Washington, D.C. 20549

For the fiscal year ended December 31, 2009.
For the transition period from ______________ to ______________.

Commission file number: 000-23601
  (Exact name of registrant as specified in its charter)
Federal                                                                                                                                                                                                                                                                                                    16-1540137 
(State or other jurisdiction of                                                           I.R.S. Employer
incorporation or organization)                                                                  Identification No.)

214 West First Street
Oswego, NY                                                                                                                                                                                         13126 
(Address of principal executive offices)                                                                                 (Zip Code)              

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

Securities registered pursuant to Section 12(b) of the Act:  
               Title of each class                                                                                                                    Name of each exchange on which registered

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   YES *       NO T
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES * NO T 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES T        NO *
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          YES *        NO *

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

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

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

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

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

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

(1) Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant (Part III).
(2) Annual Report to Stockholders (Part II and IV).



DECEMBER 31, 2009
Item 1.
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Legal Proceedings
Item 4.
(Removed and Reserved)
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A(T).
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules



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



Pathfinder Bancorp, Inc.

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

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

Pathfinder Bank

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

The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits, together with other sources of funds, in loans secured by one- to four-family residential real estate and commercial real estate.  At December 31, 2009, $196.6 million, or 75% of the Bank's total loan portfolio consisted of loans secured by real estate, of which $134.3 million, or 68%, were loans secured by one- to four-family residences and $62.2 million, or 32%, were secured by commercial real estate.  Additionally, $26.1 million, or 10%, of total loans, were secured by second liens on residential properties that are classified as consumer loans.  The Bank also originates commercial and consumer loans that totaled $35.4 million and $3.6 million, respectively, or 15%, of the Bank's total loan portfolio at December 31, 2009.  The Bank
invests a portion of its assets in securities issued by the United States Government and its agencies and sponsored enterprises, state and municipal obligations, corporate debt securities, mutual funds, and equity securities.  The Bank also invests in mortgage-backed securities primarily issued or guaranteed by United States Government sponsored enterprises.  The Bank's principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings from correspondent financial institutions.  The principal source of income is interest on loans and investment securities.  The Bank's principal expenses are interest paid on deposits, and employee compensation and benefits.

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

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

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

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


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


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

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

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

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

Recent Regulatory Developments

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

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

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

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

The administration of President Obama introduced the Making Home Affordable program in 2009.  This program allows homeowners with loans guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments.  Pathfinder Bank services loans that
have been purchased by Fannie Mae, and therefore the Bank does participate in this program.  The program also encourages banks to voluntarily modify portfolio loans for borrowers who are eligible.  Pathfinder Bank also participates in that manner.  Very few of our borrowers have been eligible to participate in the program, although participating in the program has increased our administrative expenses.
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The New York Legislature passed, and the Governor signed into law, Governor’s Program Bill No. 46.  This law, which became effective January 14, 2010, amends and supplements various existing statues including the Real Property Actions and Proceedings Law, the Uniform Commercial Code, the Civil Practice Law and Rules and the Banking Law.  In brief, the law imposes additional foreclosure notice provisions on owners and tenants of 1-4 family residential premises; additional filing requirements in such foreclosures; mandatory judicial settlement conferences in residential foreclosures; an obligation on the bank to maintain premises in foreclosure prior to taking title; and other miscellaneous requirements.  We believe this new law will delay foreclosures on residential properties and increase foreclosure cost.

New York State Banking Law and FDIC Regulation

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

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

FDIC Insurance on Deposits

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

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

On December 22, 2008, the FDIC published a final rule that raises the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) effective for the first quarter of 2009.  On February 27, 2009, the FDIC also issued a final rule that revises the way the FDIC calculates federal deposit insurance assessment rates beginning in the second quarter of 2009.  Under the new rule, the total base assessment rate will range from 7 to 77.5 basis points of the institution’s deposits, depending on the risk category of the institution and
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the institution’s levels of unsecured debt, secured liabilities, and brokered deposits.  On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The impact of the special assessment was approximately $180,000.  Finally, on November 12, 2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009.  The three-year assessment recorded in the Company’s other assets amounted to $1.7 million. Both the special and regular assessment changes have been imposed on all FDIC insured institutions for the year ended December 31, 2009.  

