Earnings Recap: Lake Shore Bancorp, Inc. (NASDAQ: LSBK)

On Thursday, Shares of Lake Shore Bancorp, Inc. (NASDAQ: LSBK) showed the bullish trend with a higher momentum of 0.31% and ended its trading session at $16.40. The company traded total volume of 5,522 shares as contrast to its average volume of 1.69K shares. The company has a market value of $100.04M and about 6.10M shares outstanding. During the 52-week trading session, the minimum price at which share price traded was registered at $15.31 and reached the max level of $17.40.

Lake Shore Bancorp, Inc. (LSBK), the holding company for Lake Shore Savings Bank, declared unaudited results for the three months and year ended December 31, 2017.

Net income for fourth quarter 2017 was $580.0K, or $0.09 per diluted share, contrast to net income of $140.0K, or $0.02 per diluted share, for fourth quarter 2016. The $440.0K increase in fourth quarter 2017 net income reflected a $755.0K decrease in provision for loan losses and a $350.0K increase in net interest income which was partially offset by a $565.0K increase in income tax expense and a $102.0K increase in non-interest expense when contrast to the fourth quarter of 2016.

The increase in income tax expense during fourth quarter 2017 was mainly because of a $262.0K net deferred tax asset write-down as a result of the revaluation of net deferred tax assets because of the reduction in the U.S. corporate tax rate as of December 31, 2017.  The Tax Act lowered the corporate tax rate from 34% to 21%, which will lower the Company’s provision for Federal income taxes in future years.  The Tax Act was signed into law during the fourth quarter of 2017 and generally accepted accounting principles requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. As such, the Company was required to write down the value of its net deferred tax assets as of December 31, 2017, to reflect the reduction in the corporate tax rate. The fourth quarter 2017 increase in income tax expense was also because of higher pre-tax income during the 2017 fourth quarter.

Net income for the year ended December 31, 2017 was $3.40M, or $0.55 per diluted share, contrast to net income of $3.50M, or $0.58 per diluted share, for the year ended December 31, 2016. Net income for the year ended December 31, 2017 was influenced by a $1.40M decrease in non-interest income when contrast to the year ended December 31, 2016. During the year ended December 31, 2016, the Company recorded a $1.60M pre-tax realized gain on the sale of securities as contrast to a $244.0K pre-tax realized gain on the sale of securities during the year ended December 31, 2017. Moreover, net income for the year ended December 31, 2017 reflected a $1.60M increase in net interest income and a $615.0K decrease in the provision for loan losses, which was partially offset by a $481.0K increase in non-interest expense and a $410.0K increase in income tax expense, when contrast to the year ended December 31, 2016. The increase in income tax expense was mainly because of the $262.0K net deferred tax asset write-down during the fourth quarter of 2017 as a result of the Tax Act, as well as higher pre-tax income during the year ended December 31, 2017.

Net Interest Income:

Fourth quarter 2017 net interest income increased $350.0K, or 9.1%, to $4.20M as contrast to the 2016 fourth quarter.  Net interest income increased $1.60M, or 10.2%, to $16.80M for the year ended December 31, 2017 as contrast to 2016.

Interest income for the fourth quarter of 2017 was $4.90M, a boost of $519.0K, or 11.8%, contrast to the fourth quarter of 2016.  The increase was attributable to a $39.90M, or 12.3%, increase in the average balance of loans, partially offset by a $13.30M decline in the average balance of the Bank’s securities portfolio from the fourth quarter of 2016.

Interest income for the year ended December 31, 2017 was $19.40M, a boost of $1.90M, or 10.8%, contrast to 2016. The increase was mainly attributable to a $40.00M, or 12.8%, increase in the average balance of loans, partially offset by an $18.10M decline in the average balance of the Bank’s securities portfolio from the year ended December 31, 2016. The increase in the average loan balance was mainly because of growth in the commercial real estate, home equity and commercial business loan portfolios, partially offset by a decrease in residential, one- to four-family loans since December 31, 2016. The decrease in the average balance of the securities portfolio was mainly because of the Company’s strategy to reinvest paydowns and sales proceeds received on the securities portfolio into adjustable rate commercial loan originations in order to be in a better position to take advantage of future increases in market interest rates. The increase in interest income during the year ended December 31, 2017 was also because of the receipt of $202.0K in past due interest related to the pay-off of one non-performing commercial real estate loan.

Interest expense for the 2017 fourth quarter was $741.0K, a boost of 29.5%, from $572.0K for the 2016 fourth quarter. The increase was mainly because of a 19 and 16 basis points increase in the average interest rates being paid on money market and time deposit accounts, respectively, as well as a $25.30M, or 7.9%, increase in average deposits since the 2016 fourth quarter. The increase was also because of a $47.0K increase in interest paid on borrowings in the fourth quarter 2017 as contrast to the fourth quarter 2016. The average balance for borrowings increased $8.00M and the average rate paid on borrowings increased to 2.07% in the fourth quarter 2017 from 1.96% since the 2016 fourth quarter.

