Table of Contents








UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549







FORM
10-Q





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


EXCHANGE
ACT OF 1934




For
the quarterly period ending September 30, 2009




OR




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


EXCHANGE
ACT OF 1934


For
the transition period from _______ to _______




Commission File Number:
000-23601







PATHFINDER BANCORP, INC.


(Exact Name of 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
November 13, 2009, there were 2,484,832 shares outstanding of the Registrant’s
Common Stock.





Table of Contents


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
            
            6Consolidated Statements of Cash
Flows
            
            7Notes to Consolidated Financial
    Statements
            
            8Item
      2.
            Management's Discussion and Analysis of Financial
      Condition
            
            19and
      Results of OperationsItem
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            27Item
      4T.
            Controls
      and Procedures
            
            27PART II - OTHER INFORMATIONItem
      1.
            Legal
      proceedings
            
            28Item
      1A.
            Risk
      Factors
            
            28Item
      2.
            Unregistered
      sales of equity securities and use of proceeds
            
            29Item
      3.
            Defaults
      upon senior securities
            
            29Item
      4.
            Submission
      of matters to a vote of security holders
            
            29Item
      5.
            Other
      information
            
            29Item
      6.
            Exhibits
            
            29SIGNATURES
            
            29EXHIBITS
            
            30








Table of Contents





PART
I FINANCIAL INFORMATION


Item
1 – Consolidated Financial Statements





Pathfinder
Bancorp, Inc.


Consolidated
Statements of Condition


(Unaudited)


September
      30,
            
            
            December
      31,(In
      thousands, except share data)
            
            2009
            
            
            2008ASSETS:Cash
      and due from banks
            
            $
            12,199
            
            
            $
            7,365Interest
      earning deposits
            
            
            12,080
            
            
            
            313Total
      cash and cash equivalents
            
            
            24,279
            
            
            
            7,678Investment
      securities, at fair value
            
            
            65,559
            
            
            
            72,138Federal
      Home Loan Bank stock, at cost
            
            
            1,809
            
            
            
            2,549Loans
            
            
            254,425
            
            
            
            249,872Less:
      Allowance for loan losses
            
            
            2,960
            
            
            
            2,472Loans
      receivable, net
            
            
            251,465
            
            
            
            247,400Premises
      and equipment, net
            
            
            7,237
            
            
            
            7,450Accrued
      interest receivable
            
            
            1,465
            
            
            
            1,678Foreclosed
      real estate
            
            
            417
            
            
            
            335Goodwill
            
            
            3,840
            
            
            
            3,840Bank
      owned life insurance
            
            
            6,900
            
            
            
            6,731Other
      assets
            
            
            2,011
            
            
            
            2,961Total
      assets
            
            $
            364,982
            
            
            $
            352,760LIABILITIES AND SHAREHOLDERS'
      EQUITY:Deposits:Interest-bearing
            
            $
            266,000
            
            
            $
            243,288Noninterest-bearing
            
            
            26,618
            
            
            
            26,150Total
      deposits
            
            
            292,618
            
            
            
            269,438Short-term
      borrowings
            
            
            1,000
            
            
            
            17,575Long-term
      borrowings
            
            
            33,000
            
            
            
            34,400Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155Other
      liabilities
            
            
            4,778
            
            
            
            6,697Total
      liabilities
            
            
            336,551
            
            
            
            333,265Shareholders'
      equity:Preferred
      stock, par value $0.01 per share; $1,000 liquidation
      preference;1,000,000
      shares authorized; 6,771 shares issued and outstanding as of September
      30,2009;
      0 shares issued and outstanding as of December 31, 2008
            
            
            6,071
            
            
            
            -Common
      stock, par value $0.01; authorized 10,000,000 shares; 2,972,119 and
      2,484,832shares
      issued and outstanding as of September 30, 2009 and December 31,
      2008
            
            
            30
            
            
            
            30Additional
      paid in capital
            
            
            8,615
            
            
            
            7,909Retained
      earnings
            
            
            22,126
            
            
            
            21,198Accumulated
      other comprehensive loss
            
            
            (1,909
            )
            
            
            (3,140
            )Treasury
      stock, at cost; 487,287 shares
            
            
            (6,502
            )
            
            
            (6,502
            )Total
      shareholders' equity
            
            
            28,431
            
            
            
            19,495Total
      liabilities and shareholders' equity
            
            $
            364,982
            
            
            $
            352,760The
      accompanying notes are an integral part of the consolidated financial
      statements.





- 3 -
 Table of Contents





Pathfinder
Bancorp, Inc.


Consolidated
Statements of Operations


(Unaudited)





For
      the three
            
            
            For
      the threemonths
      ended
            
            
            months
      ended(In
      thousands, except per share data)
            
            September
      30, 2009
            
            
            September
      30, 2008Interest and dividend income:Loans,
      including fees
            
            $
            3,686
            
            
            $
            3,755Debt
      securities:Taxable
            
            
            619
            
            
            
            764Tax-exempt
            
            
            3
            
            
            
            44Dividends
            
            
            81
            
            
            
            91Federal
      funds sold and interest earning deposits
            
            
            2
            
            
            
            5Total
      interest income
            
            
            4,391
            
            
            
            4,659Interest
      expense:Interest
      on deposits
            
            
            1,020
            
            
            
            1,320Interest
      on short-term borrowings
            
            
            7
            
            
            
            103Interest
      on long-term borrowings
            
            
            365
            
            
            
            455Total
      interest expense
            
            
            1,392
            
            
            
            1,878Net
      interest income
            
            
            2,999
            
            
            
            2,781Provision
      for loan losses
            
            
            247
            
            
            
            270Net
      interest income after provision for loan losses
            
            
            2,752
            
            
            
            2,511Noninterest
      income:Service
      charges on deposit accounts
            
            
            382
            
            
            
            397Earnings
      on bank owned life insurance
            
            
            56
            
            
            
            56Loan
      servicing fees
            
            
            64
            
            
            
            67Losses
      on impairment of investment securities
            
            
            -
            
            
            
            (1,834
            )Net
      gains on sales of investment securities
            
            
            231
            
            
            
            26Net
      gains  (losses) on sales of loans and foreclosed real
      estate
            
            
            15
            
            
            
            (85
            )Debit
      card interchange fees
            
            
            69
            
            
            
            71Other
      charges, commissions & fees
            
            
            155
            
            
            
            127Total
      noninterest income (loss)
            
            
            972
            
            
            
            (1,175
            )Noninterest
      expense:Salaries
      and employee benefits
            
            
            1,402
            
            
            
            1,284Building
      occupancy
            
            
            312
            
            
            
            331Data
      processing expenses
            
            
            322
            
            
            
            335Professional
      and other services
            
            
            239
            
            
            
            158Regulatory
      assessments
            
            
            218
            
            
            
            16Other
      expenses
            
            
            371
            
            
            
            338Total
      noninterest expenses
            
            
            2,864
            
            
            
            2,462Income
      (loss) before income taxes
            
            
            860
            
            
            
            (1,126
            )Provision
      (benefit) for income taxes
            
            
            293
            
            
            
            (288
            )Net  income
      (loss)
            
            $
            567
            
            
            $
            (838
            )Preferred
      stock dividends and discount accretion
            
            $
            25
            
            
            $
            -Net
      income (loss) available to common shareholders
            
            $
            542
            
            
            $
            (838
            )Earnings
      (loss) per common share - basic
            
            $
            0.22
            
            
            $
            (0.34
            )Earnings
      (loss) per common share - diluted
            
            $
            0.22
            
            
            $
            (0.34
            )Dividends
      per common share
            
            $
            0.03
            
            
            $
            0.1025





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





- 4 -
 Table of Contents














Pathfinder
Bancorp, Inc.


Consolidated
Statements of Operations


(Unaudited)





For
      the nine
            
            
            For
      the ninemonths
      ended
            
            
            months
      ended(In
      thousands, except per share data)
            
            September
      30, 2009
            
            
            September
      30, 2008Interest
      and dividend income:Loans,
      including fees
            
            $
            10,999
            
            
            $
            10,943Debt
      securities:Taxable
            
            
            2,001
            
            
            
            2,219Tax-exempt
            
            
            16
            
            
            
            126Dividends
            
            
            243
            
            
            
            318Federal
      funds sold and interest earning deposits
            
            
            3
            
            
            
            59Total
      interest income
            
            
            13,262
            
            
            
            13,665Interest
      expense:Interest
      on deposits
            
            
            3,471
            
            
            
            4,332Interest
      on short-term borrowings
            
            
            26
            
            
            
            329Interest
      on long-term borrowings
            
            
            1,176
            
            
            
            1,174Total
      interest expense
            
            
            4,673
            
            
            
            5,835Net
      interest income
            
            
            8,589
            
            
            
            7,830Provision
      for loan losses
            
            
            654
            
            
            
            550Net
      interest income after provision for loan losses
            
            
            7,935
            
            
            
            7,280Noninterest
      income:Service
      charges on deposit accounts
            
            
            1,099
            
            
            
            1,131Earnings
      on bank owned life insurance
            
            
            169
            
            
            
            179Loan
      servicing fees
            
            
            175
            
            
            
            218Losses
      on impairment of investment securities
            
            
            (298
            )
            
            
            (2,176
            )Net
      gains on sales of investment securities
            
            
            319
            
            
            
            26Net
      gains (losses) on sales of loans and foreclosed real
estate
            
            
            80
            
            
            
            (79
            )Debit
      card interchange fees
            
            
            206
            
            
            
            207Other
      charges, commissions & fees
            
            
            366
            
            
            
            334Total
      noninterest income (loss)
            
            
            2,116
            
            
            
            (160
            )Noninterest
      expense:Salaries
      and employee benefits
            
            
            4,151
            
            
            
            3,863Building
      occupancy
            
            
            941
            
            
            
            1,009Data
      processing expenses
            
            
            997
            
            
            
            974Professional
      and other services
            
            
            654
            
            
            
            580Regulatory
      assessments
            
            
            438
            
            
            
            38Other
      expenses
            
            
            1,073
            
            
            
            944Total
      noninterest expenses
            
            
            8,254
            
            
            
            7,408Income
      (loss) before income taxes
            
            
            1,797
            
            
            
            (288
            )Provision
      (benefit) for income taxes
            
            
            620
            
            
            
            (82
            )Net  income
      (loss)
            
            $
            1,177
            
            
            $
            (206
            )Preferred
      stock dividends and discount accretion
            
            $
            25
            
            
            $
            -Net
      income (loss) available to common shareholders
            
            $
            1,152
            
            
            $
            (206
            )Earnings
      (loss) per share - basic
            
            $
            0.46
            
            
            $
            (0.08
            )Earnings
      (loss) per share - diluted
            
            $
            0.46
            
            
            $
            (0.08
            )Dividends
      per share
            
            $
            0.09
            
            
            $
            0.3075The
      accompanying notes are an integral part of the consolidated financial
      statements.