The credit provided by the 2005 Act was determined based on the assessment base of the institution as of December 31, 1996 as compared with the combined aggregate assessment base of all eligible institutions as of that date. Those institutions having credits could use them to offset up to 100% of the 2007 DIF assessment, and if not completely used in 2007, applied the remaining credits to not more than 90% of each of the aggregate 2008, 2009 and 2010 DIF assessments. Pathfinder Bank offset 90% of its DIF assessments with available one-time assessment credits for the first two quarters of 2008 and took the remaining balance of the credit against the third quarter assessment. For the first nine months of 2008, credits utilized to offset amounts assessed for Pathfinder Bank totaled $76,000. Fourth quarter 2008 assessments and 2009 assessments for Pathfinder Bank were not offset by credits.

See the discussion of recent regulatory developments relating to the FDIC and its impact on the Company discussed above under the caption Recent Regulatory Developments”.

Regulatory Capital Requirements

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

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

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

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Limitations on Dividends and Other Capital Distributions

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

Prompt Corrective Action

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

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

Transactions With Affiliates and Insiders

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

Further, Section 22(h) of the Federal Reserve Act and its implementing regulations restrict a savings bank with respect to loans to directors, executive officers, and principal stockholders. Under Section 22(h), loans to directors, executive officers and stockholders who control, directly or indirectly, 10% or more of voting securities of a savings bank and certain related interests of any of the foregoing, may not exceed, together with all other outstanding loans to such persons and affiliated entities, the savings bank's total unimpaired capital and unimpaired surplus. Section 22(h)
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also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and stockholders who control 10% or more of voting securities of a stock savings bank, and their respective related interests, unless such loan is approved in advance by a majority of the board of directors of the savings bank. Any "interested" director may not participate in the voting. Further, pursuant to Section 22(h), loans to directors, executive officers and principal stockholders must generally be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive officers.

Supervisory Agreement

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

Federal Holding Company Regulation

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

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

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

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

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

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

Federal Securities Law

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

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

Federal Reserve System

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

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Federal Community Reinvestment Regulation

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

New York State Community Reinvestment Regulation

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

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


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

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”) was signed into law on July 30, 2002.  Sarbanes-Oxley is a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.  As directed by Section 302(a) of Sarbanes-Oxley, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact.  The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.  On October 2, 2009, the SEC granted
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another extension for the outside auditor assessment until fiscal years ending after June 15, 2010.  We have existing policies, procedures and systems designed to comply with these regulations, and are further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 ("EESA") was enacted on October 3, 2008. EESA enables the federal government, under terms and conditions to be developed by the Secretary of the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program ("TARP"), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC.
Under the TARP, the United States Department of Treasury authorized a voluntary Capital Purchase Program to purchase up to $250 billion of senior preferred shares of qualifying financial institutions that elected to participate by November 14, 2008. The program was developed to attract broad participation by strong financial institutions, to stabilize the financial system and increase lending to benefit the national economy and citizens of the United States.The board of directors and management analyzed the potential merits of participating in the Capital Purchase Program (“CPP”) of the Treasury Department’s TARP.  It was the general view of the board and management that in the present national economic risk environment, enhancing the Company’s capital ratios is both prudent, given the current climate, and potentially opportunistic as we move into the next business cycle.  Additionally, any increase to capital will continue to support the Company’s lending activities to individuals, families, and businesses in our community.  Companies participating in the CPP are required to adopt certain standards relating to executive compensation.  The terms of the CPP also limit certain uses of capital by the issuer, including with respect to repurchases of securities and increases in dividends.  