Interest expense for the year ended December 31, 2017 was $2.60M, a boost of $336.0K, or 14.6%, from the year ended December 31, 2016.  Average core deposits increased by $19.30M since the year ended December 31, 2016, partially offset by a $3.10M decrease in higher cost average time deposits.  Average interest rates paid on money market and time deposit accounts increased by eight basis points during the year ended December 31, 2017 when contrast to the prior year. The increase was also because of a $95.0K increase in interest paid on borrowings in 2017 as contrast to 2016. The average balance for borrowings increased $3.80M and the average rate paid on borrowings increased to 2.03% for the year ended December 31, 2017 as contrast to 1.94% for the year ended December 31, 2016.

Non-Interest Income:

Non-interest income was $601.0K in the fourth quarter of 2017 as contrast to $599.0K for the fourth quarter of 2016. Non-interest income was mainly influenced by a $16.0K, or 21.6%, increase in earnings on bank owned life insurance, a $4.0K increase in gains on impaired securities and a $3.0K increase in other income during the fourth quarter of 2017. The increase in bank owned life insurance earnings was because of the purchase of an additional $2.50M in bank owned life insurance during December 2016. These increases were partially offset by a $21.0K decrease in various service charges and fees on deposit and loan accounts during the 2017 fourth quarter.

Non-interest income reduced by $1.40M, or 34.8%, to $2.70M for the year ended December 31, 2017 as contrast to $4.10M for the year ended December 31, 2016. The decrease was mainly because of a $1.60M pre-tax realized gain on the sale of securities during the year ended December 31, 2016 as contrast to a $244.0K pre-tax realized gain on the sale of securities during the year ended December 31, 2017. The decrease was also because of a $107.0K, or 88.4%, decrease in gains on the sale of loans during the year ended December 31, 2017 as contrast to the prior year. These decreases were partially offset by a $77.0K, or 27.4% increase in earnings on bank owned life insurance during the year ended December 31, 2017.

Non-Interest Expense:

Non-interest expense was $3.70M for the fourth quarter of 2017, a boost of $102.0K, or 2.9%, contrast to the same quarter in the prior year. The current year fourth quarter had higher expenses for salary and benefits, FDIC insurance and data processing, partially offset by lower expenses for professional services, occupancy and equipment and postage and supplies.

Non-interest expense was $14.40M for the year ended December 31, 2017, a boost of $481.0K, or 3.5%, contrast to the prior year. Salary and benefits expense increased by $380.0K, or 5.2%, because of annual salary increases and grants of stock awards.  Data processing expenses increased $138.0K, or 12.3%, because of implementation of new technology associated with improved product features and growth in deposit and loan accounts. Increases in advertising expenses and other expenses in the year ended December 31, 2017 were partially offset by decreases in professional service fees, FDIC insurance expense and occupancy and equipment expenses.

Asset Quality:

The fourth quarter 2017 provision for loan losses was $60.0K, a decrease of $755.0K, or 92.6%, as contrast to the same quarter in the prior year. The decrease in the provision was mainly because of a $390.0K specific reserve set aside for the impairment of one commercial real estate loan and higher commercial loan growth during the fourth quarter of 2016.

The provision for loan losses for the year ended December 31, 2017 was $510.0K, a decrease of $615.0K, or 54.7%, as contrast to the prior year. The decrease in provision expense was mainly because of a decrease in provision set aside for impaired loans as a result of non-performing commercial loan payoffs during 2017, as well as an improvement in non-performing loan ratios during the year ended December 31, 2017.

Balance Sheet Summary:

Total assets at December 31, 2017 were $519.00M. Loans receivable, net at December 31, 2017 were $365.10M, a $38.70M, or 11.9%, increase as contrast to $326.40M at December 31, 2016. The increase in total loans was mainly because of a boost in commercial real estate, construction, commercial business and home equity loans, partially offset by a decrease in residential, one- to four-family loans. Total deposits at December 31, 2017 were $405.20M, a boost of $19.30M, or 5.0%, contrast with $385.90M at December 31, 2016. The increase in deposits was mainly because of a boost in net core deposits. Core deposits at December 31, 2017 were $256.70M, a boost of $18.00M, or 7.5%, from December 31, 2016.

Long-term debt at December 31, 2017 was $27.00M, a boost of $8.00M, or 42.2%, as contrast to $19.00M at December 31, 2016. The additional borrowings taken down during 2017 allowed the Bank to take advantage of low fixed-rates in order to fund loan growth. Stockholders’ equity at December 31, 2017 was $78.40M, a boost of $2.30M, or 3.1%, contrast with $76.00M at December 31, 2016. The increase in stockholders’ equity was mainly attributed to net income in 2017 which was partially offset by dividend payments and a decrease in accumulated other comprehensive income.

The Company offered net profit margin of 14.20%. ROE was recorded as 3.60% while beta factor was -0.03. The stock, as of recent close, has shown the weekly upbeat performance of 0.31% which was maintained at -4.37% in this year.

Melinda Duque

Finance Reporter

I am Melinda Duque and I give “The Stock Gem” an insight into the most recent news hitting the “Financial” sector in Wall Street. I have been an independent financial adviser for over 11 years in the city and in recent years turned my experience in finance and passion for journalism into a full time role. I perform analysis of Companies and publicize valuable information for shareholder community.

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