
            -
            
            
            
            14Interest
      on long-term borrowings
            
            
            347
            
            
            
            406Total
      interest expense
            
            
            1,190
            
            
            
            1,717Net
      interest income
            
            
            3,270
            
            
            
            2,713Provision
      for loan losses
            
            
            263
            
            
            
            135Net
      interest income after provision for loan losses
            
            
            3,007
            
            
            
            2,578Noninterest
      income:Service
      charges on deposit accounts
            
            
            389
            
            
            
            351Earnings
      on bank owned life insurance
            
            
            83
            
            
            
            56Loan
      servicing fees
            
            
            57
            
            
            
            56Net
      gains on sales of investment securities
            
            
            11
            
            
            
            87Net
      (losses) gains on sales of loans and foreclosed real
estate
            
            
            (19
            )
            
            
            80Debit
      card interchange fees
            
            
            72
            
            
            
            64Other
      charges, commissions & fees
            
            
            117
            
            
            
            105Total
      noninterest income
            
            
            710
            
            
            
            799Noninterest
      expense:Salaries
      and employee benefits
            
            
            1,563
            
            
            
            1,372Building
      occupancy
            
            
            314
            
            
            
            323Data
      processing expenses
            
            
            328
            
            
            
            339Professional
      and other services
            
            
            192
            
            
            
            172FDIC
      assessment
            
            
            128
            
            
            
            47Other
      expenses
            
            
            337
            
            
            
            320Total
      noninterest expenses
            
            
            2,862
            
            
            
            2,573Income
      before income taxes
            
            
            855
            
            
            
            804Provision
      for income taxes
            
            
            255
            
            
            
            225Net  income
            
            
            600
            
            
            
            579Preferred
      stock dividends and discount accretion
            
            
            115
            
            
            
            -Net
      income available to common shareholders
            
            $
            485
            
            
            $
            579Earnings
      per common share - basic
            
            $
            0.20
            
            
            $
            0.23Earnings
      per common share - diluted
            
            $
            0.20
            
            
            $
            0.23Dividends
      per common share
            
            $
            0.03
            
            
            $
            -





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








- 4
-




















Pathfinder
      Bancorp, Inc.Consolidated
      Statements of Changes in Shareholders' EquityThree
      Months Ended March 31, 2010 and March 31, 2009(Unaudited)





AccumulatedAdditional
            
            
            
            
            
            Other
      Com-Preferred
            
            
            Common
            
            
            Paid
      in
            
            
            Retained
            
            
            prehensive
            
            
            Treasury(In
      thousands, except share data)
            
            Stock
            
            
            Stock
            
            
            Capital
            
            
            Earnings
            
            
            Loss
            
            
            Stock
            
            
            TotalBalance,
      January 1, 2010
            
            $
            6,101
            
            
            $
            30
            
            
            $
            8,615
            
            
            $
            22,419
            
            
            $
            (1,425
            )
            
            $
            (6,502
            )
            
            $
            29,238Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            600
            
            
            
            
            
            
            
            
            
            
            
            600Other
      comprehensive income, net of tax:Unrealized
      holding gains on securitiesavailable
      for sale (net of $247 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            370
            
            
            
            
            
            
            
            370Unrealized
      holding gains on financialderivative
      (net of $22 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            33
            
            
            
            
            
            
            
            33Retirement
      plan net gains and transitionobligation
      recognized in plan expenses(net
      of $22 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            33
            
            
            
            
            
            
            
            33Total
      Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,036Preferred
      stock discount accretion
            
            
            30
            
            
            
            
            
            
            
            
            
            
            
            (30
            )
            
            
            
            
            
            
            
            
            
            
            -Preferred
      stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (85
            )
            
            
            
            
            
            
            
            
            
            
            (85
            )Common
      stock dividends declared ($0.03 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (74
            )
            
            
            
            
            
            
            
            
            
            
            (74
            )Balance,
      March 31, 2010
            
            $
            6,131
            
            
            $
            30
            
            
            $
            8,615
            
            
            $
            22,830
            
            
            $
            (989
            )
            
            $
            (6,502
            )
            
            $
            30,115Balance,
      January 1, 2009
            
            
            -
            
            
            $
            30
            
            
            $
            7,909
            
            
            $
            21,198
            
            
            $
            (3,140
            )
            
            $
            (6,502
            )
            
            $
            19,495Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            579
            
            
            
            
            
            
            
            
            
            
            
            579Other
      comprehensive income (loss), net of tax:Unrealized
      holding losses on securitiesavailable
      for sale (net of $1 tax benefit)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (306
            )
            
            
            
            
            
            
            (306
            )Retirement
      plan net losses and transitionobligation
      recognized in plan expenses(net
      of $28 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            42
            
            
            
            
            
            
            
            42Total
      Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            315Balance,
      March 31, 2009
            
            
            -
            
            
            $
            30
            
            
            $
            7,909
            
            
            $
            21,777
            
            
            $
            (3,404
            )
            
            $
            (6,502
            )
            
            $
            19,810





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

















- 5
-





Pathfinder
Bancorp, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)


For
      the three
            
            
            For
      the threemonths
      ended
            
            
            months
      ended(In
      thousands)
            
            March
      31, 2010
            
            
            March
      31, 2009OPERATING
      ACTIVITIESNet
      income
            
            $
            600
            
            
            $
            579Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Provision
      for loan losses
            
            
            263
            
            
            
            135Proceeds
      from sales of loans
            
            
            145
            
            
            
            5,590Originations
      of loans held-for-sale
            
            
            (146
            )
            
            
            (5,510
            )Realized
      losses (gains) on sales of:Real
      estate acquired through foreclosure
            
            
            18
            
            
            
            -Premises
      and equipment
            
            
            1
            
            
            
            -Loans
            
            
            1
            
            
            
            (80
            )Available-for-sale
      investment securities
            
            
            (11
            )
            
