Lake Shore Bancorp(LSBK) - 2018 Q4 - Annual Report

PART I Business Overview Lake Shore Bancorp, Inc. operates as a federally chartered savings and loan holding company, focusing on retail deposits and loans in Western New York, and is converting to a national bank to expand activities - Lake Shore Bancorp, Inc. is a mid-tier, federally chartered savings and loan holding company for Lake Shore Savings Bank; Lake Shore, MHC holds 60.6% of Lake Shore Bancorp's common stock as of December 31, 2018[18][20] - Lake Shore Savings Bank's principal business involves attracting retail deposits and investing them primarily in one- to four-family residential mortgage loans, commercial real estate loans, and home equity lines of credit[25] - On November 26, 2018, Lake Shore Savings Bank filed an application to convert its charter from a federal savings bank to a national bank, enabling it to engage in business activities authorized for national banks, including establishing deposit relationships with New York municipalities[27] - The Bank operates eleven branch offices in Western New York, primarily in Erie and Chautauqua Counties, which have a combined population of approximately 1.1 million and a diversified economy with growth in healthcare and education sectors[32][33][35] - The Company faces intense competition from larger financial institutions and online service providers, but maintains competitiveness through personalized service, local market knowledge, local decision-making, and technological convenience[39][40] Loan Portfolio Composition (2014-2018) | Loan Type | 2018 Amount ($ thousands) | 2018 % of Total | 2017 Amount ($ thousands) | 2017 % of Total | 2016 Amount ($ thousands) | 2016 % of Total | 2015 Amount ($ thousands) | 2015 % of Total | 2014 Amount ($ thousands) | 2014 % of Total | | :---------------------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | | Residential one to four-family | 155,024 | 39.49% | 144,614 | 39.60% | 149,982 | 45.98% | 157,575 | 53.21% | 168,289 | 59.30% | | Home equity | 41,830 | 10.66% | 38,078 | 10.43% | 35,534 | 10.89% | 32,770 | 11.07% | 32,337 | 11.39% | | Commercial | 150,475 | 38.33% | 122,747 | 33.61% | 107,243 | 32.87% | 83,967 | 28.35% | 68,238 | 24.04% | | Construction - Commercial | 22,252 | 5.67% | 30,802 | 8.43% | 11,712 | 3.59% | 4,581 | 1.55% | - | - | | Total Real Estate Loans | 369,581 | 94.15% | 336,241 | 92.07% | 304,471 | 93.33% | 278,893 | 94.18% | 268,864 | 94.73% | | Commercial (Other) | 21,825 | 5.56% | 27,612 | 7.56% | 20,447 | 6.27% | 15,741 | 5.31% | 13,467 | 4.74% | | Consumer | 1,156 | 0.29% | 1,355 | 0.37% | 1,313 | 0.40% | 1,507 | 0.51% | 1,495 | 0.53% | | Total Other Loans | 22,981 | 5.85% | 28,967 | 7.93% | 21,760 | 6.67% | 17,248 | 5.82% | 14,962 | 5.27% | | Total Loans | 392,562 | 100.00% | 365,208 | 100.00% | 326,231 | 100.00% | 296,141 | 100.00% | 283,826 | 100.00% | Non-Performing Assets (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Total non-accrual loans | 3,044 | 3,833 | 5,704 | 4,506 | 4,719 | | Total non-performing loans | 3,218 | 3,833 | 5,866 | 4,668 | 4,729 | | Foreclosed real estate | 678 | 435 | 412 | 712 | 401 | | Total non-performing assets | 3,896 | 4,268 | 6,278 | 5,380 | 5,130 | | Non-performing loans as % of total loans | 0.82% | 1.05% | 1.80% | 1.57% | 1.66% | | Non-performing assets as % of total assets | 0.71% | 0.82% | 1.28% | 1.14% | 1.05% | Allowance for Loan Losses Activity (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :----------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Balance at beginning of year | 3,283 | 2,882 | 1,985 | 1,921 | 1,813 | | Provision for loan losses | 390 | 510 | 1,125 | 400 | 222 | | Total charge-offs | (255) | (139) | (257) | (415) | (134) | | Total recoveries | 30 | 30 | 29 | 79 | 20 | | Net charge-offs | (225) | (109) | (228) | (336) | (114) | | Balance at end of year | 3,448 | 3,283 | 2,882 | 1,985 | 1,921 | | Allowance for loan losses as % of total net loans | 0.88% | 0.90% | 0.88% | 0.67% | 0.67% | | Allowance for loan losses as % of non-performing loans | 107.15% | 85.65% | 49.13% | 42.52% | 40.62% | | Ratio of net charge-offs to average loans outstanding | 0.06% | 0.03% | 0.07% | 0.11% | 0.04% | - The provision for loan losses decreased by $120,000 (23.5%) to $390,000 in 2018, primarily due to a higher provision in 2017 for downgraded commercial loan relationships that were performing and well-collateralized by December 31, 2018[99] Deposit Account Distribution (2016-2018) | Deposit Type | 2018 Amount ($ thousands) | 2018 % of Total | 2017 Amount ($ thousands) | 2017 % of Total | 2016 Amount ($ thousands) | 2016 % of Total | | :---------------------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | | Savings | 52,050 | 12.04% | 52,922 | 13.06% | 52,404 | 13.58% | | Money market | 119,885 | 27.72% | 99,305 | 24.51% | 78,401 | 20.32% | | Interest bearing demand | 50,211 | 11.61% | 49,869 | 12.31% | 52,058 | 13.49% | | Non-interest bearing demand | 55,327 | 12.79% | 54,618 | 13.48% | 55,889 | 14.48% | | Total core deposits | 277,473 | 64.16% | 256,714 | 63.36% | 238,752 | 61.87% | | Total time deposits | 154,985 | 35.84% | 148,439 | 36.64% | 147,141 | 38.13% | | Total deposits | 432,458 | 100.00% | 405,153 | 100.00% | 385,893 | 100.00% | - The Company had 112 full-time and 3 part-time employees as of December 31, 2018, with good employee relations and no collective bargaining unit[134] - Lake Shore Savings Bank is regulated by the OCC, while Lake Shore Bancorp, Inc. and Lake Shore, MHC are regulated by the Federal Reserve Board; the Bank is also subject to FDIC and Federal Home Loan Bank System regulations[136] - The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (EGRRCPA) eased regulations for banks under $10 billion in assets, including exemptions from certain ability-to-repay requirements, appraisal rules, and simplified capital calculations[141] - As of December 31, 2018, Lake Shore Savings' capital exceeded all applicable minimal capital requirements, and it was categorized as 'well-capitalized' under prompt corrective action regulations[151][170] - Lake Shore, MHC, the majority shareholder, has historically waived its right to receive dividends from Lake Shore Bancorp, which requires Federal Reserve Board approval and member consent, allowing more cash resources for public shareholders and stock repurchases[191][235][237] Risk Factors The Company faces credit risk from its commercial loan portfolio, economic downturns, interest rate fluctuations, liquidity challenges, cybersecurity threats, and regulatory changes like CECL - The loan portfolio, with 50.0% in commercial real estate, commercial business, and consumer loans as of December 31, 2018, carries higher credit risk due to less liquid collateral and dependence on business operations[199][202] - Deterioration in economic conditions in Western New York could negatively affect loan portfolio performance, real estate values, and increase non-performing loans[200] - The allowance for loan losses may be insufficient if actual losses exceed estimates, potentially decreasing net income, and bank regulators can also require increases to the allowance[201][202] - The Company is generally liability-sensitive, meaning rising interest rates could increase interest expense faster than interest income, adversely affecting net interest income and potentially reducing the fair value of available-for-sale securities[206][207][208] - Liquidity risk exists if the Company cannot raise sufficient funds through deposits, borrowings, or asset sales, which could impair strategic plans and dividend payments; core deposits comprised approximately 93.0% of total deposits at December 31, 2018[212][213][215] - The Company relies heavily on executive officers and key personnel; the loss of their services could impair business strategy implementation[216] - Information systems are vulnerable to interruptions or security breaches (cyber-attacks), which could damage reputation, lead to customer loss, regulatory scrutiny, and financial liability[217][218] - A new accounting standard, Current Expected Credit Loss (CECL), effective after December 15, 2019, will require estimating lifetime expected credit losses on loans, likely increasing the allowance for loan losses and impacting financial condition[231] - Changes in U.S. tax laws, such as the Tax Cuts and Jobs Act of 2017, could adversely affect the market for residential properties, demand for mortgage loans, and borrowers' ability to make payments, potentially increasing