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LAKE SHORE BANCORP, INC. - Quarter Report: 2019 June (Form 10-Q)





United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.:  000-51821





 

 

LAKE SHORE BANCORP, INC.

(Exact name of registrant as specified in its charter)

United States

 

20-4729288

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

31 East Fourth Street, Dunkirk, New York

 

14048

(Address of principal executive offices)

 

(Zip code)

(716) 366-4070

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12b-2 of the Exchange Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

LSBK

 

The Nasdaq Stock Market LLC



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,  and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]No  [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  [X]No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

Large accelerated filer

Accelerated filer

Non-accelerated filer  

Smaller reporting company

Emerging growth company  

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [  ]        No  [X]



 

 

 

 



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:



There were 5,948,290 shares of the registrant’s common stock, $0.01 par value per share, outstanding at August 8, 2019.

 


 









 

 

 



 

TABLE OF CONTENTS

 



 

 

 

ITEM

 

PART I

PAGE



 

 

 

1

FINANCIAL STATEMENTS

 



-

Consolidated Statements of Financial Condition as of June 30, 2019 (Unaudited) and December 31, 2018

1



-

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

2



-

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

3



-

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 and  2018 (Unaudited)

4



-

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and  2018 (Unaudited)

5



-

Notes to Unaudited Consolidated Financial Statements

6

2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

35

3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

51

4

CONTROLS AND PROCEDURES

51



 

 

 



 

PART II

 



 

 

 

1A

RISK FACTORS

52

2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

52

6

EXHIBITS 

53

SIGNATURES

 

 

53



 

 





 

 


 

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary











 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2019

 

2018



 

(Unaudited)



 

(Dollars in thousands, except share data)



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

8,321 

 

$

8,880 

Interest earning deposits

 

 

334 

 

 

3,244 

Federal funds sold

 

 

13,122 

 

 

18,627 

Cash and Cash Equivalents

 

 

21,777 

 

 

30,751 

Securities available for sale

 

 

78,390 

 

 

86,193 

Federal Home Loan Bank stock, at cost

 

 

1,830 

 

 

1,545 

Loans receivable, net of allowance for loan losses 2019 $3,863;  2018 $3,448

 

 

440,175 

 

 

392,471 

Premises and equipment, net

 

 

9,358 

 

 

9,417 

Accrued interest receivable

 

 

2,128 

 

 

1,913 

Bank owned life insurance

 

 

21,711 

 

 

21,469 

Other assets

 

 

2,683 

 

 

1,949 

Total Assets

 

$

578,052 

 

$

545,708 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

              Interest bearing

 

$

395,707 

 

$

377,131 

              Non-interest bearing

 

 

61,765 

 

 

55,327 

Total Deposits

 

 

457,472 

 

 

432,458 

Short-term borrowings

 

 

8,000 

 

 

 -

Long-term debt

 

 

21,650 

 

 

24,650 

Advances from borrowers for taxes and insurance

 

 

3,156 

 

 

3,134 

Other liabilities

 

 

6,110 

 

 

5,662 

Total Liabilities

 

$

496,388 

 

$

465,904 

Stockholders' Equity

 

 

 

 

 

 

Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,827,741 shares issued and 5,957,890 shares outstanding at June 30, 2019 and 6,004,664 shares outstanding at December 31, 2018

 

$

68 

 

$

68 

Additional paid-in capital

 

 

30,995 

 

 

30,916 

Treasury stock, at cost (869,851 shares at June 30, 2019 and 823,077 shares at December 31, 2018)

 

 

(9,547)

 

 

(8,805)

Unearned shares held by ESOP

 

 

(1,407)

 

 

(1,449)

Unearned shares held by compensation plans

 

 

(123)

 

 

(200)

Retained earnings

 

 

60,306 

 

 

59,145 

Accumulated other comprehensive income

 

 

1,372 

 

 

129 

Total Stockholders' Equity

 

 

81,664 

 

 

79,804 

Total Liabilities and Stockholders' Equity

 

$

578,052 

 