            
            (87
            )Depreciation
            
            
            160
            
            
            
            163Amortization
      of mortgage servicing rights
            
            
            8
            
            
            
            6Amortization
      of deferred loan costs
            
            
            54
            
            
            
            50Earnings
      on bank owned life insurance
            
            
            (83
            )
            
            
            (56
            )Net
      amortization (accretion) of premiums and discounts on investment
      securities
            
            
            79
            
            
            
            (214
            )(Increase)
      decrease in accrued interest receivable
            
            
            (106
            )
            
            
            117Net
      change in other assets and liabilities
            
            
            (1,715
            )
            
            
            (340
            )Net
      cash (used in) provided by operating activities
            
            
            (732
            )
            
            
            353INVESTING
      ACTIVITIESPurchase
      of investment securities available-for-sale
            
            
            (17,163
            )
            
            
            (12,627
            )Net
      proceeds from the redemption of Federal Home Loan Bank
    stock
            
            
            135
            
            
            
            656Proceeds
      from maturities and principal reductions ofinvestment
      securities available-for-sale
            
            
            9,356
            
            
            
            3,633Proceeds
      from sale of:Available-for-sale
      investment securities
            
            
            1,038
            
            
            
            6,559Real
      estate acquired through foreclosure
            
            
            22
            
            
            
            -Premises
      and equipment
            
            
            24
            
            
            
            -Net
      decrease in loans
            
            
            136
            
            
            
            1,744Purchase
      of premises and equipment
            
            
            (643
            )
            
            
            (28
            )Net
      cash used in investing activities
            
            
            (7,095
            )
            
            
            (63
            )FINANCING
      ACTIVITIESNet
      increase in demand deposits, NOW accounts, savings
    accounts,money
      management deposit accounts, MMDA accounts and escrow
    deposits
            
            
            24,829
            
            
            
            16,425Net
      (decrease) increase in time deposits
            
            
            (7,072
            )
            
            
            7,167Net
      repayments on short-term borrowings
            
            
            -
            
            
            
            (16,575
            )Payments
      on long-term borrowings
            
            
            (3,000
            )
            
            
            -Proceeds
      from long-term borrowings
            
            
            -
            
            
            
            2,000Cash
      dividends paid to preferred shareholders
            
            
            (85
            )
            
            
            -Cash
      dividends paid to common shareholders
            
            
            (74
            )
            
            
            (255
            )Net
      cash provided by financing activities
            
            
            14,598
            
            
            
            8,762Increase
      in cash and cash equivalents
            
            
            6,771
            
            
            
            9,052Cash
      and cash equivalents at beginning of period
            
            
            14,631
            
            
            
            7,678Cash
      and cash equivalents at end of period
            
            $
            21,402
            
            
            $
            16,730CASH
      PAID DURING THE PERIOD FOR:Interest
            
            $
            1,199
            
            
            $
            1,700Income
      taxes
            
            
            401
            
            
            
            521NON-CASH
      INVESTING ACTIVITYTransfer
      of loans to foreclosed real estate
            
            
            -
            
            
            
            45The
      accompanying notes are an integral part of the consolidated financial
      statements.








- 6
-





Notes
to Consolidated Financial Statements (Unaudited)





(1)
Basis of Presentation




The
accompanying unaudited consolidated financial statements of Pathfinder Bancorp,
Inc. and its wholly owned subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information, the instructions for Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, they do not include all of the
information and footnotes necessary for a complete presentation of consolidated
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles.  In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included.  Certain amounts
in the 2009 consolidated financial statements have been reclassified to conform
to the current period presentation.  These reclassifications had no
effect on net income as previously reported.




The
following material under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is written with the presumption
that the users of the interim financial statements have read, or have access to,
the Company's latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 2009 and for the two year period then
ended.  Therefore, only material changes in financial condition and
results of operations are discussed in the remainder of Part 1.




Operating
results for the three months ended March 31, 2010, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.




(2)
Earnings per Common Share




Basic
earnings per common share has been computed by dividing net income by the
weighted average number of common shares outstanding throughout the three months
ended March 31, 2010 and 2009, using 2,484,832 weighted average common shares
outstanding, for both quarters.  Diluted earnings per common share for
the three months ended March 31, 2010 and 2009, have been computed using
2,484,832 weighted average common shares outstanding, for both quarters as
well.  Diluted earnings per share gives effect to weighted average
shares that would be outstanding assuming the exercise of issued stock options
and warrants using the treasury stock method.  There was no dilutive
effect during the three months ended March 31, 2010 or March 31, 2009 since the
trading price of the Company’s common stock was lower than the average strike
price of the outstanding stock options and warrants.




(3)
Pension and Postretirement Benefits





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.








- 7
-










The
composition of net periodic pension plan costs for the three months ended March
31, is as follows:





(In
      thousands)
            
            2010
            
            
            2009Service
      cost
            
            $
            65
            
            
            $
            57Interest
      cost
            
            
            94
            
            
            
            83Expected
      return on plan assets
            
            
            (126
            )
            
            
            (68
            )Amortization
      of net losses
            
            
            50
            
            
            
            65Net
      periodic benefit cost
            
            $
            83
            
            
            $
            137





The
composition of net periodic postretirement plan costs for the three months ended
March 31, is as follows:





(In
      thousands)
            
            2010
            
            
            2009Service
      cost
            
            $
            -
            
            
            $
            1Interest
      cost
            
            
            5
            
            
            
            5Amortization
      of transition obligation
            
            
            5
            
            
            
            5Net
      periodic benefit cost
            
            $
            10
            
            
            $
            11





The
Company made a non-recurring contribution to the defined benefit pension plan of
$1.0 million during the first quarter of 2010.    Regular
contributions of approximately $64,000 were also made in the first quarter as
planned.