loan loss provisions[248] Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[249] Properties The Company operates through a corporate headquarters and eleven branch offices, with most properties owned and a net book value of $9.4 million for buildings and equipment - The Company operates through its corporate headquarters, administrative offices, and eleven branch offices[251] Net Book Value of Properties and Equipment (December 31, 2018) | Asset Category | Amount ($ millions) | | :----------------------------- | :------------------ | | Buildings and premises, net | 8.3 | | Computer equipment and other | 1.1 | | Total | 9.4 | - The majority of branch and administrative offices are owned, with some locations having leased land or parking lots, with lease expiration dates ranging from 2019 to 2028[252][253] Legal Proceedings As of December 31, 2018, the Company was not involved in any material legal proceedings beyond routine business matters - At December 31, 2018, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which are considered immaterial to its financial condition and results of operations[254] Mine Safety Disclosures Mine safety disclosures are not applicable to the Company - Mine Safety Disclosures are not applicable[255] PART II Market for Registrant's Common Equity and Related Stockholder Matters Lake Shore Bancorp, Inc. common stock trades on Nasdaq, with the Board intending to maintain quarterly dividends, and the Company repurchased 42,155 shares in Q4 2018 - Lake Shore Bancorp, Inc. common stock trades on the Nasdaq Global Market under the symbol 'LSBK'[257] - The Board of Directors plans to continue a regular quarterly dividend, dependent on earnings, financial condition, capital requirements, and regulatory limitations[258] - As of March 21, 2019, there were 751 stockholders of record[259] Common Stock Repurchases (Q4 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (thousands) | | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------- | | October 1 through October 31, 2018 | 26,900 | 16.14 | 26,900 | 81,190 | | November 1 through November 30, 2018 | - | - | - | 81,190 | | December 1 through December 31, 2018 | 15,255 | 15.30 | 13,000 | 68,190 | | Total | 42,155 | 15.84 | 39,900 | 68,190 | Selected Financial Data This section provides a five-year summary of key financial and operational data, showing asset growth, increased net income, strong capital ratios, and improved asset quality Selected Financial Condition Data (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :---------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Total assets | 545,708 | 518,977 | 489,174 | 473,385 | 487,471 | | Loans, net | 392,471 | 365,063 | 326,365 | 297,101 | 284,853 | | Securities available for sale | 86,193 | 80,421 | 86,335 | 113,213 | 138,202 | | Total deposits | 432,458 | 405,153 | 385,893 | 369,155 | 386,939 | | Total stockholders' equity | 79,804 | 78,375 | 76,030 | 73,876 | 71,630 | | Allowance for loan losses | 3,448 | 3,283 | 2,882 | 1,985 | 1,921 | | Non-performing loans | 3,218 | 3,833 | 5,866 | 4,668 | 4,729 | | Non-performing assets | 3,896 | 4,268 | 6,278 | 5,380 | 5,130 | Selected Operating Data (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Interest income | 21,536 | 19,408 | 17,518 | 17,587 | 17,879 | | Interest expense | 3,602 | 2,630 | 2,294 | 2,757 | 3,348 | | Net interest income | 17,934 | 16,778 | 15,224 | 14,830 | 14,531 | | Provision for loan losses | 390 | 510 | 1,125 | 400 | 222 | | Total non-interest income | 2,474 | 2,655 | 4,070 | 2,707 | 2,235 | | Total non-interest expense | 15,433 | 14,360 | 13,879 | 13,083 | 12,819 | | Income before income taxes | 4,585 | 4,563 | 4,290 | 4,054 | 3,725 | | Income taxes | 585 | 1,185 | 775 | 716 | 567 | | Net income | 4,000 | 3,378 | 3,515 | 3,338 | 3,158 | | Basic earnings per common share ($) | 0.66 | 0.55 | 0.58 | 0.57 | 0.55 | | Diluted earnings per common share ($) | 0.66 | 0.55 | 0.58 | 0.56 | 0.55 | | Dividends declared per share ($) | 0.40 | 0.32 | 0.28 | 0.28 | 0.28 | Selected Financial Ratios and Other Data (2014-2018) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :----------------------------------------- | :------ | :------ | :------ | :------ | :------ | | Return on average assets | 0.75% | 