- 5 -
 Table of Contents








Pathfinder
      Bancorp, Inc.Consolidated
      Statements of Changes in Shareholders' EquityNine
      Months Ended September 30, 2009 and September 30, 2008(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, 2009
            
            
            -
            
            
            $
            30
            
            
            $
            7,909
            
            
            $
            21,198
            
            
            $
            (3,140
            )
            
            $
            (6,502
            )
            
            $
            19,495Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,177
            
            
            
            
            
            
            
            
            
            
            
            1,177Other
      comprehensive income, net of tax:Unrealized
      holding gains on securitiesavailable
      for sale (net of $588 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,106
            
            
            
            
            
            
            
            1,106Retirement
      plan net losses and transitionobligation
      recognized in plan expenses(net
      of $84 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            125
            
            
            
            
            
            
            
            125Total
      Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,408Preferred
      stock andcommon
      stock warrants issued
            
            
            6,065
            
            
            
            
            
            
            
            706
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,771Preferred
      stock discount accretion
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            (6
            )
            
            
            
            
            
            
            
            
            
            
            -Preferred
      stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (19
            )
            
            
            
            
            
            
            
            
            
            
            (19
            )Common
      stock dividends declared ($0.09 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (224
            )
            
            
            
            
            
            
            
            
            
            
            (224
            )Balance,
      September 30, 2009
            
            $
            6,071
            
            
            $
            30
            
            
            $
            8,615
            
            
            $
            22,126
            
            
            $
            (1,909
            )
            
            $
            (6,502
            )
            
            $
            28,431Balance,
      January 1, 2008
            
            
            -
            
            
            $
            30
            
            
            $
            7,900
            
            
            $
            21,734
            
            
            $
            (1,458
            )
            
            $
            (6,502
            )
            
            $
            21,704Cumulative
      effect of a change in accountingprinciple
      upon the change in definedemployee
      benefit plans' measurement dateunder
      FASB ASC 715 (net of $8 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48
            )
            
            
            13
            
            
            
            
            
            
            
            (35
            )Comprehensive
      loss:Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (206
            )
            
            
            
            
            
            
            
            
            
            
            (206
            )Other
      comprehensive loss, net of tax:Unrealized
      holding losses on securitiesavailable
      for sale (net of $175 tax benefit)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (317
            )
            
            
            
            
            
            
            (317
            )Retirement
      plan losses and transitionobligation
      not recognized in planexpenses
      (net of $26 tax expense)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            38
            
            
            
            
            
            
            
            38Total
      Comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (485
            )Stock
      options exercised
            
            
            
            
            
            
            
            
            
            
            9
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9Dividends
      declared ($0.3075 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (602
            )
            
            
            
            
            
            
            
            
            
            
            (602
            )Balance,
      September 30, 2008
            
            
            -
            
            
            $
            30
            
            
            $
            7,909
            
            
            $
            20,878
            
            
            $
            (1,724
            )
            
            $
            (6,502
            )
            
            $
            20,591





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





- 6 -
 Table of Contents





Pathfinder
Bancorp, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)


For
      the nine
            
            
            For
      the ninemonths
      ended
            
            
            months
      ended(In
      thousands)
            
            September
      30, 2009
            
            
            September
      30, 2008OPERATING ACTIVITIESNet
      income (loss)
            
            $
            1,177
            
            
            $
            (206
            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for loan losses
            
            
            654
            
            
            
            550Proceeds
      from sales of loans
            
            
            9,322
            
            
            
            -Originations
      of loans held-for-sale
            
            
            (9,210
            )
            
            
            -Realized
      losses (gains) on sales of:Foreclosed
      real estate
            
            
            32
            
            
            
            79Loans
            
            
            (112
            )
            
            
            -Available-for-sale
      investment securities
            
            
            (319
            )
            
            
            (26
            )Impairment
      write-down on available-for-sale securities
            
            
            298
            
            
            
            2,176Depreciation
            
            
            493
            
            
            
            529Amortization
      of mortgage servicing rights
            
            
            22
            
            
            
            24Earnings
      on bank owned life insurance
            
            
            (169
            )
            
            
            (179
            )Net
      (accretion) amortization of premiums and discounts on investment
      securities
            
            
            (84
            )
            
            
            85Decrease
      in accrued interest receivable
            
            
            213
            
            
            
            36Net
      change in other assets and liabilities
            
            
            (1,291
            )
            
            
            63Net
      cash provided by operating activities
            
            
            1,026
            
            
            
            3,131INVESTING
      ACTIVITIESPurchase
      of investment securities available-for-sale
            
            
            (21,379
            )
            
            
            (31,730
            )Net
      proceeds from the redemption of (purchase of) Federal Home Loan Bank
      stock
            
            
            740
            
            
            
            (654
            )Proceeds
      from maturities and principal reductions ofinvestment
      securities available-for-sale
            
            
            15,999
            
            
            
            15,402Proceeds
      from sale of:Available-for-sale
      investment securities
            
            
            13,758
            
            
            
            3,494Real
      estate acquired through foreclosure
            
            
            265
            
            
            
            773Net
      increase in loans
            
            
            (5,100
            )
            
            
            (20,729
            )Purchase
      of premises and equipment
            
            
            (280
            )
            
            
            (206
            )Net
      cash provided by (used in) investing activities
            
            
            4,003
            
            
            
            (33,650
            )FINANCING
      ACTIVITIESNet
      increase in demand deposits, NOW accounts, savings
    accounts,money
      market deposit accounts, MMDA accounts and escrow deposits
            
            
            20,933
            
            
            
            12,832Net
      increase in time deposits
            
            
            2,247
            
            
            
            837Net
      (repayments on) proceeds from short-term borrowings
            
            
            (16,575
            )
            
            
            3,355Payments
      on long-term borrowings
            
            
            (3,400
            )
            
            
            (8,610
            )Proceeds
      from long-term borrowings
            
            
            2,000
            
            
            
            24,000Proceeds
      from the issuance of preferred stock and common stock
    warrants
            
            
            6,771
            
            
            
            -Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            9Cash
      dividends paid
            
            
            (404
            )
            
            
            (440
            )Net
      cash provided by financing activities
            
            
            11,572
            
            
            
            31,983Increase
      in cash and cash equivalents
            
            
            16,601
            
            
            
            1,464Cash
      and cash equivalents at beginning of period
            
            
            7,678
            
            
            
            10,213Cash
      and cash equivalents at end of period
            
            $
            24,279
            
            
            $
            11,677CASH
      PAID DURING THE PERIOD FOR:Interest
            
            $
            4,721
            
            
            $
            5,861Income
      Taxes
            
            
            521
            
            
            
            160NON-CASH
      INVESTING ACTIVITYTransfer
      of loans to foreclosed real estate
            
            
            381
            
            
            
            243The
      accompanying notes are an integral part of the consolidated financial
      statements.





- 7 -
 Table of Contents








Pathfinder
Bancorp, Inc.


Note
to Consolidated Financial Statements


(Unaudited)

















(1) Basisof 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 2008 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 Company has
evaluated subsequent events and transactions occurring through the date of
issuance of the financial data included herein, November 13,
2009.




The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB”.  The FASB sets generally
accepted accounting principals (“GAAP”) that the Company
follows.  References to GAAP issued by the FASB in these footnotes are
to the FASB Accounting Standards Codification, sometimes referred to as the
Codification or ASC.  The FASB finalized the Codification effective
for periods ending on or after September 15, 2009.




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, 2008 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 nine months ended September 30, 2009, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.




(2)
Earnings per Share




Basic
earnings per share has been computed by dividing net income by the weighted
average number of common shares outstanding throughout the three months and nine
months ended September 30, 2009 and 2008, using 2,484,832 and 2,484,364 weighted
average common shares outstanding for the three month periods and 2,484,832 and
2,483,944 for the nine month periods, respectively.  Diluted earnings
per share for the three months and nine months ended September 30, 2009 and
2008, have been computed using 2,486,652 and 2,484,364 for the three month
periods and 2,485,445 and 2,483,944 for the nine month periods,
respectively.
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.




(3)
Pension and Postretirement Benefits





On
January 1, 2008, the Company recorded a $48,000 charge to retained earnings,
representing the cumulative effect adjustment upon adopting the measurement date
transition rule for the Company’s pension plan and post retirement benefit
plan.  In accordance with FASB ASC 715-20-65, Compensation – Retirement
Benefits, measurement date provisions, plan assets and obligations are to
be measured as of the employer’s balance sheet date.  The Company
previously measured its pension plan as of October 1 of each year.  As
a result of the measurement date provisions, the Company decreased its pension
plan asset with a corresponding charge to retained earnings, representing the
net periodic benefit cost for the period between the October 1, 2007 measurement
date and January 1, 2008.