(4)
Comprehensive Income (Loss)





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, unrealized gains
and losses on financial derivatives, 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
income.





The
components of other comprehensive income (loss) and related tax effects for the
three months ended March 31 are as follows:







(In
      thousands)
            
            2010
            
            
            2009Unrealized
      holding gains (losses) on securities available for sale:Unrealized
      holding gains (losses) arising during the period
            
            $
            628
            
            
            $
            (220
            )Reclassification
      adjustment for net gains included in net income
            
            
            (11
            )
            
            
            (87
            )Net
      unrealized gains (losses) on securities available for sale
            
            
            617
            
            
            
            (307
            )Unrealized
      holding gains on financial derivative:Unrealized
      holding gains arising during the period
            
            
            55
            
            
            
            -Net
      unrealized gains on financial derivative
            
            
            55
            
            
            
            -Defined
      benefit pension and post retirement plans:Reclassification
      adjustment for amortization of benefit plans' net lossand
      transition obligation recognized in net periodic expense
            
            
            55
            
            
            
            70Net
      change in defined benefit plan
            
            
            55
            
            
            
            70Other
      comprehensive income (loss) before tax
            
            
            727
            
            
            
            (237
            )Tax
      effect
            
            
            (291
            )
            
            
            (27
            )Other
      comprehensive income (loss)
            
            $
            436
            
            
            $
            (264
            )











- 8
-









The
components of accumulated other comprehensive loss and related tax effects for
the periods indicated are as follows:





March
      31,
            
            
            December
      31,(In
      thousands)
            
            2010
            
            
            2009Unrealized
      gains on securities available for sale(net
      of tax expense 2010 - $413; 2009 - $166)
            
            $
            619
            
            
            $
            249Unrealized
      gains on financial derivative(net
      of tax expense 2010 - $22; 2009 - $0)
            
            
            33
            
            
            
            -Net
      pension losses(net
      of tax benefit 2010 - $1,080; 2009 - $1,100)
            
            
            (1,619
            )
            
            
            (1,649
            )Net
      post-retirement transition obligation(net
      of tax benefit 2010 - $15; 2009 - $17)
            
            
            (22
            )
            
            
            (25
            )$
            (989
            )
            
            $
            (1,425
            )








(5)
Investment Securities





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





March
      31, 2010Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            Fair(In
      thousands)
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            ValueBond investment securities:US
      Treasury and Agencies
            
            $
            21,131
            
            
            $
            39
            
            
            $
            (62
            )
            
            $
            21,108State
      and political subdivisions
            
            
            13,440
            
            
            
            322
            
            
            
            (38
            )
            
            
            13,724Corporate
            
            
            5,324
            
            
            
            235
            
            
            
            (527
            )
            
            
            5,032Residential
      mortgage-backed
            
            
            33,975
            
            
            
            1,031
            
            
            
            (96
            )
            
            
            34,910Total
            
            
            73,870
            
            
            
            1,627
            
            
            
            (723
            )
            
            
            74,774Equity investment
    securities:Mutual
      funds
            
            
            4,790
            
            
            
            125
            
            
            
            -
            
            
            
            4,915Common
      stock
            
            
            380
            
            
            
            3
            
            
            
            -
            
            
            
            383Total
            
            
            5,170
            
            
            
            128
            
            
            
            -
            
            
            
            5,298Total
      investment securities
            
            $
            79,040
            
            
            $
            1,755
            
            
            $
            (723
            )
            
            $
            80,072








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








- 9
-


The
amortized cost and estimated fair value of debt investments at March 31, 2010 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
            
            $
            595
            
            
            $
            597Due
      after one year through five years
            
            
            22,930
            
            
            
            23,180Due
      after five years through ten years
            
            
            6,725
            
            
            
            6,833Due
      after ten years
            
            
            9,645
            
            
            
            9,254Mortgage-backed
      securities
            
            
            33,975
            
            
            
            34,910Totals
            
            $
            73,870
            
            
            $
            74,774





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





March
      31, 2010Less
      than Twelve Months
            
            
            Twelve
      Months or More
            
            
            TotalUnrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            FairLosses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value(In
      thousands)US
      Treasury and Agencies
            
            $
            (62
            )
            
            $
            10,571
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (62
            )
            
            $
            10,571State
      and political subdivisions
            
            
            (38
            )
            
            
            2,345
            
            
            
            -
            
            
            
            -
            
            
            
            (38
            )
            
            
            2,345Corporate
            
            
            -
            
            
            
            -
            
            
            
            (527
            )
            
            
            1,438
            
            
            
            (527
            )
            
            
            1,438Residential
      mortgage-backed
            
            
            (84
            )
            
            
            3,859
            
            
            
            (12
            )
            
            
            340
            
            
            
            (96
            )
            
            
            4,199$
            (184
            )
            
            $
            16,775
            
            
            $
            (539
            )
            
            $
            1,778
            
            
            $
            (723
            )
            
            $
            18,553December
      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
            )
            
            
            1,402Residential
      mortgage-backed
            
            
            (149
            )
            
            
            9,665
            
            
            
            (24
            )
            
            
            545
            
            
            
            (173
            )
            
            
            10,210$
            (256
            )
            
            $
            17,649
            
            
            $
            (586
            )
            
            $
            1,947
            
            
            $
            (842
            )
            
            $
            19,596





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 statement of condition date. Under these
circumstances, OTTI is considered to have occurred (1) if we intend to sell the
security; (2) if it is “more likely than not” we will be required to sell the
security before recovery of its amortized cost basis; or (3) the present value
of expected cash flows is not 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 March
31, 2010, 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.





- 10
-


At March
31, 2010, two 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 $756,000. The Bank
of America floating rate trust-preferred security has a carrying value of
$980,000 and a fair value of $682,000.  The securities are rated A2
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 17
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 March
31, 2010, a total of 11 Government Agency Bonds are in unrealized loss
positions.  All losses are 4% or less of the current carrying value
and each holding has been in an unrealized loss position for four months or
less.  No OTTI is deemed present on these securities.