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

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

Securities and Exchange Commission Reporting

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

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

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Federal Taxation

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

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

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

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

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

State Taxation

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

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


Not required of a smaller reporting company.



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The Bank conducts its business through its main office located in Oswego, New York, and six branch offices located in Oswego County.  The following table sets forth certain information concerning the main office and each branch office of the Bank at December 31, 2009.  The aggregate net book value of the Bank's premises and equipment was $7.2 million at December 31, 2009.  For additional information regarding the Bank's properties, see Notes 7 and 15 to the Consolidated Financial Statements.

Main Office
214 West First Street
Oswego, New York  13126
Plaza Branch
Route 104, Ames Plaza
Oswego, New York  13126
     Owned (1)
Mexico Branch
Norman & Main Streets
Mexico, New York  13114
Oswego East Branch
34 East Bridge Street
Oswego, New York  13126
Lacona Branch
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch
5 West First Street South
Fulton, New York  13069
Central Square Branch
3025 East Ave
Central Square, New York  13036
     Owned (2)
The building is owned; the underlying land is leased with an annual rent of $21,000
The building is owned; the underlying land is leased with an annual rent of $30,000

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



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

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

Dividends and Dividend History

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

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

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

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

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

Tangible equity excludes intangible assets.
The dividend payout ratio is calculated using dividends declared and not waived by the  Mutual Holding Company, divided by net income.
The efficiency ratio is calculated as noninterest expense, including regulatory assessments, divided by the sum of taxable-equivalent net interest income and noninterest income excluding net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate.
Exclusive of net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate.
Exclusive of regulatory assessments.
As calculated in this ratio, noninterest income includes net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate.

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

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

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


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

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified
Page 15

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

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

Deferred income tax assets and liabilities are determined using the liability method.  Under this method, the net deferred tax asset or liability is recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.  To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established.  The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.  A valuation allowance of $458,000 was maintained at December 31, 2009, as management believes it may not generate sufficient capital gains to offset its capital loss carry forward.  The Company’s effective tax rate differs from the statutory rate due to non-taxable investment securities, and bank owned life insurance offset by the valuation allowance established on a portion of the capital loss carry forwards.
Pension and post-retirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, rate of future compensation increases and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 11 to the consolidated annual financial statements.

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

The Company carries all of its investments at fair value with any unrealized gains or losses reported net of deferred tax as an adjustment to shareholders' equity, except for debt security impairment losses, which are charged to earnings when the loss is credit-related and recognized in other comprehensive income when the loss is noncredit-related and the security is not expected to be sold.  The Company's ability to fully realize the value of its investments in various debt securities is dependent on the underlying creditworthiness of the issuing organization.  In evaluating the debt security portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not
Page 16

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

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

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


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

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

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

Page 17


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

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

Net Interest Income

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

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

The average balance of interest-earning assets increased $17.2 million, or 5.4%, during 2009 and the average balance of interest-bearing liabilities increased by $14.2 million, or 4.9%.  The increase in the average balance of interest earning assets primarily resulted from a $19.0 million increase in the average balance of the loan portfolio and a $4.7 million increase in the average balance of interest earning deposits, offset by a $6.5 million reduction in the average balance of the security investment portfolio. The increase in the average balance of interest-bearing liabilities primarily resulted from a $22.1 million, or 9.2%, increase in the average balance of deposits, offset by a $7.9 million, or 15.7%, decrease in the average balance of borrowed funds.  Interest income, on a tax-equivalent basis, decreased $620,000, or 3.4%, during 2009. The decrease in yield on interest earning assets to 5.38% in 2009 from 5.87% in 2008 was partially offset by the 5.4% increase in volume, but the volume increase was not enough to make up for the overall reduction in yields.  Interest expense on deposits decreased $1.2 million, or 21.7%, as the cost of deposits dropped 67 basis points to 1.69% in 2009 from 2.36% in 2008.  Interest expense on borrowings decreased $419,000, or 20.8%, during 2009 as the 15.7% decrease in the average balance of borrowed funds was combined with a decrease in the cost of borrowed funds to 3.75% in 2009 from 4.00% in 2008.
Page 18

