Lake Shore Bancorp(LSBK) - 2019 Q3 - Quarterly Report

PART I Item 1. Financial Statements Unaudited consolidated financial statements for Lake Shore Bancorp, Inc. are presented, detailing financial condition, income, comprehensive income, equity, and cash flows Consolidated Statements of Financial Condition Total assets increased to $596.8 million by September 30, 2019, primarily due to a rise in net loans receivable Consolidated Statements of Financial Condition (Unaudited) | (Dollars in thousands) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $596,815 | $545,708 | | Cash and Cash Equivalents | $20,558 | $30,751 | | Securities available for sale | $75,093 | $86,193 | | Loans receivable, net | $462,993 | $392,471 | | Total Liabilities | $514,356 | $465,904 | | Total Deposits | $471,275 | $432,458 | | Long-term debt | $34,650 | $24,650 | | Total Stockholders' Equity | $82,459 | $79,804 | Consolidated Statements of Income Net income for Q3 2019 rose to $1.21 million from $1.06 million YoY, driven by higher net interest income Key Income Statement Data (Unaudited, in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $4,953 | $4,535 | $14,174 | $13,274 | | Provision for Loan Losses | $300 | $125 | $725 | $315 | | Net Income | $1,212 | $1,058 | $2,915 | $3,000 | | Basic and diluted EPS | $0.20 | $0.17 | $0.48 | $0.49 | | Dividends declared per share | $0.12 | $0.10 | $0.36 | $0.30 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q3 2019 significantly increased to $1.41 million from $0.56 million YoY, driven by unrealized gains on securities Comprehensive Income Summary (Unaudited, in thousands) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $1,212 | $1,058 | $2,915 | $3,000 | | Other Comprehensive Income (Loss) | $197 | $(494) | $1,440 | $(1,542) | | Total Comprehensive Income | $1,409 | $564 | $4,355 | $1,458 | Consolidated Statements of Stockholders' Equity Stockholders' equity increased from $79.8 million to $82.5 million by September 30, 2019, driven by net income and comprehensive income - Total stockholders' equity increased to $82.5 million at September 30, 2019, from $79.8 million at January 1, 2019[15] - Key changes during the nine months ended September 30, 2019 include: net income of $2.9 million, other comprehensive income of $1.4 million, cash dividends declared of approximately $1.0 million, and treasury stock purchases of $1.0 million[15] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $10.2 million for the nine months ended September 30, 2019, primarily due to investing activities Cash Flow Summary for Nine Months Ended Sept 30 (Unaudited, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $4,315 | $3,839 | | Net Cash Used in Investing Activities | $(59,882) | $(32,290) | | Net Cash Provided by Financing Activities | $45,374 | $25,607 | | Net Decrease in Cash and Cash Equivalents | $(10,193) | $(2,844) | Notes to Unaudited Consolidated Financial Statements Detailed explanations of accounting policies and financial data are provided, including investment securities, loan loss allowance, and fair value measurements - The Company adopted ASU 2016-02, "Leases (Topic 842)" on January 1, 2019, resulting in the recognition of lease liabilities of $916,000 and right-of-use (ROU) assets of $904,000[26] - The Company is a smaller reporting company and expects to adopt the new credit loss standard (CECL, ASU 2016-13) for fiscal years beginning after December 15, 2022, anticipating an increase to the allowance for loan losses upon adoption[31] - On October 23, 2019, the Board declared a quarterly cash dividend of $0.12 per share, with the majority shareholder, Lake Shore, MHC, waiving its right to receive the full dividend[134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, focusing on net interest income, asset quality, and operational results Analysis of Net Interest Income Net interest margin increased to 3.66% in Q3 2019, driven by higher loan volume and yield, partially offset by increased cost of liabilities Net Interest Margin and Spread | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Interest Rate Spread | 3.41% | 3.41% | 3.37% | 3.40% | | Net Interest Margin | 3.66% | 3.61% | 3.61% | 3.58% | - The increase in net interest margin for Q3 2019 was primarily impacted by an increased volume of higher-yielding average loan balances, which grew by $67.6 million (17.6%) compared to Q3 2018[159] - The