Lake Shore Bancorp(LSBK) - 2023 Q2 - Quarterly Report

PART I - Financial Information Financial Statements Financial statements show total assets at $714.0 million, with net income decreasing due to higher expenses and a $723,000 CECL impact Consolidated Statements of Financial Condition Highlights (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $714,041 | $699,914 | | Cash and Cash Equivalents | $35,582 | $9,633 | | Loans receivable, net | $569,503 | $573,537 | | Securities | $65,377 | $73,047 | | Total Liabilities | $630,647 | $618,730 | | Total Deposits | $581,965 | $570,119 | | Long-term debt | $36,450 | $24,950 | | Total Stockholders' Equity | $83,394 | $81,184 | Consolidated Statements of Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $6,214 | $5,978 | $12,505 | $11,446 | | (Credit) Provision for Credit Losses | $(187) | $100 | $(812) | $500 | | Net Income | $816 | $1,684 | $2,500 | $2,745 | | Diluted EPS | $0.14 | $0.29 | $0.43 | $0.47 | - On January 1, 2023, the Company adopted the Current Expected Credit Loss (CECL) methodology (ASC 326), resulting in a cumulative effect adjustment that decreased retained earnings by $723,000[23][24] Note 3 – Investment Securities The securities portfolio decreased to $65.4 million, with $12.6 million in unrealized losses and $49,000 in realized losses from Q2 sales Securities Portfolio Composition (Fair Value, in thousands) | Security Type | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | U.S. government agencies | $1,841 | $1,833 | | Municipal bonds | $36,692 | $42,414 | | Mortgage-backed securities | $26,738 | $28,702 | | Other | $103 | $104 | | Total Securities | $65,377 | $73,047 | - As of June 30, 2023, the securities portfolio had gross unrealized losses of $12.6 million, primarily due to market interest rate changes, not credit issues[38][42] - During the second quarter of 2023, the company sold twenty-three municipal bonds and two mortgage-backed securities, realizing a gross loss of $49,000[46] Note 4 - Loans and Allowance for Credit Losses Net loans decreased slightly to $569.5 million, with a $6.8 million ACL (1.19% of loans) post-CECL, and stable non-performing loans at $2.8 million Loan Portfolio Composition (in thousands) | Loan Segment | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Residential, one- to four-family | $174,940 | $175,904 | | Home Equity | $50,750 | $53,057 | | Commercial Real Estate | $326,987 | $326,955 | | Commercial (Other) | $18,585 | $19,576 | | Consumer | $1,151 | $1,217 | | Total gross loans | $572,413 | $576,709 | Allowance for Credit Losses (ACL) Activity - H1 2023 (in thousands) | Description | Amount | | :--- | :--- | | Balance - January 1, 2023 | $7,065 | | Impact of adopting ASC 326 | $282 | | (Credit) provision | $(590) | | Net charge-offs/(recoveries) | $(1) | | Balance – June 30, 2023 | $6,758 | - Total non-accrual loans were $2.8 million as of June 30, 2023, a slight decrease from $2.9 million at year-end 2022, primarily in residential real estate[62] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased due to higher regulatory and interest expenses, with deposits shifting to higher-cost time deposits amid regulatory restrictions on liquidity - The Bank consented to a Consent Order with the OCC and the parent companies entered into a Written Agreement with the Federal Reserve Bank of Philadelphia, which will keep non-interest expenses elevated due to deficiencies in IT, security, audit, and BSA/AML[117][118] Key Performance Metrics Comparison (Net Income in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Margin | 3.65% | 3.71% | 3.71% | 3.54% | | Net Income (thousands) | $816 | $1,684 | $2,500 | $2,745 | | Non-performing assets / Total assets | 0.41% | N/A | 0.41% | N/A | - As a result of regulatory orders, the Company's access to FHLB funds is curtailed to short-term advances, a correspondent bank line of credit was terminated, and eligibility for the Federal Reserve's Bank Term Funding Program is unavailable[164] Comparison of Financial Condition Total assets increased to $714.0 million driven by cash, while deposits grew due to a $60.8 million shift to time deposits, and equity rose to $83.4 million - Total deposits increased by 2.1% to $582.0 million, driven by a 39.8% ($60.8 million) increase in time deposits, offset by an 11.7% ($49.0 million) decrease in core deposits, reflecting a shift to higher-yielding products[137] - Non-performing assets decreased slightly by 2.6% to $2.9 million at June 30, 2023, representing 0.41% of total assets, down from 0.43% at year-end 2022[135][136] - Stockholders' equity rose 2.7% to $83.4 million, primarily due to $2.5 million in net income, partially offset by a $0.7 million reduction to retained earnings from CECL adoption[141] Comparison of Results of Operations Q2 2023 net income fell 51.5% to $0.8 million YoY, and H1 2023 net income decreased 8.9% to $2.5 million, driven by increased non-interest and interest expenses - Q2 2023 net income decreased by $0.9 million (51.5%) YoY, primarily due to a $1.3 million (28.9%) increase in non-interest expense[142][150] - Professional services expense for Q2 2023 increased by $513,000 (153.1%) YoY due to regulatory remediation costs, while FDIC insurance expense rose by $389,000 (827.7%) due to higher premium assessments[150] - Interest expense for Q2 2023 surged by 398.0% to $2.3 million, driven by a 482.1% increase in interest paid on deposits as the deposit mix shifted to higher-cost time deposits[145] Liquidity and Capital Resources Liquidity is maintained through deposits and cash flows, but regulatory actions have curtailed access to FHLB and other borrowing facilities; the Bank's capital ratios exceed minimums, remaining well-capitalized Bank Regulatory Capital Ratios (as of June 30, 2023) | Ratio | Bank's Actual | Required for Well-Capitalized Status | Individual Minimum Requirement | | :--- | :--- | :--- | :--- | | Tier 1 Leverage Ratio | 12.16% | 5.00% | 10.00% | | Total Risk-Based Capital Ratio | 17.23% | 10.00% | 13.00% | - The Bank's Community Bank Leverage Ratio was 12.16% as of June 30, 2023, exceeding the 9.0% minimum requirement[171] Quantitative and Qualitative Disclosures About Market Risk Disclosure is not required as the Company qualifies as a smaller reporting company Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of the end of the reporting period[175] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[176] PART II - Other Information Risk Factors New material risks include restrictions from a Written Agreement with the Federal Reserve, impacting dividends and debt, and potential adverse impacts from recent bank failures on depositor confidence - A new risk factor is the Written Agreement with the Federal Reserve Bank of Philadelphia, which requires the company to act as a source of strength for the Bank and restricts dividends, share repurchases, and new debt without prior regulatory approval[178][180] - The company identifies a risk related to recent failures of other banks, which has decreased confidence in the banking sector and could lead to liquidity pressures, reduced net interest margins, and increased credit losses[180][181] Unregistered Sales of Equity Securities and Use of Proceeds The company suspended its stock repurchase program and made no purchases during Q2 2023, with 30,626 shares remaining authorized for repurchase - The Company has suspended its stock repurchase program and made no purchases of its equity securities during the second quarter of 2023[182] - As of June 30, 2023, there are 30,626 shares remaining that may be repurchased under the publicly announced plan[184] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files