Lake Shore Bancorp, Inc. Announces 2023 Second Quarter Financial Results

DUNKIRK, N.Y., July 27, 2023 (GLOBE NEWSWIRE) -- Lake Shore Bancorp, Inc. (the "Company") (NASDAQ:LSBK), the holding company for Lake Shore Savings Bank (the "Bank"), reported unaudited net income of $0.8 million, or $0.14 per diluted share, for the 2023 second quarter compared to net income of $1.7 million, or $0.29 per diluted share, for the 2022 second quarter. For the first six months of 2023, the Company reported unaudited net income of $2.5 million, or $0.43 per diluted share, as compared to $2.7 million, or $0.47 per diluted share, for the first six months of 2022.

"Lake Shore's 2023 second quarter performance was solid despite significant expenses connected to our efforts to remediate previously disclosed regulatory matters," stated Kim Liddell, President and CEO. "The loan portfolio continues to perform well with little to no credit deterioration. Deposit competition remains fierce demanding close personal service to retain and grow the deposit base. We expect more of the same economic headwinds and remain committed to enhancing the Company's results."    

2023 Second Quarter and Year-to-Date Financial Highlights:

• Net income decreased to $0.8 million during the 2023 second quarter, a decrease of $868,000, or 51.5%, when compared to the 2022 second quarter. Net income during the three months ended June 30, 2023 was negatively impacted by an increase in non-interest expenses associated with remediation activities related to regulatory matters, partially offset by an increase in net interest income;
• Net income decreased to $2.5 million during the first half of 2023, a decrease of $0.2 million, or 8.9%, when compared to the first half of 2022. Net income during the six months ended June 30, 2023 was negatively impacted by an increase in non-interest expenses associated with remediation activities related to regulatory matters, partially offset by an increase in net interest margin;
• Net interest income increased $236,000, or 3.9%, to $6.2 million during the 2023 second quarter as compared to the 2022 second quarter, primarily due to an increase in the average yield earned on interest-earning assets and an increase in the average balance of interest-earning assets since June 30, 2022;
• Net interest income increased $1.1 million, or 9.3%, to $12.5 million during the first six months of 2023 as compared to $11.4 million during the first six months of 2022, primarily due to an increase in the average yield earned on interest-earning assets and an increase in the average balance of interest-earning assets since June 30, 2022;
• Average loan yield increased 90 basis points for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022, primarily due to loan portfolio growth along with an increase in market interest rates;  
• Total deposits increased by $11.8 million, or 2.1% since December 31, 2022. Uninsured deposits at June 30, 2023 amounted to $60.6 million, or 10.4% of our total deposits, down from $82.5 million, or 16.6% of our total deposits, at December 31, 2022;
• Net interest margin and interest rate spread was 3.65% and 3.29%, respectively, for the 2023 second quarter as compared to 3.71% and 3.63%, respectively, for the 2022 second quarter; and
• Non-performing loans as a percent of total net loans was 0.49% and 0.51% at June 30, 2023 and December 31, 2022, respectively.

Net Interest Income

2023 second quarter net interest income increased $236,000, or 3.9%, to $6.2 million as compared to $6.0 million for the 2022 second quarter. Net interest income for the first six months of 2023 increased $1.1 million, or 9.3%, to $12.5 million as compared to $11.4 million for the first six months of 2022.

Interest income for the 2023 second quarter was $8.4 million, an increase of $2.0 million, or 31.7%, compared to $6.4 million for the 2022 second quarter.  The increase was primarily due to a 99 basis points increase in the average yield on interest-earning assets due to an increase in market interest rates. The increase was also due to a $35.8 million, or 5.6%, increase in the average balance of interest earning assets since June 30, 2022. During the second quarter of 2023 as compared to the same period in 2022, there was a $1.6 million increase in interest earned on loans due to a 90 basis points increase in the average yield earned along with an increase in the average loans balance of $30.1 million, or 5.6%.

Interest income for the first six months of 2023 was $16.4 million, an increase of $4.1 million, or 32.8%, compared to $12.4 million for the first six months of 2022.  The increase was primarily due to a 104 basis points increase in the average yield on interest-earning assets due to an increase in market interest rates. The increase was also due to a $28.9 million, or 4.5%, increase in the average balance of interest earning assets since June 30, 2022. During the first half of 2023 as compared to the same period in 2022, there was a $3.4 million increase in interest earned on loans due to a 89 basis points increase in the average yield earned along with an increase in the average loans balance of $42.0 million, or 7.9%.

