May 2--Lake Shore Bancorp said profits for the first quarter fell 38.4 percent because of lower loan income, a loss on an investment, a higher set-aside for losses and higher expenses for a new branch in Tonawanda.

The Dunkirk-based parent of Lake Shore Savings Bank reported earnings of $405,000, or 7 cents per share, down from $658,000, or 11 cents per share, a year ago.

"We are pleased with our results for the first quarter," CEO David C. Mancuso said. "Our earnings in the first quarter of 2009 are slightly above our expected budget projections."

Net interest income from taking deposits and making loans rose 0.9 percent to $2.79 million from $2.76 million as higher income from making new mortgages and lower interest paid on deposits and borrowings offset a drop in overall interest income.

The savings bank has benefited in recent quarters from interest income earned from an "interest-rate floor" derivative, which guarantees a certain level of income even if interest rates drop below a certain level. However, the bank sold that product in January because officials concluded that its value had already peaked, based on their expectations that interest rates will go up in the future.

The product generated interest earnings of $43,000 in the quarter, down 88 percent from $345,000 in the quarter a year ago. Also, the sale of the product resulted in a $135,000 loss.

Loans grew 3.2 percent to $248 million, while deposits rose 2.5 percent to $300.7 million.

The bank set aside $120,000 to cover loan losses, compared to no provision in the same quarter a year ago. That increase was due to three commercial loans to one borrower, with a total balance of $2.6 million, to support operations and building acquisition for a startup franchise restaurant business. Officials worked with the borrower during the quarter to restructure the loan, which was current as of the end of the quarter.

Fee and non-interest income fell 7.6 percent to $545,000, primarily because of lower earnings on bank-owned life insurance. Operating expenses rose 7.6 percent to $2.7 million, because of the loss on the derivative and a nearly six-fold increase in FDIC deposit premiums. Salary, benefits, occupancy and equipment costs also rose, because of the new branch on Delaware Avenue.

jepstein@buffnews.com

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