Pathfinder Bancorp, Inc. Announces Fourth Quarter and Year-End Earnings

Pathfinder Bancorp, Inc., the mid-tier holding company of Pathfinder Bank (NASDAQ: PBHC), reported record quarterly net income of $574,000, or $0.23 per basic and diluted share, for the three months ended December 31, 2008 as compared to $485,000, or $0.20 per basic and diluted share for the same period in 2007. For the twelve months ended December 31, 2008, the Company reported net income of $368,000 or $0.15 per basic and diluted share, compared to $1.1 million, or $0.45 per basic and diluted share, for the same period in 2007.

Full year earnings were impacted by $1.6 million in unrealized losses net of related tax benefits associated with other than temporary impairment charges on four securities within the investment securities portfolio. Exclusive of these charges, core earnings would have been a record $2.0 million.

Core earnings performance was driven by strong organic growth of both the loan and deposit portfolios, improved net interest margins and controlled operating expenses.

"Our fourth quarter earnings performance was the highest level in our Company's history," said President and Chief Executive Officer Thomas W. Schneider. "These results reflect a significant improvement in our net interest margin as balance sheet growth and diversification drove revenues while expenses remained well controlled."

"As Pathfinder Bank enters its 150th year, we remain committed to the same sound banking practices that have served us well throughout our history," Schneider added. "These fundamental practices and our focus on our customers have better prepared us for these turbulent times. We have experienced loan growth of $27 million, deposit growth of $18 million, and net interest margin growth of 35 basis points, while our operating expenses have increased just $97,000, or 1.0%. Additionally, we increased our loan loss allowances by $769,000, or 45.2%, while net charge-offs were just $51,000."

"We anticipate that 2009 will be extremely challenging for our industry," Schneider added, "and while we must continue to enhance every aspect of our diligence, we feel we are very well positioned to continue to be one of the leaders of banking services in our market place."

Net interest income for the quarter ended December 31, 2008, increased $580,000, or 26%, when compared to the same period during 2007. Interest income increased $282,000, or 6%, combined with a decrease in interest expense of $298,000, or 14%. Net interest rate spread increased to 3.34% for the fourth quarter of 2008 from 2.88% for the same period in 2007. Average interest-earning assets increased 13% to $326.3 million for the quarter ended December 31, 2008, as compared to $287.8 million for the same quarter of 2007. The yield on interest-earning assets decreased 37 basis points to 5.79% compared to 6.16% for the same period in 2007. Average interest-bearing liabilities increased $36.7 million and the cost of funds decreased 83 basis points to 2.45% from 3.28% for the same period in 2007.

Net interest income for the year ended December 31, 2008 increased $2.0 million, or 23.2%, when compared to the same period during 2007. Interest income increased $1.0 million, or 6.0%, combined with a decrease in interest expense of $967,000, or 11.2%. Net interest rate spread increased to 3.22% for the year ended December 31, 2008 from 2.82% for the same period in 2007. Average interest-earning assets increased 9.8%, to $315.3 million, for the year ended December 31, 2008 as compared to $287.1 million for the year ended December 31, 2007. The yield on average interest earning assets decreased 21 basis points to 5.87% compared to 6.08% for the same period in 2007. The increase in average interest earning assets is primarily attributable to a $22.7 million increase in the average balance of the loan portfolio and a $7.7 million increase in the average balance of security investments. These increases were offset by a $2.2 million decrease in the average balance of interest-earning deposits. Average interest-bearing liabilities increased $26.1 million, while the cost of funds decreased 63 basis points to 2.64% from 3.27% for the same period in 2007. The increase in the average balance of interest-bearing liabilities resulted primarily from an $18.9 million, or 60%, increase in average borrowed funds, combined with an increase in average deposits of $7.3 million, or 3%.

The provision for loan losses for the year ended December 31, 2008 increased to $820,000 from $365,000 for the same period in 2007. The increase in the provision is reflective of the overall increase in loan portfolio volumes and a portfolio that is more heavily concentrated in commercial lending activities. In addition, the increased provision is a result of the Company operating in the current heightened risk environment due to stressed national economic conditions. The Company's ratio of allowance for loan losses to period end loans has increased to 0.99% at December 31, 2008 from 0.76% at December 31, 2007. Nonperforming loans to period end loans increased to 0.93% at December 31, 2008, compared to 0.71% at December 31, 2007. Non-accrual loans increased $732,000 as of December 31, 2008 when compared to December 31, 2007. The increase was centered in commercial real estate and commercial loans. These accounts are considered well collateralized, and several are supported by government guarantees. Non-accrual loans as a percentage of total assets decreased slightly from 0.77% in 2007 to 0.76% in 2008. The Company does not anticipate any losses above the level of specific loss allowances that have been established.