A total
of five residential mortgage-backed security holdings have unrealized losses as
of March 31, 2010.  Three of these securities were issued by
government agencies or government sponsored enterprises.  All three
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 three
securities have unrealized losses that exceed 3%.  No OTTI is deemed
present on these securities.  The remaining two securities in this
classification represent private label CMO’s, which have current unrealized
losses of less than $8,000 each. Both 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 OTTI is deemed present
on these securities.





At March
31, 2010, four state and political subdivision securities are in unrealized loss
positions.  All holdings have unrealized losses that are less than 3%
of their related book values.  None of the securities have been in
unrealized loss positions for more than eight 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 one security issued by the Oswego, NY City
School District, which is unrated. No OTTI 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.  The Company’s
holdings in an equity investment in The Phoenix Companies was carried at an
unrealized loss of  $372 at March 31, 2010.  The loss has
only been in place for three months.  Due to the relative short
duration of the unrealized loss and the insignificant dollar amount of the loss
no OTTI is deemed present on this security.





The
following table presents a roll-forward of the amount related to credit losses
recognized in earnings for the period ended March 31, 2010.





(In
      thousands)
            
            TotalBeginning
      balance – January 1, 2010
            
            $
            875Initial
      credit impairment
            
            
            -Subsequent
      credit impairments
            
            
            -Reductions
      for amounts recognized in earnings due to intent or requirement to
      sell
            
            
            -Reductions
      for securities sold
            
            
            -Reductions
      for increases in cash flows expected to be collected
            
            
            -Ending
      balance - March 31, 2010
            
            $
            875














- 11
-








Gross
realized gains (losses) on sales of securities for the three months ended March
31 are detailed below:





(In
      thousands)
            
            2010
            
            
            2009Realized
      gains
            
            $
            11
            
            
            $
            96Realized
      losses
            
            
            -
            
            
            
            (9
            )$
            11
            
            
            $
            87





As of
March 31, 2010 and December 31, 2009, securities with an amortized cost of $52.5
million and $45.7 million, respectively, were pledged to collateralize certain
deposit and borrowing arrangements.





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





(6)
Guarantees





The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit.  Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.  Generally,
all letters of credit, when issued have expiration dates within one
year.  The credit risk involved in issuing letters of credit is
essentially the same as those that are involved in extending loan facilities to
customers.  The Company generally holds collateral and/or personal
guarantees supporting these commitments.  The Company had $1.4 million
of standby letters of credit as of March 31, 2010.  Management
believes that the proceeds obtained through a liquidation of collateral and the
enforcement of guarantees would be sufficient to cover the potential amount of
future payments required under the corresponding
guarantees.   The current amount of the liability as of March 31,
2010, for guarantees under standby letters of credit issued is not
material.





(7)
Fair Value Measurements





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.





·
            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
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.





Interest
rate swap derivative:  The fair value of the interest rate swap
derivative is calculated based on a discounted cash flow model. All future
floating cash flows are projected and both floating and fixed cash flows are
discounted to the valuation date.  The curve utilized for discounting
and projecting is built by obtaining publicly available third party market
quotes for various swap maturity terms.








- 12
-


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.





The
following tables summarize assets measured at fair value on a recurring basis as
of March 31, 2010 and December 31, 2009, segregated by the level of valuation
inputs within the hierarchy utilized to measure fair value:





At
      March 31, 2010Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueInvestment
      securities available for sale
            
            $
            2,192
            
            
            $
            77,880
            
            
            $
            -
            
            
            $
            80,072Interest
      rate swap derivative
            
            
            -
            
            
            
            56
            
            
            
            -
            
            
            
            56At
      December 31, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueInvestment
      securities available for sale
            
            $
            2,088
            
            
            $
            70,666
            
            
            $
            -
            
            
            $
            72,754Interest
      rate swap derivative
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            1





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).


The
following tables summarize assets measured at fair value on a nonrecurring basis
as of March 31, 2010 and December 31, 2009, segregated by the level of valuation
inputs within the hierarchy utilized to measure fair value:





At
      March 31, 2010Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            799
            
            
            $
            799At
      December 31, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            907
            
            
            $
            907





There
have been no transfers of assets in or out of any fair value measurement
level.





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:





- 13
-


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 (see previous discussion of methods
and assumptions), 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.





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





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





Interest rate swap derivative
- The fair value of the interest rate swap derivative is calculated based on a
discounted cash flow model. All future floating cash flows are projected and
both floating and fixed cash flows are discounted to the valuation
date.  The curve utilized for discounting and projecting is built by
obtaining publicly available third party market quotes for various swap maturity
terms.





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 March 31, 2010 and
2009.








- 14
-







The
carrying amounts and fair values of the Company’s financial instruments as of
March 31, 2010 and December 31, 2009 are presented in the following
table:





March
      31, 2010
            
            
            December
      31, 2009Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimated(Dollars
      in thousands)
            
            Amounts
            
            
            Fair
      Values
            
            
            Amounts
            
            
            Fair
      ValuesFinancial
      assets:Cash
      and cash equivalents
            
            $
            21,402
            
            
            $
            21,402
            
            
            $
            14,631
            
            
            $
            14,631Investment
      securities
            
            
            80,072
            
            
            
            80,072
            
            
            
            72,754
            
            
            
            72,754Net
      loans
            
            
            258,934
            
            
            
            266,358
            
            
            
            259,387
            
            
            
            266,290Federal
      Home Loan Bank stock
            
            
            1,764
            
            
            
            1,764
            
            
            
            1,899
            
            
            
            1,899Accrued
      interest receivable
            
            
            1,588
            
            
            
            1,588
            
            
            
            1,482
            
            
            
            1,482Mortgage
      servicing rights
            
            
            53
            
            
            
            53
            
            
            
            61
            
            
            
            61Interest
      rate swap derivative
            
            
            56
            
            
            
            56
            
            
            
            1
            
            
            
            1Financial
      liabilities:Deposits
            
            $
            314,596
            
            
            $
            317,286
            
            
            $
            296,839
            
            
            $
            299,613Borrowed
      funds
            
            
            33,000
            
            
            
            34,125
            
            
            
            36,000
            
            
            
            37,116Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155
            
            
            
            5,155
            
            
            
            5,155Accrued
      interest payable
            
            
            181
            
            
            
            181
            
            
            
            189
            
            
            
            189Off-balance
      sheet instruments:Standby
      letters of credit
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Commitments
      to extend credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -





(8)
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.