average cost of interest-bearing liabilities rose by 30 basis points in Q3 2019 YoY, mainly due to higher rates on time deposits and money market accounts amid increased competition[159] Comparison of Financial Condition at September 30, 2019 and December 31, 2018 Total assets grew by 9.4% to $596.8 million, driven by an 18.0% increase in net loans, primarily commercial real estate and construction - Net loans receivable increased by $70.5 million (18.0%), with commercial real estate loans growing by $51.9 million (34.5%) and commercial construction loans by $10.2 million (46.0%)[165] - Total deposits increased by $38.8 million (9.0%), with growth across core deposits (+$26.4 million) and time deposits (+$12.4 million) due to competitive rates[171] Non-Performing Assets (in thousands) | Metric | Sept 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total non-performing loans | $3,428 | $3,218 | | Total non-performing assets | $4,198 | $3,896 | | Non-performing loans as a % of total loans | 0.74% | 0.82% | | Non-performing assets as a % of total assets | 0.70% | 0.71% | - The allowance for loan losses increased to $4.1 million, representing 0.89% of total net loans, up from 0.87% at year-end 2018[170] Comparison of Results of Operations Q3 2019 net income increased 14.6% YoY to $1.2 million due to higher net interest income, while nine-month net income slightly decreased - Q3 2019 net income increased by $154,000 (14.6%) YoY, primarily due to a $990,000 (21.2%) increase in loan interest income[174][175] - The provision for loan losses for Q3 2019 was $300,000, a 140.0% increase from Q3 2018, reflecting inherent losses on new loan growth[182] - For the nine months ended Sept 30, 2019, net income decreased by $85,000 (2.8%) YoY, as a $900,000 increase in net interest income was offset by a $492,000 increase in non-interest expenses and a $410,000 increase in the provision for loan losses[192] - Non-interest expenses for the nine-month period increased by $492,000 (4.3%), driven by higher salaries and benefits (+$327,000) and occupancy and equipment costs (+$120,000)[205] Liquidity and Capital Resources The company maintains strong liquidity from deposits and FHLBNY advances, with robust capital levels significantly exceeding 'Well Capitalized' thresholds - Primary sources of funds include deposits, loan and security cash flows, and FHLBNY advances; the company has access to $112.0 million from the FHLBNY, with $34.7 million outstanding as of September 30, 2019[207] Bank Regulatory Capital Ratios (September 30, 2019) | Ratio | Actual (%) | To Be Well Capitalized (%) | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 17.01% | >= 6.50% | | Tier 1 capital (to risk-weighted assets) | 17.01% | >= 8.00% | | Total capital (to risk-weighted assets) | 17.93% | >= 10.00% | | Tier 1 Leverage | 13.18% | >= 5.00% | - The Bank's capital conservation buffer was 9.93%, significantly exceeding the 2.50% minimum requirement for 2019[217] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not required as the Company is a smaller reporting company - Disclosure is not required as the Company is a smaller reporting company[219] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control - 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 period covered by this report[220] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[221][222] PART II - Other Information Item 1A. Risk Factors There have been no material changes in the Company's risk factors from those 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[223] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2019, the company repurchased 16,990 shares of common stock at $14.99 per share, and approved a new repurchase plan Company Purchases of Equity Securities (Q3 2019) | Period | Total Shares Purchased (shares) | Average Price Paid per Share ($) | | :--- | :--- | :--- | | July 2019 | 9,600 | $15.05 | | August 2019 | 7,390 | $14.92 | | September 2019 | - | - | | Total | 16,990 | $14.99 | - On September 6, 2019, a new stock repurchase plan was approved, authorizing the repurchase of up to 116,239 shares[224] Item 6. Exhibits This section lists the exhibits filed with the report, including CEO and CFO certifications and XBRL data files - Exhibits filed include certifications by the CEO and CFO pursuant to Sarbanes-Oxley Sections 302 and 906, as well as XBRL Interactive Data Files[225] Signatures