- 8 -
 Table of Contents








The
composition of net periodic pension plan costs for the three months and nine
months ended September 30, is as follows:





For
      the three months
            
            
            For
      the nine monthsended
      September 30,
            
            
            ended
      September 30,(In
      thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Service
      cost
            
            $
            57
            
            
            $
            54
            
            
            $
            171
            
            
            $
            162Interest
      cost
            
            
            83
            
            
            
            79
            
            
            
            250
            
            
            
            237Expected
      return on plan assets
            
            
            (68
            )
            
            
            (112
            )
            
            
            (204
            )
            
            
            (335
            )Amortization
      of net losses
            
            
            65
            
            
            
            16
            
            
            
            194
            
            
            
            49Net
      periodic benefit cost
            
            $
            137
            
            
            $
            37
            
            
            $
            411
            
            
            $
            113





The
composition of net periodic postretirement plan costs for the three months and
nine months ended September 30, is as follows:





For
      the three months
            
            
            For
      the nine monthsended
      September 30,
            
            
            ended
      September 30,(In
      thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Service
      cost
            
            $
            1
            
            
            $
            1
            
            
            $
            2
            
            
            $
            2Interest
      cost
            
            
            5
            
            
            
            5
            
            
            
            16
            
            
            
            16Amortization
      of transition obligation
            
            
            5
            
            
            
            5
            
            
            
            14
            
            
            
            14Amortization
      of net losses
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            -Net
      periodic benefit cost
            
            $
            11
            
            
            $
            11
            
            
            $
            33
            
            
            $
            32





The
Company made a non-recurring contribution to the defined benefit pension plan
of  $2,000,000 during the second quarter of 2009.  The large
contribution was made to reduce the overall plan funding shortfall and mitigate
future anticipated pension expense increases.





(4)
Comprehensive Income





Accounting
principles generally accepted in the United States of America require that
recognized revenue, expenses, gains and losses be included in net
income.  Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, 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 and nine months ended September 30 are as follows:




For
      the three months
            
            
            For
      the nine monthsended
      September 30,
            
            
            ended
      September 30,(In
      thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Unrealized
      holding gains (losses) on securities available for sale:Unrealized
      holding gains (losses) arising during the period
            
            $
            1,718
            
            
            $
            (952
            )
            
            $
            1,715
            
            
            $
            (2,678
            )Reclassification
      adjustment for impairment charges included in net income
            
            
            -
            
            
            
            1,834
            
            
            
            298
            
            
            
            2,176Reclassification
      adjustment for net gains included in net income
            
            
            (232
            )
            
            
            (26
            )
            
            
            (319
            )
            
            
            (26
            )Net
      unrealized gains (losses) on securities available for sale
            
            
            1,486
            
            
            
            856
            
            
            
            1,694
            
            
            
            (528
            )Defined
      benefit pension and post retirement plans:Reclassification
      adjustment for amortization of benefit plans'net
      loss and transition obligation recognized in netperiodic
      expense
            
            
            70
            
            
            
            21
            
            
            
            210
            
            
            
            63Net
      change in defined benefit plan
            
            
            70
            
            
            
            21
            
            
            
            210
            
            
            
            63Other
      comprehensive income (loss) before tax
            
            
            1,556
            
            
            
            877
            
            
            
            1,904
            
            
            
            (465
            )Tax
      effect
            
            
            (484
            )
            
            
            (350
            )
            
            
            (673
            )
            
            
            186Other
      comprehensive income (loss)
            
            $
            1,072
            
            
            $
            527
            
            
            $
            1,231
            
            
            $
            (279
            )








- 9 -
 Table of Contents


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




September
      30,
              
              
              December
      31,(In
      thousands)
              
              2009
              
              
              2008Unrealized
      gains (losses) on securities available for sale(net
      of tax expense 2009 - $384; net of tax benefit 2008 -
$205)
              
              $
              53
              
              
              $
              (1,053
              )Net
      pension losses(net
      of tax benefit 2009 - $1,274; 2008 - $1,352)
              
              
              (1,911
              )
              
              
              (2,027
              )Net
      post-retirement plan losses and transition obligation(net
      of tax benefit 2009 - $34; 2008 - $40)
              
              
              (51
              )
              
              
              (60
              )$
              (1,909
              )
              
              $
              (3,140
              )


(5)
Investment Securities





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





September
      30, 2009Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            Fair(In
      thousands)
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            ValueBond
      investment securities:US
      Treasury and agencies
            
            $
            6,522
            
            
            $
            47
            
            
            $
            -
            
            
            $
            6,569State
      and political subdivisions
            
            
            2,633
            
            
            
            61
            
            
            
            (5
            )
            
            
            2,689Corporate
            
            
            8,822
            
            
            
            314
            
            
            
            (706
            )
            
            
            8,430Residential
      mortgage-backed
            
            
            39,477
            
            
            
            1,294
            
            
            
            (43
            )
            
            
            40,728Total
            
            
            57,454
            
            
            
            1,716
            
            
            
            (754
            )
            
            
            58,416Equity
      investment securities:Mutual
      funds
            
            
            5,179
            
            
            
            3
            
            
            
            (525
            )
            
            
            4,657Common
      stock
            
            
            313
            
            
            
            -
            
            
            
            (4
            )
            
            
            309Total
            
            
            5,492
            
            
            
            3
            
            
            
            (529
            )
            
            
            4,966Other
      investments
            
            
            2,177
            
            
            
            -
            
            
            
            -
            
            
            
            2,177Total
      investment securities
            
            $
            65,123
            
            
            $
            1,719
            
            
            $
            (1,283
            )
            
            $
            65,559December
      31, 2008Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            Fair(In
      thousands)
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            ValueBond
      investment securities:US
      Treasury and agencies
            
            $
            9,126
            
            
            $
            342
            
            
            $
            -
            
            
            $
            9,468State
      and political subdivisions
            
            
            5,020
            
            
            
            23
            
            
            
            (70
            )
            
            
            4,973Corporate
            
            
            12,181
            
            
            
            117
            
            
            
            (1,472
            )
            
            
            10,826Residential
      mortgage-backed
            
            
            39,478
            
            
            
            707
            
            
            
            (155
            )
            
            
            40,030Total
            
            
            65,805
            
            
            
            1,189
            
            
            
            (1,697
            )
            
            
            65,297Equity
      investment securities:Mutual
      funds
            
            
            5,179
            
            
            
            -
            
            
            
            (744
            )
            
            
            4,435Common
      stock
            
            
            313
            
            
            
            -
            
            
            
            (6
            )
            
            
            307Total
            
            
            5,492
            
            
            
            -
            
            
            
            (750
            )
            
            
            4,742Other
      investments
            
            
            2,099
            
            
            
            -
            
            
            
            -
            
            
            
            2,099Total
      investment securities
            
            $
            73,396
            
            
            $
            1,189
            
            
            $
            (2,447
            )
            
            $
            72,138








- 10 -
 The
amortized cost and estimated fair value of debt investments at September 30,
2009 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.




Amortized
            
            
            Estimated(In
      thousands)
            
            Cost
            
            
            Fair
      ValueDue
      in one year or less
            
            $
            863
            
            
            $
            873Due
      after one year through five years
            
            
            10,576
            
            
            
            10,809Due
      after five years through ten years
            
            
            1,509
            
            
            
            1,599Due
      after ten years
            
            
            5,029
            
            
            
            4,407Residential
      mortgage-backed securities
            
            
            39,477
            
            
            
            40,728Totals
            
            $
            57,454
            
            
            $
            58,416





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





September
      30, 2009Less
      than Twelve Months
            
            
            Twelve
      Months or More
            
            
            TotalUnrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair(In
      thousands)
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            ValueState
      and political subdivisions
            
            $
            (5
            )
            
            $
            517
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (5
            )
            
            $
            517Corporate
            
            
            -
            
            
            
            -
            
            
            
            (706
            )
            
            
            1,258
            
            
            
            (706
            )
            
            
            1,258Residential
      mortgage-backed
            
            
            (5
            )
            
            
            3,027
            
            
            
            (38
            )
            
            
            1,362
            
            
            
            (43
            )
            
            
            4,389Mutual
      funds
            
            
            -
            
            
            
            -
            
            
            
            (525
            )
            
            
            4,471
            
            
            
            (525
            )
            
            
            4,471Common
      stock
            
            
            -
            
            
            
            -
            
            
            
            (4
            )
            
            
            24
            
            
            
            (4
            )
            
            
            24$
            (10
            )
            
            $
            3,544
            
            
            $
            (1,273
            )
            
            $
            7,115
            
            
            $
            (1,283
            )
            
            $
            10,659December
      31, 2008Less
      than Twelve Months
            
            
            Twelve
      Months or More
            
            
            TotalUnrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair(In
      thousands)
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            ValueState
      and political subdivisions
            
            $
            (70
            )
            
            $
            2,134
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (70
            )
            
            $
            2,134Corporate
            
            
            (327
            )
            
            
            5,349
            
            
            
            (1,145
            )
            
            
            2,805
            
            
            
            (1,472
            )
            
            
            8,154Residential
      mortgage-backed
            
            
            (150
            )
            
            
            7,491
            
            
            
            (5
            )
            
            
            734
            
            
            
            (155
            )
            
            
            8,225Mutual
      funds
            
            
            (744
            )
            
            
            4,251
            
            
            
            -
            
            
            
            -
            
            
            
            (744
            )
            
            
            4,251Common
      stock
            
            
            -
            
            
            
            -
            
            
            
            (6
            )
            
            
            21
            
            
            
            (6
            )
            
            
            21$
            (1,291
            )
            
            $
            19,225
            
            
            $
            (1,156
            )
            
            $
            3,560
            
            
            $
            (2,447
            )
            
            $
            22,785





We
conduct a formal review of investment securities on a quarterly basis for the
presence of other-than-temporary impairment (“OTTI”). In the second quarter of
2009, we adopted the updated guidance in FASB ASC 320-10, Investments – Debt and Equity
Securities, on determining OTTI on securities. We assess whether OTTI is
present when the fair value of a debt security is less than its amortized cost
basis at the balance sheet date. Under these circumstances, OTTI is considered
to have occurred (1) if we intend to sell the security; (2) if it is “more
likely than not” we will be required to sell the security before recovery of its
amortized cost basis; or (3) the present value of expected cash flows is not
sufficient to recover the entire amortized cost basis. The “more likely than
not” criteria is a lower threshold than the “probable” criteria used under
previous guidance.  The guidance requires that credit-related OTTI is
recognized in earnings while noncredit-related OTTI on securities not expected
to be sold is recognized in other comprehensive income (“OCI”).
Noncredit-related OTTI is based on other factors, including illiquidity. As
required, presentation of OTTI should be 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 in 2009, and
therefore no offset 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
September 30, 2009, we applied the criteria of FASB ASC 320-10-65, Investments – Debt and Equity
Securities. That is, we do not intend to sell the securities and it is
not “more likely than not” that we will be required to sell the securities
before recovery of their amortized cost basis.





