Lake Shore Bancorp(LSBK) - 2019 Q2 - Quarterly Report

PART I: Financial Information Item 1. Financial Statements This section presents Lake Shore Bancorp's unaudited consolidated financial statements, including condition, income, cash flows, and detailed notes Consolidated Statements of Financial Condition As of June 30, 2019, total assets increased to $578.1 million, driven by loan growth, with liabilities and equity also rising Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | $21,777 | $30,751 | | Loans receivable, net | $440,175 | $392,471 | | Total Assets | $578,052 | $545,708 | | Liabilities & Equity | | | | Total Deposits | $457,472 | $432,458 | | Total Liabilities | $496,388 | $465,904 | | Total Stockholders' Equity | $81,664 | $79,804 | | Total Liabilities and Stockholders' Equity | $578,052 | $545,708 | Consolidated Statements of Income Net income decreased for Q2 and the six months ended June 30, 2019, primarily due to higher loan loss provisions and increased non-interest expenses Key Performance Indicators (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $4,683 | $4,407 | $9,221 | $8,739 | | Provision for Loan Losses | $350 | $115 | $425 | $190 | | Net Income | $805 | $1,006 | $1,703 | $1,942 | | Diluted EPS | $0.13 | $0.16 | $0.28 | $0.32 | | Dividends declared per share | $0.12 | $0.10 | $0.24 | $0.20 | Consolidated Statements of Cash Flows Net cash decreased by $9.0 million for the six months ended June 30, 2019, due to investing activities offsetting operating and financing inflows Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $2,040 | $2,225 | | Net Cash Used in Investing Activities | $(39,735) | $(23,871) | | Net Cash Provided by Financing Activities | $28,721 | $23,856 | | Net (Decrease) Increase in Cash | $(8,974) | $2,210 | Notes to Unaudited Consolidated Financial Statements Notes detail accounting policies, financial instruments, and key events, including ASU 2016-02 adoption and a subsequent dividend declaration - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, resulting in the recognition of Right-of-Use (ROU) assets of $904,000 and lease liabilities of $916,000[24] - The Company is preparing for the adoption of ASU 2016-13 (CECL), which is expected to increase the allowance for loan losses, with a proposed deferral for smaller reporting companies to fiscal years beginning after December 15, 2022[28][29] - The allowance for loan losses increased to $3.86 million at June 30, 2019, from $3.45 million at year-end 2018, with a provision of $425,000 for the first six months of 2019, up from $190,000 in the prior-year period[48][167] - On July 24, 2019, the Board declared a quarterly cash dividend of $0.12 per share, with the majority shareholder waiving its right to receive $0.06 per share of this dividend[132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, attributing net income decline to higher loan loss provisions and expenses, while highlighting strong loan growth and capital position Analysis of Net Interest Income Net interest income and margin improved in Q2 2019 due to loan growth, despite rising cost of interest-bearing liabilities Net Interest Margin and Spread Analysis | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $4,683k | $4,407k | $9,221k | $8,739k | | Interest Rate Spread | 3.34% | 3.36% | 3.36% | 3.39% | | Net Interest Margin | 3.58% | 3.54% | 3.59% | 3.56% | - The increase in net interest income for the first six months of 2019 was primarily driven by a $638 million positive impact from increased volume of interest-earning assets, partially offset by a $156 million negative impact from rate changes[156] Comparison of Financial Condition Total assets grew by 5.9% to $578.1 million, driven by a 12.2% increase in net loans, primarily commercial real estate - The strategic focus on originating shorter duration, adjustable-rate commercial real estate loans continued, with this portfolio growing by $41.7 million (27.7%) in the first six months of 2019[162][163] - Total non-performing loans increased by $158,000 (4.9%) to $3.4 million at June 30, 2019, primarily due to an increase in non-accrual home equity loans, while non-performing assets as a percentage of total assets remained stable at 0.71%[166] - Total deposits grew by $25.0 million (5.8%), driven by a $15.4 million increase in time deposits and a $9.6 million increase in core deposits[168] Comparison of Results of Operations Net income decreased due to a significant increase in loan loss provisions and higher non-interest expenses, despite growth in interest income - Q2 2019 provision for loan losses was $350,000, a significant increase from $115,000 in Q2 2018, mainly to reflect inherent losses from the 20.6% growth in the commercial real estate portfolio during the quarter[177] - Q2 2019 non-interest income fell 16.9% to $546,000, primarily due to a $61,000 unrealized loss on a derivative contract and a $55,000 decrease in recoveries on impaired securities[184] - Q2 2019 non-interest expenses rose 4.4% to $3.9 million, driven by higher salaries and benefits ($103,000 increase) and occupancy and equipment costs ($38,000 increase)[185] Liquidity and Capital Resources The company maintains strong liquidity and capital, exceeding all regulatory requirements with robust capital ratios and borrowing capacity Bank Capital Ratios as of June 30, 2019 | Ratio | Actual | Minimum for Adequacy | To Be Well Capitalized | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 17.45% | >= 4.50% | >= 6.50% | | Tier 1 capital (to risk-weighted assets) | 17.45% | >= 6.00% | >= 8.00% | | Total capital (to risk-weighted assets) | 18.34% | >= 8.00% | >= 10.00% | | Tier 1 Leverage (to adjusted total assets) | 13.38% | >= 4.00% | >= 5.00% | - The Bank's capital conservation buffer was 10.34% as of June 30, 2019, significantly exceeding the 2.50% minimum requirement for 2019[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk Disclosure for market risk is not required as the Company qualifies as a smaller reporting company - The company is a smaller reporting company and is therefore not required to provide disclosures for this item[216] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, 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[217][218] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, these controls[219] PART II: Other Information Item 1A. Risk Factors No material changes to the Company's previously disclosed risk factors have been reported - No material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K have been reported[220] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 43,900 shares of common stock in Q2 2019, with 16,990 shares remaining for repurchase Company Purchases of Equity Securities (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 22,500 | $15.59 | | May 2019 | 6,400 | $15.05 | | June 2019 | 15,000 | $15.04 | | Total | 43,900 | $15.32 | - The current stock repurchase plan, approved on May 16, 2018, authorized the repurchase of up to 121,190 shares, with 16,990 shares remaining available as of June 30, 2019[221] Item 6. Exhibits This section lists exhibits filed with the report, including CEO/CFO certifications and XBRL data files