Pathfinder Bancorp, Inc. Announces Third Quarter Earnings

Pathfinder Bancorp, Inc., the mid-tier holding company of Pathfinder Bank, (NASDAQ: PBHC) (listing: PathBcp) has announced third quarter operating results. Third quarter results were adversely impacted by investment security portfolio impairment charges. The Company reported a net loss of $838,000, or $0.34 per diluted share, for the three months ended September 30, 2008 as compared to net income of $306,000, or $0.12 per diluted share for the same period in 2007. For the nine months ended September 30, 2008, the Company reported a net loss of $206,000, or $0.08 per share, compared to net income of $637,000, or $0.26 per share, for the same period in 2007.

Core earnings, which represent earnings exclusive of impairment charges in the investment securities portfolio, resulted in net income of $1.3 million, or $.53 per diluted share for the nine months ended September 30, 2008. These earnings resulted in a return on average assets and return on average equity of .51% and 7.95% respectively. Management believes that the presentation of core earnings is more representative of the results of operations and the ongoing earnings potential of the company.

The Company recorded impairment charges on investment security holdings totaling $1.3 million, net of the related tax benefits, during the 3rd quarter of 2008. These charges relate to Company holdings in a senior unsecured note issued by Lehman Brothers Holdings, Inc., a position in the AMF Large Cap Equity Fund, and holdings in the AMF Ultra Short Mortgage Fund. In addition, during the second quarter of 2008, the Company recorded an investment security impairment charge of $205,000, net of taxes, on the AMF Ultra Short Mortgage Fund.

"The financial crisis that deepened in the third quarter, including the bankruptcy filing of Lehman Brothers Holdings, has resulted in impairment charges on three security holdings that have significantly impacted what otherwise are solid results for the first nine months of this year," according to Thomas W. Schneider, President and CEO. "Security positions in a $1 million Lehman Brothers Bond, a large cap equity mutual fund, and a mortgage-backed security mutual fund, have been marked to market at September 30, 2008 to values that have resulted in unrealized losses of approximately $1.5 million, net of tax, year-to-date," Schneider stated.

"Exclusive of these securities charges," Schneider continued, "the Company's core earnings show significant improvement over prior periods. Core earnings for the quarter ended September 30, 2008 were $474,000 compared to $306,000 in the prior year. Year-to-date core earnings for 2008 were $1.3 million compared to $637,000. Exclusive of the securities impairment charges, year to date return on equity is 7.95% compared to 4.03% in the prior year and basic core earnings per share of $.53 year to date compared to $.26 in the prior year."

"While the impaired securities losses are extremely disappointing, our core business continues to grow successfully," Schneider said. "We have had strong loan growth over the last twelve months with total loans increasing $27 million, or 12.7%, with good portfolio diversification between residential, commercial and consumer loans. The Central New York region remains resilient through this current economic cycle and we continue to provide loans to creditworthy individuals and businesses. The Bank's net interest margin continues to expand and operating expenses have remained stable. We have been increasing our provision for loan losses commensurate with our loan portfolio growth and the risk environment inherent in a weakened national economy."

"We are a well capitalized bank," Schneider continued, "and we remain ready to serve the loan and deposit needs of our community. We are cautiously optimistic, despite the current economic down cycle, for three primary reasons: 1) we believe our business model of prudent lending and management into a well-known local market has been validated by the events that led to the current crisis; 2) the Central New York market has not been subject to over valued real estate assets and will suffer less than other regions of the country during this economic downturn; and 3) we are experiencing decreased competitive forces and believe opportunities will be present as other banks consolidate."

Net interest income for the quarter ended September 30, 2008, increased 29% when compared to the same period during 2007. Interest income increased $359,000, or 8%, combined with a decrease in interest expense of $269,000, or 13%. Net interest rate spread increased to 3.29% for the third quarter of 2008 from 2.85% for the same period in 2007. Average interest-earning assets increased 14% to $321.4 million for the quarter ended September 30, 2008 as compared to $282.5 million for the same quarter of 2007. The yield on interest-earning assets decreased 29 basis points to 5.84% compared to 6.13% for the same period in 2007. The increase in average earning assets is primarily attributable to a $26.4 million increase in the average balance of the loan portfolio, an $11.5 million increase in the average balance of the investment securities portfolio, and an increase in the average balance of interest earning deposits of $887,000. Average interest-bearing liabilities increased $33.9 million and the cost of funds decreased 73 basis points to 2.55% from 3.28% for the same period in 2007. The increase in average interest-bearing liabilities resulted primarily from a $26.8 million and a $7.1 million increase in the average balance of borrowed funds and deposits, respectively. The borrowed funds are primarily short and mid-term advances from the Federal Home Loan Bank of New York.