At
September 30, 2009, two corporate securities were in unrealized loss
positions.  The two securities in the  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 $678,000. The Bank
of America





- 11 -
 Table of Contents


floating
rate trust-preferred security has a carrying value of $979,000 and a fair value
of $580,000.  The securities are rated A1 and Baa3, respectively, by
Moody’s.  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 much
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 thus, the securities are not deemed to be other-than-temporarily
impaired. Due to the fact that each security has in excess of 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.





At
September 30, 2009, five private label CMOs and two agency mortgage-backed
securities are currently in unrealized loss positions. All seven of the above
mentioned securities are currently rated AAA.  These unrealized losses
relate principally to changes in interest rates subsequent to the acquisition of
the specific securities.  None of the securities in this category had
an unrealized loss that exceeded 7% of the carrying value of the security.
Management reviewed the underlying mortgage collateral associated with its
holdings in CMOs and agency MBS noting the underlying credit score information,
loan-to-value information, and the concentration risk associated with the
geographic area that the majority of the underlying mortgage collateral resides
in.   Based on the relatively high composite credit ratings and
low average loan-to-value ratios identified, combined with the low collateral
concentrations in the more troubled states, management deems that no
other-than-temporary impairment is present.





In
determining whether OTTI has occurred for equity securities, the Company
considers the applicable factors described above and the intent and ability of
the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair
value.  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 presently holds in its investment portfolio a $2.8 million investment in
a no-load mutual fund, which invests primarily in mortgage-related
instruments.  The fund holds mortgage-backed bonds and securities
issued by government-sponsored mortgage entities and by private
companies.  The underlying assets are comprised of variable rate,
adjustable rate and fixed-rate residential mortgage and home equity
loans.  As a result of the recent problems in the real estate and
mortgage securities markets, the fair value of the fund has declined and,
accordingly, the Company’s recorded other-than-temporary impairment charges of
18% of the value during 2008.  The value of the investment in the fund
is still below its cost basis by approximately $286,000 as of September 30,
2009.  The current fund value is not a compilation of the daily
trading prices of the underlying securities, but rather is derived from matrix
pricing in an illiquid market, thus it is more reflective of liquidation pricing
than of the Fund’s true fair value.  Fund cash flows have been
uninterrupted, as no individual security has experienced a default of
contractual principal or interest payments. The Fund continues to reinvest
excess cash flows into short-term federal agency backed mortgage-backed
securities, thus improving the overall risk profile of the Fund.  The
overall value of the fund has continued to improve during 2009.  As of
October 31st, the unrealized loss associated with the Company’s holdings in the
fund has decreased to approximately $276,000, representing a 4% improvement
since September 30, 2009 and a 25% improvement since June 30,
2009.  Management has displayed the intent and ability to hold this
security until its value improves.  Given all these facts, it is
management’s opinion that additional other-than-temporary impairment is not
present at this time.





In
addition to the mutual fund backed by mortgage-related instruments, the Company
also holds a $2.2 million investment in a mutual fund consisting of investment
grade, dividend paying common stocks of large capitalization companies
(companies with market capitalization in excess of $5
billion).  Management recorded an other-than-temporary impairment
charge of 24% of the Fund’s value in 2008.  The value of the
investment in this fund is still below its cost basis by approximately $239,000
as of September 30, 2009.  As of October 31st, the unrealized loss
associated with the Company’s holdings in the fund has slipped to approximately
$241,000, however, the overall improvement in the value of the fund since June
30, 2009 still represents a 46% increase in the fund
value.  Management believes that the underlying investment grade
securities represent equity positions in well-managed companies with a diverse
cross section of various industries.  Management has performed a
review of each underlying holding comprising the Fund. The review and analysis
indicates that there are no individually impaired holdings and there is no
indication that the profitability of the individual companies is impaired beyond
the current economic cycle.  The Fund value is highly correlated to
the overall stock market performance and management believes that the market
will return to previous valuation levels over the next economic
cycle.  Management has the intent and ability to hold this security
until its value improves.  As such, the recent decline in fair value,
since the previous write-down for impairment, is not considered to be
other-than-temporary.





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





- 12 -
 Table of Contents


The
following table presents a roll-forward of the amount related to credit losses
recognized in earnings for the period ended September 30, 2009.





(In
      thousands)
            
            TotalBeginning
      balance – January 1, 2009
            
            $
            875Initial
      credit impairment
            
            
            298Subsequent
      credit impairments
            
            
            -Reductions
      for amounts recognized in earnings due to intent or requirement to
      sell
            
            
            -Reductions
      for securities sold
            
            
            (298
            )Reductions
      for increases in cash flows expected to be collected
            
            
            -Ending
      balance - September 30, 2009
            
            $
            875





Gross
realized gains (losses) on sales of securities and other-than-temporary
impairment charges for the nine months ended September 30 are detailed
below:





(In
      thousands)
            
            2009
            
            
            2008Available-for-sale
      securities:Realized
      gains
            
            $
            327
            
            
            $
            49Realized
      losses
            
            
            (8
            )
            
            
            (23
            )Other
      than temporary impairment
            
            
            (298
            )
            
            
            (2,176
            )$
            21
            
            
            $
            (2,150
            )





As of
September 30, 2009 and December 31, 2008, securities with an amortized cost of
$50.6 million and $37.8 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 $1.6 million
of standby letters of credit as of September 30, 2009.  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 September
30, 2009, for guarantees under standby letters of credit issued is not
material.





(7)
Fair Value Measurements and Disclosures





FASB ASC
Topic 820: 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.
In accordance with FASB ASC Topic 820, 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.





- 13 -
 An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.





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





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





Impaired
loans: Impaired loans are those that are accounted for under FASB ASC 310-10-35,
Receivables, 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 as determined under FASB ASC 310-10-35, Receivables.





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





The
following tables summarize assets measured at fair value on a recurring basis as
of September 30, 2009 and December 31, 2008, segregated by the level of
valuation inputs within the hierarchy utilized to measure fair
value:





At
      September 30, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueInvestment
      securities available for sale
            
            $
            1,954
            
            
            $
            63,605
            
            
            $
            -
            
            
            $
            65,559At
      December 31, 2008Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueInvestment
      securities available for sale
            
            $
            1,918
            
            
            $
            70,220
            
            
            $
            -
            
            
            $
            72,138





Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).  The following tables summarize
assets measured at fair value on a nonrecurring basis as of September 30, 2009
and December 31, 2008, segregated by the level of valuation inputs within the
hierarchy utilized to measure fair value:





At
      September 30, 2009Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            911
            
            
            $
            911Foreclosed
      real estate
            
            
            -
            
            
            
            -
            
            
            
            417
            
            
            
            417At
      December 31, 2008Total
      Fair(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            ValueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            295
            
            
            $
            295Foreclosed
      real estate
            
            
            -
            
            
            
            -
            
            
            
            335
            
            
            
            335







FASB ASC
Topic 825: Financial
Instruments, requires disclosure of 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.





- 14 -
 Table of Contents


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





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





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





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





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





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





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





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





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





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





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





Off-balance sheet instruments
– Fair values for the Company’s off-balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit
standing.








- 15 -
 The
carrying amounts and fair values of the Company’s financial instruments as of
September 30, 2009 and December 31, 2008 are presented in the following
table:






September
      30, 2009
            
            
            December
      31, 2008Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimated(Dollars
      in thousands)
            
            Amounts
            
            
            Fair
      Values
            
            
            Amounts
            
            
            Fair
      ValuesFinancial
      assets:Cash
      and cash equivalents
            
            $
            24,279
            
            
            $
            24,279
            
            
            $
            7,678
            
            
            $
            7,678Investment
      securities
            
            
            65,559
            
            
            
            65,559
            
            
            
            72,138
            
            
            
            72,138Net
      loans
            
            
            251,465
            
            
            
            258,259
            
            
            
            247,400
            
            
            
            250,020Federal
      Home Loan Bank stock
            
            
            1,809
            
            
            
            1,809
            
            
            
            2,549
            
            
            
            2,549Accrued
      interest receivable
            
            
            1,465
            
            
            
            1,465
            
            
            
            1,678
            
            
            
            1,678Mortgage
      servicing rights
            
            
            68
            
            
            
            68
            
            
            
            15
            
            
            
            15





September
      30, 2009
            
            
            December
      31, 2008Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimated(Dollars
      in thousands)
            
            Amounts
            
            
            Fair
      Values
            
            
            Amounts
            
            
            Fair
      ValuesFinancial
      liabilities:Deposits
            
            $
            292,618
            
            
            $
            294,632
            
            
            $
            269,438
            
            
            $
            272,207Borrowed
      funds
            
            
            34,000
            
            
            
            35,485
            
            
            
            51,975
            
            
            
            53,777Junior
      subordinated debentures
            
            
            5,155
            
            
            
            5,155
            
            
            
            5,155
            
            
            
            5,155Accrued
      interest payable
            
            
            165
            
            
            
            165
            
            
            
            211
            
            
            
            211Off-balance
      sheet instruments:Standby
      letters of credit
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Commitments
      to extend credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -





(8)
Shareholders’ Equity





Preferred
Stock Issued to the United States Department of Treasury





In
connection with the Emergency Economic Stabilization Act of 2008 (EESA), the
U.S. Treasury Department (Treasury) initiated a Capital Purchase Program (CPP)
which allows for qualifying financial institutions to issue preferred stock to
the Treasury, subject to certain limitations and terms.  The EESA was
developed to attract broad participation by strong financial institutions, to
stabilize the financial system and increase lending to benefit the national
economy and citizens of the United States.