The
Company has $5 million of floating rate Trust Preferred debt indexed to 3-month
LIBOR.  As a result, it is exposed to variability in cash flows
related to changes in projected interest payments caused by changes in the
benchmark interest rate.   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 hedging strategy ensures that changes in cash flows from
the derivative will be highly effective at offsetting changes in interest
expense from the hedged exposure.





The
following table summarizes the fair value of outstanding derivatives and their
presentation on the statements of condition:





March
      31,
            
            
            December
      31,(In
      thousands)
            
            
            2010
            
            
            2009Cash
      flow hedge:Interest
      rate swap
            Other
      assets
            
            $
            56
            
            
            $
            1














- 15
-







The
change in accumulated other comprehensive income and the impact on earnings from
the interest rate swap that qualifies as a cash flow hedge for the three months
ended March 31, 2010 were as follows:





(In
      thousands)
            
            2010Balance
      as of January 1:
            
            $
            1Amount
      of gain recognized in other comprehensive income
            
            
            33Amount
      of gain (loss) recognized in earnings
            
            
            -Change
      in deferred taxes
            
            
            22Balance
      as of March 31:
            
            $
            56





No gain
or loss has been recognized in earnings related to the interest rate swap, as
the derivative has been determined to be fully effective during all periods
presented.  No amount of ineffectiveness has been included in income
and the changes in fair value have been recorded in OCI.  The amount
included in accumulated other comprehensive income would be reclassified into
current earnings should a portion, or the entire hedge no longer be considered
effective, but at this time, management expects the hedge to remain fully
effective during the remaining term of the swap.





The
Company posted cash, of $100,000, under collateral arrangements to satisfy
collateral requirements associated with the interest rate swap
contract.





(9)
New Accounting Pronouncements





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 adoption
of this standard did not have a material effect on our consolidated financial
statements.





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
not, and has no plans to, issue convertible debt and, therefore, the Update does
not have an impact on its consolidated financial statements.





In
October 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 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 did not have a
material impact on the Company’s consolidated financial statements.





In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) - Accounting for
Distributions to Shareholders with Components of Stock and
Cash.  The amendments in this update clarify that the stock
portion of a distribution to shareholders that allows them to elect to receive
cash or stock with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the aggregate is considered a share
issuance that is reflected in earnings per share prospectively and is not a
stock dividend.  This update codifies the consensus reached in EITF
Issue No. 09-E, “Accounting for Stock Dividends, Including Distributions to
Shareholders with Components of Stock and Cash.”This update is effective
for interim and annual periods ending on or after December 15, 2009, and should
be applied on a retrospective basis.The Company has not, and
has no plans to, issue shareholder distributions in stock and, therefore, the
update does not have an impact on its consolidated financial
statements.





- 16
-


The FASB
has issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now
require:


·
            A
      reporting entity to disclose separately the amounts of significant
      transfers in and out of Level 1 and Level 2 fair value measurements and
      describe the reasons for the transfers;
and


·
            In
      the reconciliation for fair value measurements using significant
      unobservable inputs, a reporting entity should present separately
      information about purchases, sales, issuances, and
      settlements.


In
addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures:


·
            For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate classes of assets and liabilities;
  and


·
            A
      reporting entity should provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.


ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal
years.  This update may require the Company to provide additional
disclosures related to fair value measurements, if conditions are
met.





The FASB
has issued ASU 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements. The
amendments in the ASU remove the requirement for an SEC filer to disclose a date
through which subsequent events have been evaluated in both issued and revised
financial statements. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective
application of U.S. GAAP. The FASB also clarified that if the financial
statements have been revised, then an entity that is not an SEC filer should
disclose both the date that the financial statements were issued or available to
be issued and the date the revised financial statements were issued or available
to be issued. The FASB believes these amendments remove potential conflicts with
the SEC’s literature.  This amendment was effective upon issuance and
only reduces disclosure requirements in the Company’s consolidated financial
statements.




Item
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations




General





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.  Pathfinder
Commercial Bank, Pathfinder REIT, Inc. and Whispering Oaks Development Corp. are
wholly owned subsidiaries of Pathfinder Bank.  At March 31, 2010,
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 public
shareholders held the remaining 36.3% of the common stock.





The
following discussion reviews the Company's financial condition at March 31, 2010
and the results of operations for the three months ended March 31, 2010 and
March 31, 2009.





Statement
Regarding Forward-Looking Statements





When used
in this quarterly 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. 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 various factors 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.





- 17
-


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 included in the 2009 Annual Report on
Form 10-K ("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 the allowance for
loan losses, deferred income taxes, pension obligations, 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 statement 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.





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 financial statements.




The
Company carries all of its investments at fair value with any unrealized gains
or losses reported net of tax as an adjustment to shareholders' equity, except
for security impairment losses, which are charged to earnings.  The
Company's ability to fully realize the value of its investments in various
securities, including corporate debt securities, is dependent on the underlying
creditworthiness of the issuing organization.  In evaluating the
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 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.  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, the interest rate derivative,
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.