0.67% | 0.74% | 0.70% | 0.65% | | Return on average equity | 5.07% | 4.34% | 4.58% | 4.57% | 4.58% | | Interest rate spread | 3.43% | 3.45% | 3.29% | 3.18% | 3.06% | | Net interest margin | 3.61% | 3.61% | 3.44% | 3.34% | 3.21% | | Efficiency ratio | 75.62% | 73.89% | 71.93% | 74.60% | 76.46% | | Common Equity Tier 1 capital to risk-weighted assets | 19.70% | 20.82% | 22.23% | 24.21% | n/a | | Total risk-based capital to risk-weighted assets | 20.59% | 21.75% | 23.15% | 24.93% | 25.71% | | Non-performing loans as a percent of total net loans | 0.82% | 1.05% | 1.80% | 1.57% | 1.66% | | Allowance for loan losses as a percent of non-performing loans | 107.15% | 85.65% | 49.13% | 42.52% | 40.62% | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and results, focusing on net interest income, strategic objectives, risk management, and the impact of tax law changes on performance - The Company's results depend primarily on net interest income, influenced by interest-earning assets, interest-bearing liabilities, and their respective rates[268] - Management's strategy focuses on maintaining its position as an authentic community bank in Western New York, emphasizing individualized customer service, financial strength, community involvement, effective risk management, strong capital, and technological services[275] - A key strategic objective is to enhance technology supporting customer service, with a five-year plan for cost-effective digital services to attract new customers and improve operational efficiencies[277] - Lending strategy prioritizes growth in short-term adjustable rate commercial real estate, commercial business, and home equity loans to diversify the asset mix and reduce interest rate risk[279][280] - Asset quality is maintained through prudent underwriting standards and aggressive monitoring, resulting in a non-performing loans to total net loans ratio of 0.82% at December 31, 2018, down from 1.05% in 2017[282] - The investment policy aims to complement lending and deposit activities, provide liquidity, generate favorable returns, and manage interest rate and credit risk; the portfolio primarily consists of agency collateralized mortgage obligations, agency mortgage-backed securities, and municipal securities[283][284] - The Company is exposed to interest rate risk as interest-bearing liabilities re-price more quickly than interest-earning assets in a rising rate environment; strategies include increasing adjustable-rate commercial loans and building lower-cost core deposits[287][288][289] - Net income increased by $662,000 (18.4%) to $4.0 million in 2018, driven by a $1.2 million increase in net interest income and a $600,000 decrease in income tax expense, partially offset by higher non-interest expenses[312] - Interest income rose by $2.1 million (11.0%) in 2018, primarily from a $1.6 million increase in loan interest income due to a 7.8% increase in average loan balances and a higher average yield (4.83% in 2018 vs. 4.74% in 2017)[314] - Interest expense increased by $972,000 (37.0%) in 2018, mainly due to a $897,000 (43.1%) rise in interest paid on deposits, reflecting higher market interest rates and growth in money market and time deposit balances[318] - Income tax expense decreased by $600,000 (50.6%) in 2018, primarily due to the reduction in the federal corporate tax rate from 34% to 21% under the Tax Cuts and Jobs Act[326] - Total assets increased by $26.7 million (5.2%) to $545.7 million at December 31, 2018, mainly due to a $27.4 million increase in net loans receivable and a $5.8 million increase in securities available for sale[303] - Total deposits increased by $27.3 million (6.7%) to $432.5 million at December 31, 2018, driven by growth in core deposits, particularly money market accounts, as the Company offered competitive rates to fund loan growth[308][309] - The Company maintains strong liquidity, with available borrowing capacity from FHLBNY ($107.8 million) and Federal Reserve Bank ($11.0 million), and correspondent bank lines of credit ($22.0 million)[345] Quantitative and Qualitative Disclosures About Market Risk Disclosure on quantitative and qualitative market risk is not required for smaller reporting companies - Disclosure not required for smaller reporting