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





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





Common
Stock Warrant





The
Warrant has a ten year term and is immediately exercisable.  The
Warrant provides for the adjustment of the exercise price and the number of
shares of the Company’s common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions
of securities or other assets to holders of the Company’s common stock, and upon
certain issuances of the Company’s common stock at or below a specified price
relative to the then current market price of the Company’s common
stock.  If, on or prior to December 31, 2009, the Company
receives aggregate gross cash proceeds of not less than the purchase price of
the Series A Preferred Stock from one or more “qualified equity offerings,”
the number of shares of common stock issuable pursuant to the Warrant will be
reduced by one-half of the original number of shares, taking into account all
adjustments.  Pursuant to the Purchase Agreement, the Treasury
Department has agreed not to exercise voting power with respect to any shares of
common stock issued upon exercise of the Warrant.





- 16 -
 Table of Contents


The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.  The $6.8 million of proceeds was allocated to the
preferred stock and the warrant based on their relative fair values at issuance
($6.1 million was allocated to preferred stock and $706,000 to the
warrants).  The difference between the initial value allocated to the
preferred stock of approximately $6.1 million and the liquidation value of $6.8
million, i.e., the preferred stock discount, will be charged to retained
earnings over the first five years of the contract as an adjustment to the
dividend yield using the effective yield method.





(9)
New Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 168,” (SFAS 168). SFAS 168
establishes the FASB
Accounting Standards Codification(Codification)as the source of
authoritative generally accepted accounting principles (GAAP) for
nongovernmental entities. The Codification does not change
GAAP.  Instead, it takes the thousands of individual pronouncements
that currently comprise GAAP and reorganizes them into approximately 90
accounting Topics, and displays all Topics using a consistent
structure.  Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph.  The Paragraph level is
the only level that contains substantive content.  Citing particular
content in the Codification involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure.  FASB suggests that all citations begin with “FASB ASC,”
where ASC stands for Accounting Standards
Codification.  Changes to the ASC subsequent to June 30, 2009
are referred to as Accounting
Standards Updates (ASU).
 
 In
conjunction with the issuance of SFAS 168, the FASB also issued its first
Accounting Standards Update No. 2009-1, “Topic 105 – Generally Accepted
Accounting Principles” (ASU 2009-1) which includes SFAS 168 in its entirety as a
transition to the ASC.  ASU 2009-1 is effective for interim and annual
periods ending after September 15, 2009.  Its adoption will not have
an impact on our financial position or results of operations, but will change
the referencing system for accounting standards.  In order to
facilitate an effective and efficient transition to the new Codification, the
disclosure and key presentation requirements may reference pre-Codification FASB
literature for this quarter.





Certain
of the following pronouncements were issued prior to the issuance of the ASC and
adoption of the ASUs.  For such pronouncements, citations to the
applicable Codification Topic, Subtopic, and Section are provided where
applicable in addition to the original standard type and number.





In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1 (FASB ASC
715-20-65), “Employers’ Disclosures about Postretirement Benefit Plan
Assets”.  This FSP provides guidance on an employer’s disclosures
about plan assets of a defined benefit pension or other postretirement
plan.  The objective of the FSP is to provide the users of the
financial statements with an understanding of: (a) how investment allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies; (b) the major categories of plan assets;
(c) the inputs and valuation techniques used to measure the fair value of plan
assets; (d) the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period; and (e) significant
concentrations of risk within plan assets.  The disclosures about plan
assets required by this FSP shall be provided for fiscal years ending after
December 15, 2009.  The new pronouncement will require the Company to
provide additional disclosures related to its benefit plans.





In June
2009, the FASB issued SFAS No. 166 (not yet reflected in FASB ASC), Accounting for Transfers of
Financial Assets, an amendment of FASB Statement
No. 140.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,
SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, or
SFAS 140, by removing the concept of a qualifying special-purpose entity
from SFAS 140 and removes the exception from applying FIN 46(R) to
variable interest entities that are qualifying special-purpose
entities.  It also modifies the financial-components approach used in
SFAS 140. SFAS 166 is effective for fiscal years beginning after
November 15, 2009.  We have not determined the effect that the
adoption of SFAS 166 will have on our financial position or results of
operations.





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





- 17 -
 Table of Contents


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


- 18 -
 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 September 30, 2009,
Pathfinder Bancorp, M.H.C, the Company’s mutual holding company parent, whose
activities are not included in the consolidated financial statements or the
MD&A, held 63.7% of the Company’s outstanding common stock and public
shareholders held the remaining 36.3% of the common stock.





The
following discussion reviews the Company's financial condition at September 30,
2009 and the results of operations for the three months and nine months ended
September 30, 2009 and September 30, 2008.





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.





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 2008 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 statements of condition.  Note 1 to the
consolidated financial statements describes the methodology used to determine
the allowance for loan losses, and a discussion of the factors driving changes
in the amount of the allowance for loan losses is included in this
report.





- 19 -
 Table of Contents


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 annual 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.   Management continually
analyzes the portfolio to determine if further impairment has occurred that may
be deemed as other-than-temporary.  Further charges are possible
depending on future economic conditions.





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





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





Overview





The
Company's net income is primarily dependent on its net interest income, which is
the difference between interest income earned on its investments in mortgage
loans, investment securities and other loans, and its cost of funds consisting
of interest accrued on deposits and borrowed funds.  The Company's net
income is also affected by its provision for loan losses, as well as by the
amount of other income, including income from fees and service charges on
deposit accounts, net gains and losses on sales and the impairment of
securities, loans and foreclosed real estate, and other expenses such as
salaries and employee benefits, building occupancy and equipment costs, data
processing and income taxes.  Earnings of the Company also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the
Company.  In particular, the general level of market interest rates
which tend to be highly cyclical have a significant impact on our
earnings.





Net
income available to common shareholders was $542,000, or $0.22 per basic and
diluted common share, for the three months ended September 30, 2009, as compared
to a net loss of $838,000, or $0.34 per basic and diluted common share, for the
same period in 2008.  For the nine months ended September 30, 2009,
the Company reported net income available to common shareholders of $1,152,000,
or $0.46 per basic and diluted common share as compared to a net loss of
$206,000, or $0.08 per basic and diluted common share for the same period in
2008.  During the second quarter of 2009, the Company recorded an
investment security impairment charge of $197,000, net of tax benefits of
$101,000.  The 2008 net losses were the result of the Company
recording impairment charges on investment security holdings totaling $1.3
million, net of the related tax benefits of $522,000, during the third quarter
of 2008.  In addition, during the second quarter of 2008, the Company
recorded an investment security impairment charge of $205,000, net of tax
benefits of $137,000.





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 Table of Contents


The
Company has continued efforts to expand its lending and deposit relationships
within the small business community.  These efforts have helped the
Company transform its statement of condition 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 comprised 34.3% of the total gross loan portfolio for the
nine months ended September 30, 2009 compared to 31.0% for the nine months ended
September 30, 2008.





The
Company sold approximately $13.4 million in investment portfolio holdings and
$9.2 million of fixed rate residential real estate loans during the first nine
months of the year.  These efforts, combined with other deposit
gathering efforts, were undertaken to improve the Company’s overall liquidity
position, reduce its reliance on wholesale borrowings, and to take advantage of
beneficial pricing levels to generate gains from sale of the related
assets.  Short-term borrowings decreased $16.6 million, or 94%, when
compared to December 31, 2008.  Long-term borrowings decreased $1.4
million, or 4%, when compared to December 31, 2008.





Results
of Operations





The
return on average assets and return on average shareholders' equity were 0.63%
and 10.09%, respectively, for the three months ended September 30, 2009,
compared with a loss on average assets of (0.97)% and a loss on average
shareholders’ equity of  (15.65)%, for the three months ended
September 30, 2008.  During the third quarter of 2009, when compared
to the third quarter of 2008, net interest income increased $218,000, combined
with a provision for loan losses that is less than the previous year by
$23,000.   Noninterest expense increased $402,000, which was
primarily the result of increased pension plan expense to amortize losses
recorded in the prior year, and the increase in FDIC regular and special
assessment charges.  The largest variance in operating results between
the third quarter of 2009, when compared to the third quarter of 2008, is in
noninterest income.  In 2008, the Company’s noninterest income was
negatively impacted by impairment charges of $1,834,000 on available-for-sale
securities.  Sales of loans and foreclosed real estate also produced
losses of $85,000 during the third quarter of 2008.  In 2009, no such
impairment charges were required.  Sales of investments, loans and
foreclosed real estate produced gains of
$246,000.     The provision for income tax expense was
$293,000 for the third quarter of 2009, compared to a tax benefit of $288,000 in
the same quarter last year.





The
return on average assets and return on average shareholders' equity were 0.44%
and 7.52%, respectively, for the nine months ended September 30, 2009, compared
with a loss on average assets and a loss on average shareholders’ equity of
(0.08)% and (1.25)%, respectively, for the nine months ended September 30,
2008.  During the nine month period ended September 30, 2009, when
compared to the same period of 2008, net interest income increased $759,000,
offset by a provision for loan losses that is greater than the previous year by
$104,000.   Noninterest expense increased $846,000, which was
primarily the result of increased pension plan expense to amortize losses
recorded in the prior year, and the increase in FDIC regular and special
assessment charges.  The largest variance in operating results between
the nine months ended September 30, 2009, when compared to the same period in
2008, is in noninterest income.  In 2008, the Company’s noninterest
income was negatively impacted by impairment charges of $2,176,000 on
available-for-sale securities.  Sales of loans and foreclosed real
estate also produced losses of $79,000 during the nine month period of
2008.  In 2009, impairment charges were $298,000.  Sales of
investments, loans and foreclosed real estate produced gains of
$399,000.  The provision for income tax expense was $620,000 for the
nine months ended September 30, 2009, compared to a tax benefit of $82,000 in
the same period last year.





