Lake Shore Bancorp(LSBK) - 2019 Q1 - Quarterly Report

PART I Financial Information Item 1. Financial Statements This section presents Lake Shore Bancorp's unaudited consolidated financial statements for Q1 2019 and 2018, covering financial condition, income, comprehensive income, equity, and cash flows, along with detailed accounting notes Consolidated Statements of Financial Condition As of March 31, 2019, total assets increased to $554,497 thousand from $545,708 thousand at December 31, 2018, driven by higher net loans, deposits, and stockholders' equity Consolidated Balance Sheet Summary (Unaudited) | (Dollars in thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | $31,106 | $30,751 | | Securities available for sale | $84,865 | $86,193 | | Loans receivable, net | $401,047 | $392,471 | | Total Assets | $554,497 | $545,708 | | Liabilities | | | | Total Deposits | $440,540 | $432,458 | | Total Liabilities | $473,435 | $465,904 | | Total Stockholders' Equity | $81,062 | $79,804 | | Total Liabilities and Stockholders' Equity | $554,497 | $545,708 | Consolidated Statements of Income Net income for Q1 2019 decreased slightly to $898 thousand from $936 thousand in Q1 2018, primarily due to increased interest expense on deposits offsetting interest income growth Consolidated Income Statement Summary (Unaudited) | (Dollars in thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $4,538 | $4,332 | | Provision for Loan Losses | $75 | $75 | | Non-Interest Income | $589 | $590 | | Non-Interest Expenses | $4,003 | $3,758 | | Income before Income Taxes | $1,049 | $1,089 | | Net Income | $898 | $936 | | Basic and diluted earnings per common share | $0.15 | $0.15 | | Dividends declared per share | $0.12 | $0.10 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2019 significantly improved to $1,526 thousand from $239 thousand in Q1 2018, driven by net income and a positive swing in other comprehensive income from securities gains Comprehensive Income Summary (Unaudited) | (Dollars in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Income | $898 | $936 | | Other Comprehensive Income (Loss) | $628 | $(697) | | Total Comprehensive Income | $1,526 | $239 | Consolidated Statements of Stockholders' Equity Stockholders' equity increased from $79,804 thousand at year-end 2018 to $81,062 thousand at March 31, 2019, primarily due to net income and other comprehensive income - Key changes in stockholders' equity for Q1 2019 include: net income of $898 thousand, other comprehensive income of $628 thousand, cash dividends of $267 thousand, and treasury stock purchases of $111 thousand[17] Consolidated Statements of Cash Flows Net cash provided by operating activities was $303 thousand in Q1 2019, while investing activities used $6,780 thousand and financing activities provided $6,832 thousand, resulting in a $355 thousand net increase in cash Cash Flow Summary (Unaudited) | (Dollars in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $303 | $478 | | Net Cash Used in Investing Activities | $(6,780) | $(5,092) | | Net Cash Provided by Financing Activities | $6,832 | $11,239 | | Net Increase in Cash and Cash Equivalents | $355 | $6,625 | | Cash and Cash Equivalents - Ending | $31,106 | $47,538 | Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations for the financial statements, covering accounting policies, new standard adoptions, investment and loan portfolio breakdowns, allowance for loan losses, and fair value measurements - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing lease liabilities of $916 thousand and right-of-use (ROU) assets of $904 thousand[28] - The Company is preparing for ASU 2016-13 (CECL) adoption, which is expected to increase the allowance for loan losses, with the full impact still under evaluation[32] - On April 24, 2019, the Board declared a $0.12 per share quarterly cash dividend, which the majority shareholder, Lake Shore, MHC, waived, totaling approximately $436 thousand[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2019 financial performance and condition, highlighting stable net interest margin, strategic commercial real estate lending, and robust capital levels Analysis of Net Interest Income Net interest income increased by $206 thousand to $4,538 thousand in Q1 2019, driven by loan growth but offset by a 30 basis point rise in interest-bearing liability costs, maintaining a stable net interest margin Net Interest Margin and Spread | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Interest Income | $4,538 thousand | $4,332 thousand | | Interest Rate Spread | 3.39% | 3.42% | | Net Interest Margin | 3.60% | 3.59% | - The increase in net interest income was primarily driven by higher loan volume (+$315 thousand impact), while rising interest rates on liabilities negatively impacted it (-$308 thousand impact)[151] Comparison of Financial Condition Total assets grew by $8,800 thousand to $554,497 thousand at March 31, 2019, driven by an $8,600 thousand increase in net loans, primarily commercial real estate and construction, while non-performing loans slightly increased Loan Portfolio Change (Q1 2019) | Loan Category | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | | Commercial Real Estate | +$4,729 | +3.1% | | Commercial Construction | +$5,183 | +23.3% | | Commercial (Other) | -$1,593 | -7.3% | | Total Gross Loans | +$8,606 | +2.2% | - The company continues its strategic focus on originating shorter duration, adjustable-rate commercial real estate loans to diversify its asset mix and reduce interest rate risk[156] Asset Quality Ratios | Ratio | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Non-performing loans to total loans | 0.84% | 0.82% | | Non-performing assets to total assets | 0.74% | 0.71% | | Allowance for loan losses to total net loans | 0.88% | 0.91% | Comparison of Results of Operations Net income for Q1 2019 decreased by 4.1% to $898 thousand, primarily due to a 6.5% increase in non-interest expenses, notably salaries and benefits, which offset the growth in net interest income - Interest income grew 10.8% to $5,700 thousand, driven by a $26,000 thousand increase in the average loan portfolio balance[163] - Interest expense increased 44.8% to $1,100 thousand, primarily due to higher rates on time deposits and money market accounts amid increased competition and rising market rates[166] - Non-interest expenses rose 6.5% to $4,000 thousand, mainly due to a 9.5% increase in salaries and employee benefits from annual raises, new hires, and higher health insurance costs[173] Liquidity and Capital Resources The company maintains strong liquidity and capital, with $111,200 thousand in FHLBNY borrowing capacity and capital ratios significantly exceeding 'Well Capitalized' regulatory requirements - Primary sources of funds include deposits, loan and security amortization, and operations, supplemented by credit lines with FHLBNY ($111,200 thousand capacity) and correspondent banks ($22,000 thousand capacity)[175][178] Bank Capital Ratios | Ratio (at March 31, 2019) | Actual | 'Well Capitalized' Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 19.29% | >= 6.50% | | Tier 1 Capital | 19.29% | >= 8.00% | | Total Capital | 20.16% | >= 10.00% | | Tier 1 Leverage | 14.15% | >= 5.00% | - The Bank's capital conservation buffer was 12.16% as of March 31, 2019, exceeding the 2.50% minimum requirement[188] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not required for disclosure as the Company qualifies as a smaller reporting company - Disclosure is not required as the Company is a smaller reporting company[190] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the reporting period[191][192] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[193] PART II Item 1A. Risk Factors There have been no material changes to the company's risk factors from those previously disclosed in its Annual Report on Form 10-K - There have been no material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2019, the Company repurchased 7,300 shares of common stock at an average price of $15.14 per share, with 60,890 shares remaining available under the repurchase program Company Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2019 | 6,000 | $15.05 | | February 2019 | 1,300 | $15.55 | | March 2019 | - | - | | Total | 7,300 | $15.14 | - As of March 31, 2019, 60,890 shares may yet be purchased under the stock repurchase plan approved on May 16, 2018[195] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO/CFO certifications and XBRL Instance Documents[197]