- 18
-


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.





Overview





Net
income was $600,000 for the three months ended March 31, 2010.  Net
income available to common shareholders was $485,000, or $0.20 per basic and
diluted common share, for the same three months.  This is compared to
$579,000, or $0.23 per basic and diluted common share, for the three month
period ended March 31, 2009.  The Company has continued efforts to
expand both its lending and deposit relationships within the small business
community.  Consequently, the Company’s statement of condition has
shifted from one more concentrated in residential loans and retail deposits to a
more diversified mix of residential, consumer, and commercial
relationships.  On an average balance basis, total commercial loans,
including loans to municipalities, comprised 37.2% of the total gross loan
portfolio for the quarter ended March 31, 2010 compared to 34.7% for the quarter
ended March 31, 2009.  Total business deposits, including municipal
deposits, comprised 23.8% of total deposits on an average basis for the quarter
ended March 31, 2010 compared to 21.3% for the first quarter of the previous
year.





The
Company made a non-recurring contribution to the defined benefit pension plan of
$1.0 million during the first quarter of 2010.  The contribution was
made to reduce the future anticipated pension expense.  Long-term
borrowings decreased $3.0 million, or 8.3%, when compared to December 31,
2009.





Results
of Operations





The
return on average assets and return on average shareholders' equity were 0.62%
and 8.05%, respectively, for the three months ended March 31, 2010, compared
with 0.65% and 11.67%, respectively, for the three months ended March 31,
2009.  During the first quarter of 2010, when compared to the first
quarter of 2009, net interest income increased $557,000.  The
provision for loan losses increased $128,000, noninterest income decreased
$89,000 and noninterest expenses increased $289,000.





Net
Interest Income





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





Net
interest income, on a tax-equivalent basis increased to $3.3 million for the
three months ended March 31, 2010, from $2.8 million for the three months ended
March 31, 2009.  The Company's net interest margin for the first
quarter of 2010 increased to 3.71% from 3.37% when compared to the same quarter
in 2009.  Significant reductions in short-term interest rates have
resulted in a positively sloped yield curve.  Reductions in the
Company’s cost of funds, combined with efforts to maintain the current levels of
earning asset yields have resulted in an expansion of the Company’s net interest
margin. The increase in net interest income is attributable to a decrease of 76
basis points in the average cost of interest bearing liabilities, and was
partially offset by a decrease of 38 basis points in the average yield earned on
earning assets.  Average interest-earning assets increased 6.6% to
$356.5 million for the three months ended March 31, 2010, as compared to $334.3
million for the three months ended March 31, 2009.  The increase in
average earning assets is primarily attributable to a $14.6 million increase in
loans receivable, a $4.6 million increase in interest earning deposits and a
$2.9 million increase in investment securities.  Average
interest-bearing liabilities increased  $15.9 million to $322.4
million from $306.5 million for the three months ended March 31, 2009. The
increase in the average balance of interest-bearing liabilities resulted
primarily from a $22.9 million increase in average deposits, offset by a
decrease of $7.0 million in average borrowings.





Interest
Income





Total
interest income, on a tax-equivalent basis, for the quarter ended March 31,
2010, decreased $39,000, or 0.86%, to $4.5 million when compared to the quarter
ended March 31, 2009.





- 19
-


The
average balance of loans increased $14.6 million to $262.8 million, with yields
decreasing 9 basis points to 5.78% for the first quarter of
2010.  Average residential real estate loans increased $1.0 million,
or 0.7%, and experienced an increase in the average yield to 5.68% from 5.61% in
the comparable quarter of 2009.   Average commercial real estate
loans increased $7.2 million, while the average yield on those loans decreased
to 6.36% from 6.76% in the comparable quarter. Average commercial loans
increased $4.1 million and experienced a decrease in the average yield of 4
basis points, to 5.04% for the quarter ended March 31, 2010, from 5.08%, in the
quarter ended March 31, 2009.  Average municipal loans increased
approximately $349,000, but experienced a decrease in yield of 82 basis
points.  Average consumer loans increased $2.0 million, or 7.1%, while
the average yield decreased by 23 basis points.





Average
investment securities (taxable and tax-exempt) for the quarter ended March 31,
2010, increased by $2.9 million, with a decrease in tax-equivalent interest
income from investments of $195,000, or 21.8%, when compared to the first
quarter of 2009.  The average tax-equivalent yield of the portfolio
decreased 120 basis points, to 3.62% from 4.82%.   The decrease
in the overall portfolio yield is being driven by the portfolio repricing during
the current low rate environment as well as management’s decision to invest in
shorter term investments in order to position the Company for the potential of
rising interest rates.





Interest
Expense





Total
interest expense decreased $527,000 for the three months ended March 31, 2010,
compared to the same quarter in 2009, as the cost of funds decreased 76 basis
points to 1.48% in 2010 from 2.24% in 2009.  Although each deposit
product line’s average balance increased in 2010 over the first quarter of 2009,
the associated cost of funds decreased sufficiently to lower the overall
interest expense incurred.  The largest decrease in interest expense
came from time deposits.  The average balance of time deposits
increased $218,000, and was offset by a 127 basis point reduction in the cost of
funds.  Time deposits with longer original maturities continue to
reprice into the current low rate environment as they renew providing relief in
the related cost of funds.  Additionally, the average balance of money
market demand accounts increased to $46.3 million for the three months ended
March 31, 2010 from $34.2 million for the three months ended March 31, 2009 but
was offset by a decrease in the cost of funds to 0.54% from
0.92%.  The other deposit categories, NOW accounts, money management
and savings, experienced an increased average combined balance of $10.6 million,
but the small reductions in cost of funds (ranging from 1 to 5 basis points) was
enough to reduce interest expense on these deposits by $3,000 from the same
quarter in 2009.    The average balance of total borrowings
decreased $7.0 million.  Interest expense on borrowings decreased by
$73,000, or 17.4%, from the prior period as a result of a 24 basis point
decrease in the cost of funds on the junior subordinated debenture that resulted
from a reduction in its index rate which is based on 3-month LIBOR, combined
with the cost of funds on other borrowings decreasing 6 basis points to 3.68%
for the three months ended March 31, 2010.