Average Balances and Rates

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

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

Page 19

Interest Income

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

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

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

Page 20

Rate/Volume Analysis

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

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

Provision for Loan Losses

The provision for loan losses increased $56,000 to $876,000 for the year ended December 31, 2009, as compared to the prior year.  The increased provision is reflective of a growing loan portfolio that is more heavily weighted to commercial term and commercial real estate loans, which have higher inherent risk characteristics than a traditional consumer real estate portfolio.  The current level of non-performing assets does not fall significantly outside of the Bank’s historic trend levels, however, the generally weak economic conditions nationally over the past two years, and the current strain on consumer discretionary income have caused management to carefully monitor and react to these trends by increasing the provision for loan losses, maintaining the Company’s strict loan underwriting standards and carefully monitoring the performance of the loan portfolio.
Page 21

Noninterest Income

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

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

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

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

The small decrease in noninterest income before gains and losses was offset by the significant change from net losses on sales and impairment of investment securities and loans in the prior year, to a net gain in the current year.  The net gain in sales and impairment of investment securities is a result of gains generated from the sales of securities through out the year, which were offset by recording other-than-temporary impairment charges during the fourth quarter. Net gains on the sale of loans and foreclosed real estate is the result of the sale of fixed rate loans into the secondary market, offset by the sale of seven foreclosed real estate properties at a loss and the adjustment to fair value of one property.  

Page 22


Noninterest Expense

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

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

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

Income Tax Expense

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


Investment Securities

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

Page 23

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

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

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

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

The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2009. Yield is calculated on the amortized cost to maturity and adjusted to a fully tax-equivalent basis.
One Year or Less
One to Five Years
Five to Ten Years
(Dollars in thousands)
Average Yield
Average Yield
Average Yield
Debt investment securities:
US Treasury and agencies
  $ 1,505       3.88 %   $ 11,000       2.00 %   $ 1,023       3.01 %
State and political subdivisions
    96       3.25 %     2,190       3.32 %     2,644       3.24 %
    -       -       3,135       5.53 %     -       0.00 %
    2,203       4.68 %     -       0.00 %     -       -  
    3,804       4.32 %     16,325       2.85 %     3,667       3.17 %
Mortgage-backed securities:
Residential mortgage-backed
    765       4.14 %     1,650       4.33 %     4,085       4.89 %
    765       4.14 %     1,650       4.33 %     4,085       4.89 %
Other non-maturity investments:
Mutual funds
    4,790       2.73 %     -       -       -       -  
Equity securities and FHLB stock
    2,271       4.94 %     -       -       -       -  
    7,061       3.44 %     -       -       -       -  
Total investment securities
  $ 11,630       3.77 %   $ 17,975       2.99 %   $ 7,752       4.08 %

Page 24

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

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

Loans Receivable

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

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

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

Page 25

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

Due Under
Due 1-5
Due Over
(In thousands)
One Year
Five Years
Real estate:
Commercial real estate
  $ 10,459     $ 45,089     $ 6,702     $ 62,250  
Residential real estate
    10,228       33,417       91,457       135,102  
      20,687       78,506       98,159       197,352  
Commercial and municipal loans
    20,710       12,022       2,715       35,447  
    14,423       4,082       11,161       29,666  
Total loans
  $ 55,820     $ 94,610     $ 112,035     $ 262,465  
Interest rates:
  $ 3,734     $ 13,849     $ 103,766     $ 121,349  
    52,086       80,761       8,269       141,116  
Total loans
  $ 55,820     $ 94,610     $ 112,035     $ 262,465  

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

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

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

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

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Non-performing Loans and Assets

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

December 31,
(In thousands)