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 $3.0 million for the
three months ended September 30, 2009, from $2.8 million for the three months
ended September 30, 2008.  The Company's net interest margin increased
16 basis points to 3.66%, for the third quarter of 2009 when compared to the
same quarter in 2008.  Reductions in the Company’s current levels of
earning asset yields, due to falling short-term interest rates, have been more
than offset by efforts to reduce the cost of funds, and have resulted in
improving the Company’s net interest margin. The increase in net interest income
is attributable to a decrease of 72 basis points in the average cost of interest
bearing liabilities, and was offset by a decrease of 49 basis points in the
average yield earned on earning assets.  Average interest-earning
assets increased 2.4% to $329.2 million for the three months ended September 30,
2009, as compared to $321.4 million for the three months ended September 30,
2008.  The increase in average earning assets is primarily
attributable to a $13.8 million increase in average loans receivable, and a $9.3
million increase in average interest earning deposits, offset by a $15.3 million
decrease in average investment securities.  Average interest-bearing
liabilities increased  $8.8 million to $303.3 million from $294.5
million for the three months ended September 30, 2008. The increase in the
average balance of interest-bearing liabilities resulted from a $25.5 million
increase in average deposits offset by a $16.7 million decrease in average
borrowings.





For the
nine months ended September 30, 2009, net interest income, on a tax-equivalent
basis, increased to $8.6 million from $7.9 million for the nine months ended
September 30, 2008.  Net interest margin increased 11 basis points, to
3.49% for the nine months ended September 30, 2009 from 3.38% for the nine
months ended September 30, 2008. Average





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 Table of Contents


interest-earning
assets increased 5.3% to $329.7 million for the nine months ended September 30,
2009 as compared to $313.2 million for the nine months ended September 30, 2008,
and the yield on interest-earning assets decreased 48 basis points to 5.38% from
5.86% for the comparable period.   The increase in average
interest-earning assets was attributable to a $20.4 million increase in average
loans receivable and a $4.4 million increase in average interest earning
deposits, partially offset by a $8.3 million decrease in average investment
securities.Average
interest-bearing liabilities increased $15.9 million but the cost of funds
decreased 65 basis points to 2.05% for the nine months ended September 30, 2009,
from 2.70% for the same period in 2008.  The increase in the average
balance of interest-bearing liabilities resulted from a $20.7 million, or 8.6%,
increase in average deposits offset by a $4.8 million, or 10.2%, decrease in
average borrowings.





Interest
Income





Total
interest income, on a tax-equivalent basis, for the quarter ended September 30,
2009, decreased $294,000, or 6.3%, to $4.4 million from $4.7 million for the
quarter ended September 30, 2008.





The
average balance of loans increased $13.8 million to $251.3 million, with yields
decreasing 47 basis points to 5.88% for the third quarter of
2009.  Average residential real estate loans remained level at $133.0
million, although there was a decrease in the average yield to 5.54% from 5.70%
in the comparable quarter of 2008.   Average commercial real
estate loans increased $9.6 million, while the average yield on those loans
decreased to 6.89% from 7.37% from the period a year earlier. Average commercial
loans increased $2.2 million and the average yield decreased 157 basis points,
to 5.15% for the quarter ended September 30, 2009, from 6.72%, in the quarter
ended September 30, 2008. The decrease in the average yield on commercial loans
was primarily the result of new commercial loan origination activity taking
place at yields lower than the average yield on the existing commercial loan
portfolio, combined with the downward repricing of the existing adjustable rate
commercial loan portfolio into the current, historically low, interest rate
environment.  Average consumer loans increased $2 million, or 8%,
while the average yield decreased by 124 basis points.





Average
investment securities (taxable and tax-exempt) for the quarter ended September
30, 2009, decreased by $15.3 million, with a decrease in tax-equivalent interest
income from investments of $217,000, or 24%, when compared to the third quarter
of 2008.  The average tax-equivalent yield of the portfolio decreased
27 basis points, to 4.19% from 4.46%.





Total
interest income, on a tax-equivalent basis, for the nine months ended September
30, 2009 decreased $472,000, or 3.4%, when compared to the nine months ended
September 30, 2008.





Average
loans increased $20.4 million, with average yields decreasing 50 basis points to
5.89% from 6.39% for the nine month period ended September 30, 2009 when
compared with the same period in 2008.  Average residential real
estate loans increased $3.9 million, or 3%, and the average yield decreased 16
basis points from the comparable nine month period ended September 30,
2008.   Average commercial real estate loans increased $9.9
million, while the average yield on those loans decreased to 6.88% from 7.38%
from the period a year earlier.  Average commercial loans increased
$4.5 million and experienced a decrease in the average yield of 165 basis
points, to 5.10% for the nine months ended September 30, 2009, from 6.75%, for
the nine months ended September 30, 2008. The decrease in the average yield on
commercial loans was the result of new commercial loan origination activity
taking place at lower yields and variable rate loans pricing downwards. Average
consumer loans increased $2.1 million, or 8.4%, while the average yield
decreased by 130 basis points.





For the
nine months ended September 30, 2009, tax-equivalent interest income from
investment securities decreased $460,000, or 16.9%, compared to the same period
in 2008.   The average tax-equivalent yield of the portfolio
decreased 32 basis points, to 4.21% from 4.53%.   Moreover, there
was a $8.3 million decrease in the average balance of investment securities,
reflecting the sale of municipal investment portfolio holdings in the first
quarter.





Interest
Expense





Total
interest expense decreased $486,000 for the three months ended September 30,
2009, compared to the same quarter in 2008, as the cost of funds decreased 72
basis points to 1.83% in 2009 from 2.55% in 2008.  Although average
deposits increased in 2009 over the third quarter of 2008, the associated cost
of funds decreased sufficiently to lower the overall interest expense
incurred.  Average time deposits increased $10.6 million, but were
offset by a 95 basis point reduction in the cost of funds.  The
average balance of money market demand accounts increased to $33.7 million at
September 30, 2009 from $26.6 million at September 30, 2008 and was offset by a
decrease in the cost of funds to 0.63% from 1.70%.  The average
balance of savings accounts increased $5.8 million between the two periods and
was offset by a decrease in the cost of funds of 11 basis points.  The
average balances of other deposit categories showed smaller increases when
comparing the third quarter averages between 2009 and 2008, but all categories
had a reduction in the associated cost of funds.





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 Table of Contents


Interest
expense on borrowings decreased by $186,000, or 33.3%, when compared to the same
quarter in 2008, as a result of a decrease in average borrowings of $16.7
million and a 23 basis point decrease in the cost of funds. The decrease in cost
is attributed to the cost of the junior subordinated debenture, down 225 basis
points, which resulted from a reduction in its index rate based on 3-month
LIBOR.





Total
interest expense decreased $1.2 million for the nine months ended September 30,
2009, compared to the same period in 2008, as the average cost of funds
decreased 65 basis points.Average time deposits
increased $11.4 million, but were offset by a 83 basis point reduction in the
cost of funds.  The nine month average balance of money market demand
accounts increased $5.0 million at September 30, 2009 from the prior year period
and was offset by a decrease in the cost of funds to 0.75% from
2.06%.  The average balances of other deposit categories showed
smaller increases when comparing the nine month period results between 2009 and
2008, but all categories had a reduction in the associated interest expense as
the result of a decrease in cost of funds of 63 basis points.





Interest
expense on borrowings decreased by $303,000, or 20%, from the prior nine month
period. The reduction in the average cost of borrowings to 3.76% from 4.23% in
2008, was combined with a decrease in average borrowings of $4.8
million.





Provision
for Loan Losses





The
provision for loan losses decreased $23,000 for the three month period, but
increased $104,000 for the nine month period ended September 30, 2009, when
compared to the same periods in 2008.  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.  The Company's ratio of allowance for loan losses to
period-end loans increased to 1.16% at September 30, 2009 as compared to 0.99%
at December 31, 2008.  Nonperforming loans to period end loans
increased to 0.97% at September 30, 2009 from 0.93% at December 31, 2008. The
increase in nonperforming loans is primarily the result of an increase in
delinquency within the residential real estate loan
portfolio.  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 September 30,(in
      thousands)
            
            2009
            
            
            2008
            
            
            ChangeService
      charges on deposit accounts
            
            $
            382
            
            
            $
            397
            
            
            $
            (15
            )
            
            
            -3.8
            %Earnings
      on bank owned life insurance
            
            
            56
            
            
            
            56
            
            
            
            -
            
            
            
            0.0
            %Loan
      servicing fees
            
            
            64
            
            
            
            67
            
            
            
            (3
            )
            
            
            -4.5
            %Debit
      card interchange fees
            
            
            69
            
            
            
            71
            
            
            
            (2
            )
            
            
            -2.8
            %Other
      charges, commissions and fees
            
            
            155
            
            
            
            127
            
            
            
            28
            
            
            
            22.0
            %Noninterest
      income before gains (losses)
            
            
            726
            
            
            
            718
            
            
            
            8
            
            
            
            1.1
            %Net
      gains (losses) on sales and impairment of investment
      securities
            
            
            231
            
            
            
            (1,808
            )
            
            
            2,039
            
            
            
            -112.8
            %Net
      gains (losses) on sales of loans and foreclosed real
estate
            
            
            15
            
            
            
            (85
            )
            
            
            100
            
            
            
            -117.6
            %Total
      noninterest income (loss)
            
            $
            972
            
            
            $
            (1,175
            )
            
            $
            2,147
            
            
            
            -182.7
            %








Nine
      Months Ended September 30,(in
      thousands)
            
            2009
            
            
            2008
            
            
            ChangeService
      charges on deposit accounts
            
            $
            1,099
            
            
            $
            1,131
            
            
            $
            (32
            )
            
            
            -2.8
            %Earnings
      on bank owned life insurance
            
            
            169
            
            
            
            179
            
            
            
            (10
            )
            
            
            -5.6
            %Loan
      servicing fees
            
            
            175
            
            
            
            218
            
            
            
            (43
            )
            
            
            -19.7
            %Debit
      card interchange fees
            
            
            206
            
            
            
            207
            
            
            
            (1
            )
            
            
            -0.5
            %Other
      charges, commissions and fees
            
            
            366
            
            
            
            334
            
            
            
            32
            
            
            
