Lake Shore Bancorp(LSBK) - 2023 Q3 - Quarterly Report

PART I Financial Information Item 1. Financial Statements Presents unaudited consolidated financial statements for Lake Shore Bancorp, Inc. as of September 30, 2023, detailing financial condition, income, and cash flows, including CECL adoption Consolidated Statements of Financial Condition Total assets increased to $713.6 million as of September 30, 2023, primarily driven by a significant rise in cash, partially offset by decreases in net loans and securities Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $713,563 | $699,914 | $13,649 | 2.0% | | Cash and Cash Equivalents | $45,999 | $9,633 | $36,366 | 377.5% | | Loans receivable, net | $564,848 | $573,537 | ($8,689) | (1.5%) | | Securities | $57,952 | $73,047 | ($15,095) | (20.7%) | | Total Liabilities | $631,706 | $618,730 | $12,976 | 2.1% | | Total Deposits | $584,158 | $570,119 | $14,039 | 2.5% | | Long-term debt | $36,450 | $24,950 | $11,500 | 46.1% | | Total Stockholders' Equity | $81,857 | $81,184 | $673 | 0.8% | Consolidated Statements of Income Net income decreased to $1.57 million in Q3 2023 and $4.07 million year-to-date, primarily due to increased interest expense and higher non-interest expenses Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $6,295 | $6,345 | $18,800 | $17,791 | | (Credit) Provision for Credit Losses | ($199) | $0 | ($1,011) | $500 | | Non-Interest Income | $605 | $668 | $1,712 | $2,120 | | Non-Interest Expense | $5,196 | $4,870 | $16,614 | $13,979 | | Net Income | $1,571 | $1,771 | $4,071 | $4,516 | | Diluted EPS | $0.27 | $0.30 | $0.69 | $0.77 | Notes to Unaudited Consolidated Financial Statements Details significant accounting policies, including CECL adoption, investment securities with unrealized losses, loan portfolio credit quality, and other financial commitments - The Company adopted the Current Expected Credit Loss (CECL) standard (ASC 326) on January 1, 2023, resulting in a cumulative effect adjustment that decreased retained earnings by $723,000[22][23] - As of September 30, 2023, the investment securities portfolio had gross unrealized losses of $16.6 million, primarily attributed to increases in market interest rates, with no allowance for credit losses deemed necessary for these securities[39][42] - The allowance for credit losses on unfunded loan commitments was $351,000 as of September 30, 2023, established following the adoption of CECL on January 1, 2023, which initially created a $633,000 liability for this exposure[59] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Details financial performance and condition, highlighting regulatory actions, compressed net interest income due to rising interest expenses, and changes in the loan portfolio and liquidity - The Bank is subject to a Consent Order from the OCC and a Written Agreement with the Federal Reserve Bank of Philadelphia due to deficiencies, restricting dividend payments and debt incurrence without prior approval, and is expected to increase non-interest expenses[118][119] - Net interest margin decreased to 3.74% in Q3 2023 from 3.92% in Q3 2022, as the average interest rate paid on interest-bearing liabilities increased by 140 basis points, outpacing the 91 basis point increase in the average yield on interest-earning assets[125][128][130] - Total assets increased by $13.6 million (2.0%) to $713.6 million since year-end 2022, driven by a $36.4 million increase in cash, while net loans receivable decreased by $8.7 million (1.5%) and securities decreased by $15.0 million (20.7%)[132] - Total deposits grew by $14.0 million (2.5%), driven by a $62.9 million (41.1%) increase in higher-cost time deposits, while lower-cost core deposits declined by $48.9 million (11.7%), reflecting a shift in customer preference in the current rate environment[138][140] Quantitative and Qualitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide this disclosure - Disclosure is not required as the Company is a smaller reporting company[173] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023 - 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[174] - There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[175] PART II Other Information Risk Factors Highlights updated risk factors, including Federal Reserve restrictions on dividends and debt, and potential liquidity pressures from decreased banking sector confidence due to recent institutional failures - A significant risk factor is the Written Agreement with the Federal Reserve Bank of Philadelphia, effective June 28, 2023, which restricts the company from declaring dividends, engaging in share repurchases, or incurring new debt without prior written approval[177][179] - The company identifies recent failures of other financial institutions as a risk factor that could decrease depositor confidence, create liquidity pressures, reduce net interest margins, and potentially lead to increased FDIC premiums or special assessments[179][180] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during Q3 2023, with the stock repurchase program suspended and 30,626 shares remaining authorized - The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2023[181][183] - The Company has suspended its stock repurchase program, with a maximum of 30,626 shares yet to be purchased under the plan[181][183] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL data files