2023 second quarter interest expense was $2.3 million, an increase of $1.8 million, or 398.0%, from $453,000 for the 2022 second quarter. The increase in interest expense was primarily due to a 133 basis points increase in average interest paid on interest-bearing liabilities and a $37.0 million increase in average interest-bearing liabilities.  During the second quarter of 2023 as compared to the same period in 2022, there was a $1.3 million increase in interest paid on time deposit accounts due to a 221 basis points increase in the average interest rate paid along with an increase in average time deposit balances of $81.9 million, or 62.4%. The increase in the average rate paid on deposit accounts was primarily due to the increase in market interest rates since June 30, 2022. Average deposit balances were $494.8 million, a 4.2% increase during the 2023 second quarter, resulting from an increase in certificate of deposits and brokered deposits since June 30, 2022.  During the 2023 second quarter, interest expense on short-term and long-term debt increased by $217,000, or 175.0%, compared to the 2022 second quarter, primarily due to a $16.9 million increase in average borrowings outstanding.

Interest expense for the first six months of 2023 was $3.9 million, an increase of $3.0 million, or 326.1%, from $919,000 for the first six months of 2022. The increase in interest expense was primarily due to a 111 basis points increase in average interest paid on interest-bearing liabilities and a $30.1 million increase in average interest-bearing liabilities. During the first six months of 2023, there was a $2.1 million increase in interest paid on time deposit accounts due to a 186 basis points increase in the average interest rate paid along with an increase in average time deposit balances of $65.1 million, or 49.0%. The increase in the average rate paid on deposit accounts was primarily due to the increase in market interest rates since June 30, 2022. Average deposit balances were $488.8 million, a 2.5% increase during the first six months of 2023, resulting from an increase in certificate of deposits and brokered deposits since June 30, 2022.  During the first six months of 2023, interest expense on short-term and long-term debt increased by $446,000, or 183.5%, compared to the first six months of 2022, primarily due to a $18.0 million increase in average borrowings outstanding.

Non-Interest Income

Non-interest income was $553,000 for the 2023 second quarter, a decrease of $167,000, or 23.2%, as compared to the 2022 second quarter. The decrease was primarily due to a $79,000 net increase in unrealized losses on interest rate swap products as a result of market interest rate movements, a $52,000 decrease in service charges and fees, and a $49,000 loss on the sale of $6.0 million of available-for-sale securities in the current period to reposition the Bank's balance sheet.

Non-interest income was $1.1 million for the first six months of 2023, a decrease of $345,000, or 23.8%, as compared to the first six months of 2022. The decrease was primarily due to a $311,000 net increase in unrealized losses on interest rate swap products as a result of market interest rate movements and a $49,000 loss on the sale of securities in the current period to reposition the Bank's balance sheet. The decrease was partially offset by a $18,000 increase in earnings on bank owned life insurance and a $18,000 decrease in loss on sale of loans when compared to the first six months of 2022. 

Non-Interest Expense

Non-interest expense was $5.9 million for the 2023 second quarter, an increase of $1.3 million, or 28.9%, as compared to $4.6 million for the 2022 second quarter. Professional services expense increased by $513,000, or 153.1%, primarily due to an increase in legal, auditing services, regulatory assessments, and consulting costs during the 2023 second quarter associated with remediation activities related to regulatory matters. Salary and employee benefits expense increased $351,000, or 14.3%, during the second quarter of 2023 primarily due to the addition of staffing resources, annual salary increases, an increase in the cost to attract and retain employees in our market area, and an increase in employee benefits. FDIC Insurance expense increased by $389,000, or 827.7%, during the current quarter due to an increase in premium assessments. Data processing costs increased $98,000, or 26.1%, primarily due to an increase in costs related to core system maintenance and enhancements to existing IT security protocols. Advertising expense increased $56,000, or 45.5%, during the second quarter of 2023 primarily due to an increase in marketing costs during the second quarter of 2023. The increases were partially offset by a decrease in occupancy and equipment costs and other costs of $85,000, or 9.8%.