            9.6
            %Noninterest
      income before gains (losses)
            
            
            2,015
            
            
            
            2,069
            
            
            
            (54
            )
            
            
            -2.6
            %Net
      gains (losses) on sales and impairment of investment
      securities
            
            
            21
            
            
            
            (2,150
            )
            
            
            2,171
            
            
            
            -101.0
            %Net
      gains (losses) on sales of loans and foreclosed real
estate
            
            
            80
            
            
            
            (79
            )
            
            
            159
            
            
            
            -201.3
            %Total
      noninterest income (loss)
            
            $
            2,116
            
            
            $
            (160
            )
            
            $
            2,276
            
            
            
            -1422.5
            %





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 Table of Contents


For the
three months ended September 30, 2009, noninterest income before gains (losses)
remained relatively level with only a $8,000 increase, when compared with the
three months ended September 30, 2008.  The majority of the increase
in noninterest income is the result of net gains being recorded on sales of
investment securities in the current year being compared to the net losses that
were incurred in the prior year, resulting in a positive impact when comparing
the two periods.  The $2 million increase in net securities gain and
losses is the result of $231,000 in gains recognized on the sale of four
government and agency securities, two mortgage backed securities and one
corporate bond, compared to the other-than-temporary impairment charges totaling
$1.8 million recorded in the same quarter of 2008.  The $100,000
increase in gains from the sale of net loans and foreclosed real estate is the
result of the sale of fixed rate loans into the secondary market, offset by the
loss on sale of two foreclosed real estate properties, compared to the loss on
sale of three foreclosed real estate properties in the same quarter of
2008.





For the
nine months ended September 30, 2009, noninterest income before gains (losses)
decreased $54,000, or 2.6%, when compared with the nine months ended September
30, 2008.   The decrease was comprised of a decrease in service
charges on deposit accounts, a decrease in earnings on bank owned life insurance
and a decrease in loan servicing fees.  The decrease in service
charges on deposit accounts was primarily attributable to the decrease in usage
of our extended overdraft product.  The decrease in loan servicing
fees was primarily attributable to non-recurring fees that were collected for
commercial loans in 2008.  The reduction in fees was partially offset
by a non-recurring administrative charge recorded from the Company’s mutual
holding company parent that is not consolidated and eliminated for financial
statement reporting purposes.  The decrease in noninterest income
before gains (losses) was offset by the change from net losses on sales and
impairment of investment securities and loans in the prior year, to net gains in
the current year.  Other-than-temporary impairment charges were
significantly less in 2009 and were offset by gains on the sale of $13.4 million
in investment securities, resulting in a positive impact when comparing the two
periods. The increase in net gains on sales of loans and foreclosed real estate
is due to the gains recognized on the sale of $9.2 million in 30-year fixed rate
residential mortgages, which were offset by losses on the sale of foreclosed
real estate.





Noninterest
Expense





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




Three
      Months Ended September 30,(In
      thousands)
            
            2009
            
            
            2008
            
            
            ChangeSalaries
      and employee benefits
            
            $
            1,402
            
            
            $
            1,284
            
            
            $
            118
            
            
            
            9.2
            %Building
      occupancy
            
            
            312
            
            
            
            331
            
            
            
            (19
            )
            
            
            -5.7
            %Data
      processing
            
            
            322
            
            
            
            335
            
            
            
            (13
            )
            
            
            -3.9
            %Professional
      and other services
            
            
            239
            
            
            
            158
            
            
            
            81
            
            
            
            51.3
            %Regulatory
      assessments
            
            
            218
            
            
            
            16
            
            
            
            202
            
            
            
            1262.5
            %Other
      expenses
            
            
            371
            
            
            
            338
            
            
            
            33
            
            
            
            9.8
            %Total
      noninterest expense
            
            $
            2,864
            
            
            $
            2,462
            
            
            $
            402
            
            
            
            16.3
            %Nine
      Months Ended September 30,(In
      thousands)
            
            
            2009
            
            
            
            2008
            
            
            ChangeSalaries
      and employee benefits
            
            $
            4,151
            
            
            $
            3,863
            
            
            $
            288
            
            
            
            7.5
            %Building
      occupancy
            
            
            941
            
            
            
            1,009
            
            
            
            (68
            )
            
            
            -6.7
            %Data
      processing
            
            
            997
            
            
            
            974
            
            
            
            23
            
            
            
            2.4
            %Professional
      and other services
            
            
            654
            
            
            
            580
            
            
            
            74
            
            
            
            12.8
            %Regulatory
      assessments
            
            
            438
            
            
            
            38
            
            
            
            400
            
            
            
            1052.6
            %Other
      expenses
            
            
            1,073
            
            
            
            944
            
            
            
            129
            
            
            
            13.7
            %Total
      noninterest expense
            
            $
            8,254
            
            
            $
            7,408
            
            
            $
            846
            
            
            
            11.4
            %





Total
noninterest expense increased $402,000 for the three months ended September 30,
2009 when compared to the same period for 2008. The increase in salaries and
employee benefits was primarily due to normal merit increases combined with an
increased pension expense as the result of pension plan losses incurred in
2008.   Professional and other services increased $81,000, which
is due to the combination of a $50,000 increase in advertising expenses incurred
in connection with the Bank’s 150thanniversary celebration, and $31,000 in other professional services due
to legal fees associated with the company’s participation in the US Treasury
Department’s Capital Purchase Program.  A $202,000 increase in
noninterest expenses was due to an increase in FDIC assessments on
deposits.  Pathfinder Bank offset 90% of its Deposit Insurance Fund
assessments with available one-time assessment credits during the first two
quarters of 2008 and took the remaining balance of the credit against the third
quarter assessment.  Assessments to Pathfinder Bank in 2009 were not
offset by credits.





On
December 22, 2008, the FDIC issued a final rule that raised the current deposit
insurance assessment rates uniformly for all institutions by 7 basis points (to
a range from 12 to 50 basis points) effective for the first quarter of
2009.  On February 27, 2009, the FDIC also issued a final rule that
revises the way the FDIC calculates federal deposit insurance





- 24 -
 Table of Contents


assessment
rates beginning in the second quarter of 2009.  Under the new rule,
the total base assessment rate ranges from 7 to 77.5 basis points of the
institution’s deposits, depending on the risk category of the institution and
the institution’s levels of unsecured debt, secured liabilities, and brokered
deposits.  On May 22, 2009, the FDIC issued a final rule imposing a 5
basis point special assessment on each insured depository institution's assets
minus Tier 1 capital as of June 30, 2009. The special assessment was collected
on September 30, 2009, but had to be accrued as of June 30, 2009.  The
Company estimated the impact of the special assessment to be $165,000 and
recorded the expense in the second quarter.  Both the special and
regular assessment changes have impacted all FDIC insured institutions for
2009.





Total
noninterest expense increased $846,000 for the nine months ended September 30,
2009 when compared to the same period for 2008.  The increase in
salaries and employee benefits was primarily due to normal merit increases and
incentive based compensation costs, combined with an increased pension expense
as the result of pension plan losses incurred in 2008.   A
$400,000 increase in noninterest expenses was due to the increase in FDIC
assessments on deposits discussed above.  These increases were offset
by a decrease of $68,000 in building occupancy.  The decrease is the
result of non-recurring charges that were expensed in 2008.





Income
Tax Expense





Income
taxes increased $581,000 for the quarter ended September 30, 2009, as compared
to the same period in 2008. For the nine month period ended September 30, income
taxes increased $702,000.  The effective tax rate was 34.5% and 28.5%
for the nine months ended September 30, 2009 and September 30, 2008,
respectively.  The increase in income tax expense and effective tax
rate in 2009 in comparison to 2008, resulted from pretax income for the nine
month period that was higher by $2.1 million, combined with a reduction of
income earned on tax-exempt investment securities and additional deferred tax
expense recorded in the second quarter of 2009 to increase the valuation
allowance established against deferred tax assets.  The additional
expense in 2009 is partially offset by a reduction of the Company’s tax rate
from the statutory rate 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 $12.2 million, or 3.5%, to $365.0 million at
September 30, 2009, from $352.8 million at December 31, 2008.  The
increase in total assets was primarily the result of an increase of $16.6
million in cash and cash equivalents, an increase of $4.0 million in the loan
portfolio, offset by a decrease of $6.6 million, or 9.1%, in investment
securities and a $1.8 million decrease in other assets.  The reduction
of the investment securities portfolio was a result of the sale of
securities.  The decrease in other assets is primarily due to the
reduction of the deferred tax asset related to unrealized losses on the
investment portfolio as the fair value of the portfolio continues to
improve.





Liabilities





Total
liabilities increased $3.3 million, or 1.0%, to $336.6 million at September 30,
2009, from $333.3 million at December 31, 2008.  Deposits increased
$23.2 million, or 8.6%.  This increase was offset by a reduction in
short-term borrowings of $16.6 million, or 94.3%, a reduction of long-term
borrowings of $1.4 million, or 4.1% and a $1.9 million reduction in other
liabilities as the result of a $2 million contribution to the Company’s pension
plan.  The increase in deposits was the result of an increase of $16.8
million in municipal customer deposits, with the majority of the balance coming
from increased retail deposits.  The municipal deposit increase was
driven by the receipt of tax revenues by our municipal customers.  The
decrease in short-term borrowings is a result of management utilizing liquidity
generated from net deposit growth and the sale of investment portfolio holdings
to pay down overnight borrowings and maturing short-term advances.