Provision
for Loan Losses





The
provision for loan losses for the quarter ended March 31, 2010 increased
$128,000, or 94.8%, to $263,000 from $135,000 for the same period in
2009.  The Company continues to provide for loan losses to reflect the
growing loan portfolio and to reflect a loan portfolio composition that is more
heavily weighted to commercial term and commercial real estate, which have
higher inherent risk characteristics than a consumer real estate portfolio, as
well as a general weakening in economic conditions and overall asset
quality.  The Company's ratio of allowance for loan losses to
period-end loans increased to 1.25% at March 31, 2010 as compared to 1.17% at
December 31, 2009.  Nonperforming loans to period end loans increased
to 1.52% at March 31, 2010 from 0.88% at December 31, 2009. The increase in
nonperforming loans is primarily the result of an increase in delinquency of a
small number of commercial real estate loan relationships.  Management
believes that the existing allowances provided on these loans are sufficient to
cover anticipated losses.





Noninterest
Income





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





The
following table sets forth certain information on noninterest income for the
quarters indicated:


Three
      Months Ended March 31,(in
      thousands)
            
            2010
            
            
            2009
            
            
            ChangeService
      charges on deposit accounts
            
            $
            389
            
            
            $
            351
            
            
            $
            38
            
            
            
            10.8
            %Earnings
      on bank owned life insurance
            
            
            83
            
            
            
            56
            
            
            
            27
            
            
            
            48.2
            %Loan
      servicing fees
            
            
            57
            
            
            
            56
            
            
            
            1
            
            
            
            1.8
            %Debit
      card interchange fees
            
            
            72
            
            
            
            64
            
            
            
            8
            
            
            
            12.5
            %Other
      charges, commissions and fees
            
            
            117
            
            
            
            105
            
            
            
            12
            
            
            
            11.4
            %Noninterest
      income before gains (losses)
            
            
            718
            
            
            
            632
            
            
            
            86
            
            
            
            13.6
            %Net
      gains on sales of investment securities
            
            
            11
            
            
            
            87
            
            
            
            (76
            )
            
            
            -87.4
            %Net
      gains (losses) on sales of loans and foreclosed real
estate
            
            
            (19
            )
            
            
            80
            
            
            
            (99
            )
            
            
            -123.8
            %Total
      noninterest income
            
            $
            710
            
            
            $
            799
            
            
            $
            (89
            )
            
            
            -11.1
            %







- 20
-


For the three months ended March 31,
2010, noninterest income before gains (losses) increased $86,000, or 13.6%, when
compared with the three months ended March 31, 2009. The increase in service
charges on deposit accounts was primarily attributable to the increase in usage
of our extended overdraft product.  The increase in earnings on bank
owned life insurance is based on the cash surrender values of the underlying
insurance policies.  The increase in noninterest income before gains
(losses) was offset by a $175,000 decrease in net gains on sales of investment
securities, loans and foreclosed real estate recorded in 2009.  The
decrease was due to lower investment security gains and a net loss recognized on
the sale of foreclosed real estate during the first quarter of 2010, as compared
to the gains that were generated from the sale of investment securities and
residential real estate loans during the first quarter of
2009.





Noninterest
Expense





The
following table sets forth certain information on noninterest expense for the
quarters indicated:





Three
      Months Ended March 31,(In
      thousands)
            
            2010
            
            
            2009
            
            
            ChangeSalaries
      and employee benefits
            
            $
            1,563
            
            
            $
            1,372
            
            
            $
            191
            
            
            
            13.9
            %Building
      occupancy
            
            
            314
            
            
            
            323
            
            
            
            (9
            )
            
            
            -2.8
            %Data
      processing
            
            
            328
            
            
            
            339
            
            
            
            (11
            )
            
            
            -3.2
            %Professional
      and other services
            
            
            192
            
            
            
            172
            
            
            
            20
            
            
            
            11.6
            %FDIC
      assessments
            
            
            128
            
            
            
            47
            
            
            
            81
            
            
            
            172.3
            %Other
      operating
            
            
            337
            
            
            
            320
            
            
            
            17
            
            
            
            5.3
            %Total
      noninterest expenses
            
            $
            2,862
            
            
            $
            2,573
            
            
            $
            289
            
            
            
            11.2
            %





Total
noninterest expense increased $289,000 for the three months ended March 31, 2010
when compared to the same period for 2009. The increase in salaries and employee
benefits was due to the addition of three full time equivalents since the
previous year, increased costs for health benefits and normal merit and
incentive increases.  The increase in professional and other services
is due to increased legal fees relating to the analysis of and potential
establishment of stock-based compensation plans.  FDIC assessments
increased $81,000 due to increases in regular FDIC assessment rates and deposit
levels.  Other operating expense increased primarily due to the
recording of expenses associated with the Company’s debit card rewards program,
which was not in place during the first quarter of 2009.





Income
Tax Expense





Income
taxes increased $30,000 for the quarter ended March 31, 2010, as compared to the
same period in 2009. The effective tax rate was 29.8% and 28.0% for the three
months ended March 31, 2010 and March 31, 2009, respectively.  The
increase in income tax expense in 2010, in comparison to 2009, resulted
primarily from higher pretax income of $51,000.  The Company has
reduced its tax rate from the statutory rate primarily through the ownership of
tax-exempt investment securities, bank owned life insurance and other tax saving
strategies.