Non-interest expense was $11.4 million for the first six months of 2023, an increase of $2.3 million, or 25.3%, as compared to $9.1 million for the first six months of 2022. Professional services expense increased by $1.1 million, or 167.8%, primarily due to an increase in legal, auditing services, regulatory assessments, and consulting costs during the first six months of 2023 associated with remediation activities related to regulatory matters. Salary and employee benefits expense increased $723,000, or 14.9%, during the first six months of 2023 primarily due to the addition of staffing resources, annual salary increases, an increase in the cost to attract and retain employees in our market area, and an increase in employee benefits. FDIC Insurance expense increased by $439,000, or 477.2%, during the first six months of 2023 due to an increase in premium assessments. Data processing costs increased $161,000, or 23.3%, during the first six months of 2023 primarily due to an increase in costs related to core system maintenance and enhancements to existing IT security protocols. Advertising expense increased $98,000, or 37.8%, primarily due to an increase in marketing costs during the first six months of 2023. The increases were partially offset by a decrease in occupancy and equipment costs and other costs of $192,000, or 7.8%, primarily due to a one-time, insurance-related expense being recorded in the first six months of 2022. 

Credit Quality

The Company adopted the Current Expected Credit Losses ("CECL") methodology to record expected credit losses on our loan portfolio effective January 1, 2023.  The adoption of CECL under current accounting guidance resulted in a pre-tax increase to the allowance for credit losses on loans of $282,000 and an increase to the allowance for credit losses on unfunded commitments of $633,000, with an offset to the Company's retained earnings.  The Company is utilizing the vintage model to estimate its allowance for credit losses on loans. During the three months ended June 30, 2023, the Company recorded a $187,000 credit to the provision for credit losses on loans and unfunded commitments primarily due to a decrease in loan commitments during the three months ended June 30, 2023. During the six months ended June 30, 2023, the Company recorded a $812,000 credit to the provision for credit losses on loans and unfunded commitments primarily due to a change in qualitative factors from January 1, 2023 and a decrease in unfunded commitments.

The provision for loan losses was $100,000 for the three months ended June 30, 2022 and $500,000 for the six months ended June 30, 2022. 

Non-performing loans as a percent of total net loans decreased to 0.49% at June 30, 2023 as compared to 0.51% at December 31, 2022. The Company's allowance for credit losses as a percent of total loans was 1.19%, at June 30, 2023 and 1.23% at December 31, 2022.

Balance Sheet Summary

Total assets at June 30, 2023 were $714.0 million, a $14.1 million increase, or 2.0%, as compared to $699.9 million at December 31, 2022. Cash and cash equivalents increased by $25.9 million, or 269.4%, from $9.6 million at December 31, 2022 to $35.6 million at June 30, 2023. The increase was primarily due to an increase in deposit accounts and long-term borrowings and a decrease in securities available-for-sale. Securities available for sale were $65.4 million at June 30, 2023 as compared to $73.0 million at December 31, 2022 primarily as the result of the sale of $6.0 million of securities during the second quarter of 2023.  Loans receivable, net at June 30, 2023 and December 31, 2022 were $569.5 million and $573.5 million, respectively.  Total deposits at June 30, 2023 were $582.0 million, an increase of $11.8 million, or 2.1%, compared to $570.1 million at December 31, 2022. Total borrowings decreased to $36.5 million at June 30, 2023, a decrease of $1.1 million, or 2.9% as compared to $37.5 million as of December 31, 2022.

Stockholders' equity at June 30, 2023 was $83.4 million, a $2.2 million increase, or 2.7%, as compared to $81.2 million at December 31, 2022. The increase in stockholders' equity was primarily attributed to $2.5 million in net income earned during the first six months of 2023 and a $0.5 million unrealized mark-to-market gain on the available-for-sale securities portfolio recognized in other comprehensive income. 

About Lake Shore

Lake Shore Bancorp, Inc. (NASDAQ Global Market: LSBK) is the mid-tier holding company of Lake Shore Savings Bank, a federally chartered, community-oriented financial institution headquartered in Dunkirk, New York. The Bank has eleven full-service branch locations in Western New York, including five in Chautauqua County and six in Erie County. The Bank offers a broad range of retail and commercial lending and deposit services. The Company's common stock is traded on the NASDAQ Global Market as "LSBK". Additional information about the Company is available at www.lakeshoresavings.com.