- 25 -
 Loan
and Asset Quality and Allowance for Loan Losses





The
following table represents information concerning the aggregate amount of
nonperforming assets:





September
      30,
            
            
            December
      31,(In
      thousands)
            
            2009
            
            
            2008Nonaccrual
      loans:Commercial
      real estate and commercial
            
            $
            1,027
            
            
            $
            1,455Consumer
            
            
            508
            
            
            
            254Real
      estate - residential
            
            
            923
            
            
            
            614Total
      nonaccrual loans
            
            
            2,458
            
            
            
            2,323Total
      nonperforming loans
            
            
            2,458
            
            
            
            2,323Foreclosed
      real estate
            
            
            417
            
            
            
            335Total
      nonperforming assets
            
            $
            2,875
            
            
            $
            2,658Nonperforming
      loans to total loans
            
            
            0.97
            %
            
            
            0.93
            %Nonperforming
      assets to total assets
            
            
            0.79
            %
            
            
            0.75
            %





Total
nonperforming loans increased 5.8% at September 30, 2009, when compared to
December 31, 2008.  The increase in nonperforming loans was the result
of the deterioration in the delinquency status of residential real estate and
consumer loans.  Management believes that the underlying collateral,
combined with the existing allowances provided, are adequate to cover potential
losses that may occur from the remediation process.




The
allowance for loan losses at September 30, 2009 and December 31, 2008 was $3.0
million and $2.5 million, or 1.16% and 0.99% of period end loans,
respectively.





Capital





Shareholders'
equity at September 30, 2009, was $28.4 million as compared to $19.5 million at
December 31, 2008.  The Company added $1.2 million to retained
earnings through net income.  The increase to retained earnings was
combined with a decrease of $1.2 million in accumulated other comprehensive
loss, which decreased to $1.9 million from $3.1 million at December 31, 2008.
Net unrealized holding gains on securities, net of tax, resulted in a decrease
in accumulated other comprehensive loss of $1.1 million.  In addition,
$125,000 of amortization of retirement plan losses and transition obligation,
net of tax expense, decreased accumulated other comprehensive loss during
2009.  The current dividend level represents an approximately 71%
reduction as compared to 2008 dividend levels.  Common stock dividends
declared reduced capital by $224,000.  The Board of Directors and
Management of the Company believe it is in the best interest of the shareholders
to conserve capital at this time.  The remaining increase to capital
was the result of the Company entering into an agreement with the United States
Department of Treasury pursuant to which Pathfinder Bancorp, Inc. issued and
sold 6,771 shares of preferred stock and warrants to purchase the Company’s
common stock for a total price of $6,771,000.  The increase is offset
by accrued dividends on the preferred stock of $19,000.





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





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





The
Warrant has a ten year term and is immediately exercisable.  The
Warrant provides for the adjustment of the exercise price and the number of
shares of the Company’s common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions
of securities or other assets to holders of the Company’s common stock, and upon
certain issuances of the Company’s common stock at or below a specified price
relative to the then current market price of the Company’s common
stock.  If, on or prior to December 31, 2009, the Company
receives aggregate gross cash proceeds of not less than the purchase price of
the Series A Preferred Stock from one or more “qualified equity offerings,”
the number of shares of common stock issuable pursuant to the Warrant will be
reduced by one-half of the original number of shares, taking into account all
adjustments.  Pursuant to the Purchase Agreement, the Treasury
Department has agreed not to exercise voting power with respect to any shares of
common stock issued upon exercise of the Warrant.





- 26 -
 Table of Contents


The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.  The Company has agreed to register for resale the
Series A Preferred Stock, the Warrant and the shares of common stock
underlying the Warrant (the “Warrant Shares”), as soon as practicable after the
date of the issuance of the Series A Preferred Stock and the
Warrant.  Neither the Series A Preferred Stock nor the Warrant
will be subject to any contractual restrictions on transfer, except that the
Treasury Department may only transfer or exercise an aggregate of one-half of
the Warrant Shares prior to the earlier of the date on which the Company
receives aggregate gross cash proceeds of not less than the purchase price of
the Series A Preferred Stock from one or more “qualified equity offerings”
and December 31, 2009.





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
September 30, 2009, Pathfinder Bank exceeded all regulatory required minimum
capital ratios and met the regulatory definition of a “well-capitalized”
institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6% and a total risk-based capital ratio exceeding
10%.





Liquidity





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





The
Company's liquidity has been enhanced by its membership in the Federal Home Loan
Bank of New York, whose competitive advance programs and lines of credit provide
the Company with a safe, reliable and convenient source of funds.  A
significant decrease in deposits in the future 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
$74 million.  At September 30, 2009, the Company has $34 million
outstanding against the existing lines with $40 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 September 30, 2009, 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.






- 27 -
 PART II- OTHER INFORMATION





Item
1 - Legal Proceedings





None





Item
1A – Risk Factors





Although
a smaller reporting company is not required to comply with this item, in
addition to the other information contained this Quarterly Report on Form 10-Q,
the following risk factors represent material updates and additions to the risks
previously disclosed in our filings with the Securities and Exchange Commission.
Additional risks not presently known to us, or that we currently deem
immaterial, may also adversely affect our business, financial condition or
results of operations. Further, to the extent that any of the information
contained in this Quarterly Report on Form 10-Q constitutes forward-looking
statements, the risk factors set forth below also are cautionary
statements identifying important factors that could cause our actual results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of us.




We
Hold Certain Intangible Assets that Could Be Classified as Impaired in The
Future.  If These Assets Are Considered To Be Either Partially or
Fully Impaired in the Future, Our Earnings and the Book Values of These Assets
Would Decrease




Pursuant
to FASB ASC 350-20-35, Intangibles – Goodwill and
Other, we are required to test our goodwill and core deposit intangible
assets for impairment on a periodic basis.  The impairment testing
process considers a variety of factors, including the current market price of
our common shares, the estimated net present value of our assets and liabilities
and information concerning the terminal valuation of similarly situated insured
depository institutions.  If an impairment determination is made in a
future reporting period, our earnings and the book value of these intangible
assets will be reduced by the amount of the impairment.  If an
impairment loss is recorded, it will have little or no impact on the tangible
book value of our common shares or our regulatory capital levels.




A
Legislative Proposal Has Been Introduced That Would Require Pathfinder Bancorp,
MHC and the Company to Become Bank Holding Companies.




The U.S.
Treasury Department recently released a legislative proposal that would
implement sweeping changes to the current bank regulatory
structure.  The proposal would create a new federal banking regulator,
the National Bank Supervisor, and merge the Office of Thrift Supervision (the
current primary federal regulator of Pathfinder Bancorp, MHC and the Company) as
well as the Office of the Comptroller of the Currency (the primary federal
regulator for national banks) into this new federal bank regulator.




If this
proposal is implemented, Pathfinder Bancorp, MHC and the Company would become
bank holding companies subject to supervision by the Board of Governors of the
Federal Reserve System (the “Federal Reserve”) as opposed to the Office of
Thrift Supervision.  The Federal Reserve has historically looked to
Office of Thrift Supervision regulations in its regulation of mutual holding
companies and processing of mutual holding company applications; however, it is
not obligated to follow such regulations.  One important Office of
Thrift Supervision regulation that the Federal Reserve does not follow relates
to the ability of mutual holding companies to waive the receipt of dividends
declared on the common stock of their stock holding company or savings bank
subsidiaries.  While Office of Thrift Supervision regulations permit
mutual holding companies to waive the receipt of dividends, subject to filing a
notice with the Office of Thrift Supervision and receiving its non-objection,
the Federal Reserve’s current policy is to prohibit mutual holding companies
from waiving the receipt of dividends so long as the subsidiary savings bank is
well capitalized.  Moreover, Office of Thrift Supervision regulations
provide that it will not take into account the amount of waived dividends in
determining an appropriate exchange ratio for minority shares in the event of
the conversion of a mutual holding company to stock form.  If the
Office of Thrift Supervision is eliminated, the Federal Reserve becomes the
exclusive regulator of mutual holding companies, and the Federal Reserve retains
its current policy regarding dividend waivers by mutual holding companies,
Pathfinder Bancorp, MHC would not be permitted to waive the receipt of dividends
declared by the Company. This could have an adverse impact on our ability to pay
dividends and, consequently, the value of our common stock.




Any
Future FDIC Insurance Premiums Will Adversely Impact Our Earnings.




On May
22, 2009, the FDIC adopted a final rule levying a five basis point special
assessment on each insured depository institution's assets minus Tier 1 capital
as of June 30, 2009.  The special assessment was payable on September
30, 2009.  We recorded an expense of $165,000 during the quarter ended
June 30, 2009, to reflect the special assessment.  The final rule
permits the FDIC’s Board of Directors to levy up to two additional special
assessments of up to five basis points each during 2009 if the FDIC estimates
that the Deposit Insurance Fund reserve ratio will fall to a level that the
FDIC’s Board of Directors believes would adversely affect public confidence or
to a level that will be close to or below zero.  On September 29,
2009, the FDIC issued a Notice of Proposed Rulemaking (NPR), which would require
insured depository institutions to prepay their quarterly risk-based assessments
for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December
30, 2009, along with each institution’s risk-based deposit insurance assessment
for the third quarter of 2009. Comments were due by October 28,
2009.  As of this date, we do not know if the proposed rule will be
finalized.  If it is, the additional assessment paid would be expensed
over the related periods.  The FDIC materially increased the general
assessment rate and, therefore, our FDIC general insurance premium expense has
increased substantially compared to prior periods.





- 28 -
 Table of Contents


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





Other
than the sales of preferred securities to the U.S. Government, as disclosed in
the Management’s Discussion and Analysis section of this Form 10-Q, there were
no unregistered sales of equity securities.





Item
3 - Defaults Upon Senior Securities





None





Item
4 - Submission of Matters to a Vote of Security Holders





None





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











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.








November 13,
2009                            
/s/ Thomas W.
Schneider


Date                                                      Thomas
W. Schneider


President and Chief
Executive Officer





November 13,
2009                             /s/ James A.
Dowd


Date                                                      James
A. Dowd


Senior Vice President and Chief Financial Officer













- 29 -


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.November 13, 2009
            /s/ Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive Officer







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.November 13, 2009
            /s/ James A. Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial Officer










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 September 30, 2009 and that to the best of his
      knowledge:1.the
      report fully complies with the requirements of Section 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.November 13, 2009
            /s/ Thomas W. Schneider
              Thomas
      W. Schneider
              President
      and Chief Executive OfficerNovember 13, 2009
            /s/ James A. Dowd
              James
      A. Dowd
              Senior
      Vice President and Chief Financial
Officer