Changes
in Financial Condition





Assets





Total
assets increased approximately $15.0 million, or 4.0%, to $386.7 million at
March 31, 2010, from $371.7 million at December 31, 2009.  The
increase in total assets was primarily the result of an increase of $6.8
million, or 46.3%, in cash and cash equivalents, a $7.3 million increase in
investment securities, and a $941,000 increase in other assets resulting from a
$1.0 million pension contribution.  The increase in cash and cash
equivalents was primarily the result of an increase in interest earning
overnight funds held at the Federal Home Loan Bank, which were generated from
increased deposits.  Investment securities portfolio growth is being
driven by the purchase of agency securities and tax-exempt investment securities
with the excess liquidity generated by deposit growth.





Liabilities





Total
liabilities increased $14.2 million, or 4.1%, to $356.6 million at March 31,
2010, from $342.4 million at December 31, 2009.  Deposits increased
$17.8 million, or 6.0%.  This increase was offset by a reduction in
long-term borrowings of $3.0 million, or 8.3%.  The increase in
deposits was the result of an increase of $22.7 million in municipal customer
deposits and an increase in business deposits of $3.4 million, partially offset
by decreased retail and escrow deposits.  The large municipal deposit
increase was driven by the receipt of tax revenues by our municipal
customers.





- 21
-


Loan
and Asset Quality and Allowance for Loan Losses





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





March
      31,
            
            
            December
      31,(In
      thousands)
            
            2010
            
            
            2009Nonaccrual
      loans:Commercial
      real estate and commercial
            
            $
            2,704
            
            
            $
            1,021Consumer
            
            
            329
            
            
            
            111Real
      estate - residential
            
            
            943
            
            
            
            1,181Total
      nonaccrual loans
            
            
            3,976
            
            
            
            2,313Foreclosed
      real estate
            
            
            141
            
            
            
            181Total
      non-performing assets
            
            $
            4,117
            
            
            $
            2,494Non-performing
      loans to total loans
            
            
            1.52
            %
            
            
            0.88
            %Non-performing
      assets to total assets
            
            
            1.06
            %
            
            
            0.67
            %Interest
      income that would have been recordedunder
      the original terms of the loans
            
            $
            176
            
            
            $
            113





Total
non-performing loans increased almost $1.7 million, or 71.9%, at March 31, 2010,
when compared to December 31, 2009.  The increase in non-performing
loans was primarily the result of a rise in the delinquency status of two
commercial loan relationships.   These large commercial
relationships are monitored closely by management.  Management
believes that the underlying collateral and associated guarantees, combined with
the existing reserves provided, are adequate to cover potential losses that may
occur from the remediation process.




The
allowance for loan losses at March 31, 2010 and December 31, 2009 was $3.3
million and $3.1 million, or 1.25% and 1.17% of period end loans,
respectively.





Capital





Shareholders'
equity at March 31, 2010, was $30.1 million as compared to $29.2 million at
December 31, 2009.  The Company added $600,000 to retained earnings
through net income.  The increase to retained earnings was combined
with a decrease of $436,000 in accumulated other comprehensive loss, which
decreased to $989,000 from $1.4 million at December 31, 2009. Unrealized holding
gains on securities, net of tax, resulted in a decrease in accumulated other
comprehensive loss of $370,000.  In addition, $33,000 of amortization
of retirement plan losses and transition obligation, net of tax expense, and
another $33,000 in unrealized gains on the interest rate derivative, net of tax
expense, decreased accumulated other comprehensive loss.  Common stock
dividends declared reduced capital by $74,000.   Preferred stock
dividends paid to the United States Treasury, under the terms of the agreement
entered into in 2009 as part of the Capital Purchase Plan, reduced capital by
$85,000.





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
March 31, 2010, 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.





- 22
-


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 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 available to
it.  Total credit available under the existing lines is approximately
$100.2 million.  At March 31, 2010, the Company has $33.0 million
outstanding against the existing lines with $67.2 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 March 31, 2010, management reported to the Board of
Directors that the Company is in compliance with its liquidity policy
guidelines.





Item
3 – Quantitative and Qualitative Disclosures About Market Risk





A smaller
reporting company is not required to provide the information relating to this
item.





Item
4T  - Controls and Procedures





Under the
supervision and with the participation of the Company's management, including
our Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly
report.  Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this report, the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.  There has been
no change in the Company's internal control over financial reporting during the
most recent fiscal quarter that has materially affected, or is reasonable likely
to materially affect, the Company's internal control over financial
reporting.








- 23
-


PART
II - OTHER INFORMATION





Item
1 - Legal Proceedings





None





Item
1A – Risk Factors





A smaller
reporting company is not required to provide the information relating to this
item.





Item
2 – Unregistered Sales of Equity Securities and Use of Proceeds





None





Item
3 - Defaults Upon Senior Securities





None





Item
4 – Removed and Reserved








Item
5 - Other Information





None





Item
6 - Exhibits





Exhibit
No.                      Description





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


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


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


Officer





- 24
-










SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





PATHFINDER BANCORP,
INC.








May 14,
2010                                                        
/s/ Thomas W.
Schneider


Thomas W.
Schneider


President and Chief Executive Officer





May 14,
2010                                                        
/s/ James A.
Dowd


James A. Dowd


Senior Vice President and Chief
Financial Officer









- 25
-




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, certify that:1.I
      have reviewed this Quarterly Report on Form 10-Q 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.May 14, 2010
            /s/ Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive Officer





- 26
-


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, certify that:1.I
      have reviewed this Quarterly Report on Form 10-Q 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.May 14, 2010
            /s/ James A. Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial Officer





- 27
-


EXHIBIT
32.1  Section 1350 Certification of the Chief Executive Officer 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 Quarterly Report of the Company on Form
      10-Q for the quarter ended March 31, 2010 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.May 14, 2010
            /s/ Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive OfficerMay 14, 2010
            /s/ James A. Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial
Officer





- 28