companies[354] Financial Statements and Supplementary Data This item refers to the audited consolidated financial statements and supplementary data presented separately from pages F-1 through F-54 - The audited consolidated financial statements and supplementary data are located on pages F-1 through F-54 of this Annual Report on Form 10-K[355] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[356] Controls and Procedures The Company maintains effective disclosure controls and procedures, with management concluding internal control over financial reporting was effective as of December 31, 2018 - The Company's disclosure controls and procedures were evaluated and deemed effective as of December 31, 2018[357] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO Internal Control-Integrated Framework (2013)[360] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2018[362] Other Information There is no other information to report in this item - None[363] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[365] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[366] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[367] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[368] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[369] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements included in Item 8 and details the various exhibits filed as part of the Annual Report on Form 10-K - Financial statements included in Item 8 of Part II are listed, comprising the Report of Independent Registered Public Accounting Firm, Consolidated Statements of Financial Condition, Income, Comprehensive Income, Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[371][373] - Various exhibits are filed or incorporated by reference, including the Company's charter, bylaws, stock certificates, stock award notices, stock option certificates, employment and change in control agreements, supplemental benefit plans, equity incentive plans, and certifications by the CEO and CFO[374] Item 16. Form 10-K Summary There is no Form 10-K Summary provided in this report - None[378] SIGNATURES The report is duly signed on behalf of Lake Shore Bancorp, Inc. by its President and CEO and other officers and directors as of March 27, 2019 - The report was signed on March 27, 2019, by Daniel P. Reininga, President and Chief Executive Officer, and other directors and officers, including Rachel A. Foley (Chief Financial Officer and Treasurer) and Steven W. Schiavone (Principal Accounting Officer)[381][382][383] Financial Statements Report of Independent Registered Public Accounting Firm Baker Tilly Virchow Krause, LLP issued an unqualified opinion on the consolidated financial statements, affirming fair presentation in conformity with GAAP for the periods ended December 31, 2018 - Baker Tilly Virchow Krause, LLP provided an unqualified opinion on the consolidated financial statements for Lake Shore Bancorp, Inc. and subsidiary[386] - The audit confirmed that the financial statements present fairly, in all material respects, the financial position as of December 31, 2018 and 2017, and the results of operations and cash flows for the three years ended December 31, 2018, in conformity with GAAP[386] - The Company is exempt from an audit of its internal control over financial reporting, and the auditors did not perform one for the purpose of expressing an opinion on its effectiveness[388] Consolidated Statements of Financial Condition The consolidated statements show an increase in total assets and liabilities from 2017 to 2018, driven by growth in net loans receivable and total deposits Consolidated Statements of Financial Condition (December 31, 2018 vs. 2017) | Metric | December 31, 2018 ($ thousands) | December 31, 2017 ($ thousands) | | :-------------------------------------- | :------------------------------ | :------------------------------ | | Assets | | | | Cash and Cash Equivalents | 30,751 | 40,913 | | Securities available for sale | 86,193 | 80,421 | | Loans receivable, net | 392,471 | 365,063 | | Bank owned life insurance | 21,469 | 18,077 | | Total Assets | 545,708 | 518,977 | | Liabilities | | | | Total Deposits | 432,458 | 405,153 | | Long-term debt | 24,650 | 26,950 | | Total Liabilities | 465,904 | 440,602 | | Stockholders' Equity | | | | Total Stockholders' Equity | 79,804 | 78,375 | | Total Liabilities and Stockholders' Equity | 545,708 | 518,977 | - Total assets increased by $26.7 million (5.2%) from December 31, 2017, to December 31, 2018[391] - Loans receivable, net, increased by $27.4 million (7.5%) from $365.1 million in 2017 to $392.5 million in 2018[391] - Total deposits increased by $27.3 million (6.7%) from $405.2 million in 2017 to $432.5 million in 2018[391] Consolidated Statements of Income The consolidated statements reflect an increase in net income for 2018, primarily due to higher net interest income and a significant decrease in income tax expense Consolidated Statements of Income (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Total Interest Income | 21,536 | 19,408 | 17,518 | | Total Interest Expense | 3,602 | 2,630 | 2,294 | | Net Interest Income | 17,934 | 16,778 | 15,224 | | Provision for Loan Losses | 390 | 510 | 1,125 | | Net Interest Income after Provision for Loan Losses | 17,544 | 16,268 | 14,099 | | Total Non-Interest Income | 2,474 | 2,655 | 4,070 | | Total Non-Interest Expenses | 15,433 | 14,360 | 13,879 | | Income before Income Taxes | 4,585 | 4,563 | 4,290 | | Income Tax Expense | 585 | 1,185 | 775 | | Net Income | 4,000 | 3,378 | 3,515 | | Basic and diluted earnings per common share ($) | 0.66 | 0.55 | 0.58 | | Dividends declared per share ($) | 0.40 | 0.32 | 0.28 | - Net income increased by $622,000 (18.4%) from $3.378 million in 2017 to $4.000 million in 2018[393] - Net interest income increased by $1.156 million (6.9%) from $16.778 million in 2017 to $17.934 million in 2018[393] - Income tax expense decreased by $600,000 (50.6%) from $1.185 million in 2017 to $585,000 in 2018[393] Consolidated Statements of Comprehensive Income Total comprehensive income increased from 2017 to 2018, despite higher net unrealized losses on securities available for sale, reflecting the overall financial performance Consolidated Statements of Comprehensive Income (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :------------------------------------------------------------------ | :----------------- | :----------------- | :----------------- | | Net Income | 4,000 | 3,378 | 3,515 | | Unrealized holding losses on securities available for sale, net of tax benefit | (703) | (341) | (287) | | Reclassification adjustments related to: Recovery on previously impaired investment securities included in net income, net of tax expense | (115) | (89) | (94) | | Reclassification adjustments related to: Net gain on sale of securities included in net income, net of tax expense | - | (161) | (1,080) | | Total Other Comprehensive Loss | (818) | (591) | (1,461) | | Total Comprehensive Income | 3,182 | 2,787 | 2,054 | - Total Comprehensive Income increased from $2.787 million in 2017 to $3.182 million in 2018[395] - Net unrealized losses on securities available for sale, net of tax benefit, increased from $(341) thousand in 2017 to $(703) thousand in 2018[395] Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from 2017 to 2018, driven by net income and ESOP contributions, partially offset by treasury stock repurchases and cash dividends Consolidated Statements of Stockholders' Equity (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Balance - January 1 | 78,375 | 76,030 | 73,876 | | Net income | 4,000 | 3,378 | 3,515 | | Other comprehensive loss, net | (818) | (591) | (1,461) | | ESOP shares earned | 130 | 126 | 108 | | Stock based compensation | 45 | 44 | 9 | | Purchase of treasury stock, at cost | (1,448) | (269) | (455) | | Cash dividends declared | (880) | (743) | (888) | | Balance - December 31 | 79,804 | 78,375 | 76,030 | - Total Stockholders' Equity increased by $1.429 million (1.8%) from $78.375 million in 2017 to $79.804 million in 2018[397] - Treasury stock purchases amounted to $1.448 million in 2018, compared to $269 thousand in 2017[397] - Cash dividends declared increased to $880 thousand in 2018 from $743 thousand in 2017[397] Consolidated Statements of Cash Flows The statements indicate a net decrease in cash and cash equivalents in 2018, with operating activities providing cash, investing activities using cash, and financing activities providing cash from deposits Consolidated Statements of Cash Flows (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Net Cash Provided by Operating Activities | 6,114 | 5,827 | 4,294 | | Net Cash Used in Investing Activities | (39,087) | (36,462) | (7,253) | | Net Cash Provided by Financing Activities | 22,811 | 26,069 | 14,211 | | Net (Decrease) Increase in Cash and Cash Equivalents | (10,162) | (4,566) | 11,252 | | Cash and Cash Equivalents - Beginning | 40,913 | 45,479 | 34,227 | | Cash and Cash Equivalents - Ending | 30,751 | 40,913 | 45,479 | - Net cash used in investing activities increased to $39.087 million in 2018, primarily due to net loan originations and principal collections of $(30.122) million and purchases of securities of $(16.169) million[398] - Net cash provided by financing activities decreased to $22.811 million in 2018 from $26.069 million in 2017, mainly due to lower net increase in deposits and higher treasury stock purchases[398] Notes to Consolidated Financial Statements The notes provide detailed disclosures on the Company's organizational structure, significant accounting policies, financial statement line items, and recent accounting standard adoptions - Lake Shore Bancorp, Inc. and Lake Shore, MHC were formed in 2006; The MHC held 60.6% of the Company's outstanding common stock as of December 31, 2018[401][402] - The MHC's waiver of dividends, approved by members on February 6, 2019, and non-objected by the Federal Reserve Board as of March 7, 2019, allows the Company to retain resources for stock repurchases, dividends to minority stockholders, and investments[404][601] - All investment securities are classified as available for sale and carried at fair value; the Company performs quarterly reviews for other-than-temporary impairment (OTTI)[409][410] - The allowance for loan losses is estimated based on historical loss factors, environmental factors, and individual loan reviews, with specific allocations for classified loans and a general component for non-classified loans[415][416][469] Allowance for Loan Losses by Loan Type (December 31, 2018) | Loan Type | Allowance for Loan Losses ($ thousands) | Gross Loans Receivable ($ thousands) | | :---------------------------- | :-------------------------------------- | :----------------------------------- | | Residential one to four-family | 91 | 155,024 | | Home equity | 471 | 41,830 | | Commercial Real Estate | 2,020 | 150,475 | | Construction - Commercial | 250 | 22,252 | | Commercial (Other) | 507 | 21,825 | | Consumer | 25 | 1,156 | | Unallocated | 84 | - | | Total | 3,448 | 392,562 | - Total deposits increased to $432.458 million at December 31, 2018, with a weighted average interest rate of 0.87%, up from 0.59% in 2017[494] - Long-term debt, primarily FHLBNY advances, totaled $24.650 million at December 31, 2018, with a weighted average interest rate of 2.16%[500] - The Tax Cuts and Jobs Act of 2017 reduced the federal corporate income tax rate from 34% to 21%, resulting in a $262,000 net tax expense from revaluing deferred tax assets in 2017[505][506] - The Company adopted ASU 2014-09 (Revenue from Contracts with Customers) and ASU 2016-01 (Financial Instruments) on January 1, 2018, with no material impact on financial statements; ASU 2018-02 (Reclassification of Tax Effects) resulted in a $156,000 reclassification from AOCI to retained earnings[442][443][444][446] - New accounting standards, including ASU 2016-02 (Leases) and ASU 2016-13 (CECL), are pending adoption, with CECL expected to increase the allowance for loan losses[447][448] Note 1 - Organization and Nature of Operations Note 2 - Summary of Significant Accounting Policies Note 3 – Investment Securities Note 4 - Loans Receivable Note 5 - Allowance for Loan Losses Note 6 - Premises and Equipment Note 7 - Deposits Note 8 - Borrowings Note 9 - Lease Obligations Note 10- Income Taxes Note 11 - Employee and Director Benefit Plans Note 12 – Stock-based Compensation Note 13 - Fair Value of Financial Instruments Note 14 - Regulatory Capital Requirements Note 15 – Earnings per Share Note 16 – Commitments to Extend Credit Note 17 – Parent Company Only Financial Information Note 18 – Quarterly Financial Data – Unaudited Note 19 – Treasury Stock Note 20 – Other Comprehensive Loss Note 21 – Revenue Recognition Note 22 – Subsequent Events