Safe-Harbor

This release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections about the Company's and the Bank's industry, and management's beliefs and assumptions. Words such as anticipates, expects, intends, plans, believes, estimates and variations of such words and expressions are intended to identify forward-looking statements. Such statements reflect management's current views of future events and operations. These forward-looking statements are based on information currently available to the Company as of the date of this release. It is important to note that these forward-looking statements are not guarantees of future performance and involve and are subject to significant risks, contingencies, and uncertainties, many of which are difficult to predict and are generally beyond our control including, but not limited to, compliance with the Bank's Consent Order and an Individual Minimum Capital Requirement both issued by the Office of the Comptroller of the Currency, compliance with the Written Agreement with the Federal Reserve Bank of Philadelphia, data loss or other security breaches, including a breach of our operational or security systems, policies or procedures, including cyber-attacks on us or on our third party vendors or service providers, economic conditions, the effect of changes in monetary and fiscal policy, inflation, unanticipated changes in our liquidity position, climate change, increased unemployment, deterioration in the credit quality of the loan portfolio and/or the value of the collateral securing repayment of loans, reduction in the value of investment securities, the cost and ability to attract and retain key employees,  regulatory or legal developments, tax policy changes, and our ability to implement and execute our business plan and strategy and expand our operations. These factors should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements, as our financial performance could differ materially due to various risks or uncertainties. We do not undertake to publicly update or revise our forward-looking statements if future changes make it clear that any projected results expressed or implied therein will not be realized.

Source: Lake Shore Bancorp, Inc.

Category: Financial

Investor Relations/Media Contact

Rachel A. Foley

Chief Financial Officer and Treasurer

Lake Shore Bancorp, Inc.

31 East Fourth Street

Dunkirk, New York 14048

(716) 366-4070 ext. 1020

Lake Shore Bancorp, Inc. Selected Financial Information
Selected Financial Condition Data
	June 30,					December 31,
	2023				2022
	(Unaudited)
	(Dollars in thousands)
Total assets	$		714,041			$		699,914
Cash and cash equivalents			35,582					9,633
Securities available for sale			65,377					73,047
Loans receivable, net			569,503					573,537
Deposits			581,965					570,119
Short-term borrowings			—					12,596
Long-term debt			36,450					24,950
Stockholders' equity			83,394					81,184

Statements of Income
		Three Months Ended									Six Months Ended
		June 30,									June 30,
	2023				2022						2023				2022
	(Unaudited)
	(Dollars in thousands, except per share amounts)
Interest income	$		8,470			$		6,431			$		16,421			$		12,365
Interest expense			2,256					453					3,916					919
Net interest income			6,214					5,978					12,505					11,446
(Credit) provision for credit losses			(187	)				100					(812	)				500
Net interest income after (credit) provision for credit losses			6,401					5,878					13,317					10,946
Total non-interest income			553					720					1,107					1,452
Total non-interest expense			5,901					4,577					11,418					9,109
Income before income taxes			1,053					2,021					3,006					3,289
Income tax expense			237					337					506					544
Net income	$		816			$		1,684			$		2,500			$		2,745
Basic and diluted earnings per share	$		0.14			$		0.29			$		0.43			$		0.47
Dividends declared per share	$		-			$		0.16			$		-			$		0.32

Lake Shore Bancorp, Inc. Selected Financial Information
Selected Financial Ratios
	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2023			2022				2023			2022
	(Unaudited)
Return on average assets		0.45	%		0.97	%			0.69	%		0.79	%
Return on average equity		3.92	%		8.21	%			6.00	%		6.49	%
Average interest-earning assets to average interest-bearing liabilities		127.32	%		129.58	%			127.48	%		129.38	%
Interest rate spread		3.29	%		3.63	%			3.39	%		3.46	%
Net interest margin		3.65	%		3.71	%			3.71	%		3.54	%

	June 30,			December 31,
	2023			2022
	(Unaudited)
Asset Quality Ratios:
Non-performing loans as a percent of total net loans		0.49	%		0.51	%
Non-performing assets as a percent of total assets		0.41	%		0.43	%
Allowance for credit losses as a percent of total loans		1.19	%		1.23	%
Allowance for credit losses as a percent of non-performing loans		240.69	%		240.96	%