$

545,708 



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 



 









1


 

Lake Shore Bancorp, Inc. and Subsidiary



 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2019

 

 

2018

 

2019

 

2018



(Unaudited)



 

(Dollars in thousands, except per share data)

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

   Loans, including fees

 

$

5,168 

 

$

4,445 

 

$

10,023 

 

$

8,817 

   Investment securities, taxable

 

 

283 

 

 

256 

 

 

585 

 

 

486 

   Investment securities, tax-exempt

 

 

364 

 

 

397 

 

 

754 

 

 

790 

   Other

 

 

137 

 

 

169 

 

 

252 

 

 

282 

         Total Interest Income

 

 

5,952 

 

 

5,267 

 

 

11,614 

 

 

10,375 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

   Deposits

 

 

1,104 

 

 

701 

 

 

2,076 

 

 

1,318 

   Short-term borrowings

 

 

13 

 

 

 -

 

 

13 

 

 

 -

   Long-term debt

 

 

134 

 

 

140 

 

 

267 

 

 

279 

   Other

 

 

18 

 

 

19 

 

 

37 

 

 

39 

         Total Interest Expense

 

 

1,269 

 

 

860 

 

 

2,393 

 

 

1,636 

         Net Interest Income

 

 

4,683 

 

 

4,407 

 

 

9,221 

 

 

8,739 

Provision for Loan Losses

 

 

350 

 

 

115 

 

 

425 

 

 

190 

         Net Interest Income after Provision for Loan Losses

 

 

4,333 

 

 

4,292 

 

 

8,796 

 

 

8,549 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

   Service charges and fees

 

 

451 

 

 

463 

 

 

872 

 

 

914 

   Earnings on bank owned life insurance

 

 

123 

 

 

86 

 

 

242 

 

 

170 

   Unrealized (loss) gain on equity securities

 

 

(1)

 

 

 

 

35 

 

 

14 

   Unrealized loss on interest rate swap

 

 

(61)

 

 

 -

 

 

(94)

 

 

 -

   Recovery on previously impaired investment securities

 

 

13 

 

 

68 

 

 

26 

 

 

90 

   Net gain on sale of loans

 

 

 

 

 

 

 

 

   Other

 

 

19 

 

 

30 

 

 

52 

 

 

53 

         Total Non-Interest Income

 

 

546 

 

 

657 

 

 

1,135 

 

 

1,247 

Non-Interest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

   Salaries and employee benefits

 

 

2,137 

 

 

2,034 

 

 

4,398 

 

 

4,099 

   Occupancy and equipment

 

 

599 

 

 

561 

 

 

1,223 

 

 

1,148 

   Data processing

 

 

338 

 

 

335 

 

 

676 

 

 

663 

   Professional services

 

 

262 

 

 

255 

 

 

496 

 

 

479 

   Advertising

 

 

194 

 

 

169 

 

 

352 

 

 

322 

   Postage and supplies

 

 

58 

 

 

54 

 

 

123 

 

 

118 

   FDIC Insurance

 

 

34 

 

 

36 

 

 

70 

 

 

74 

   Other

 

 

325 

 

 

338 

 

 

612 

 

 

637 

         Total Non-Interest Expenses

 

 

3,947 

 

 

3,782 

 

 

7,950 

 

 

7,540 

         Income before Income Taxes

 

 

932 

 

 

1,167 

 

 

1,981 

 

 

2,256 

Income Tax Expense

 

 

127 

 

 

161 

 

 

278 

 

 

314 

         Net Income

 

$

805 

 

$

1,006 

 

$

1,703 

 

$

1,942 

Basic earnings per common share

 

$

0.13 

 

$

0.17 

 

$

0.28 

 

$

0.32 

Diluted earnings per common share

 

$

0.13 

 

$

0.16 

 

$

0.28 

 

$

0.32 

Dividends declared per share

 

$

0.12 

 

$

0.10 

 

$

0.24 

 

$

0.20 



 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

























2


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income









 

 

 

 

 

 

 



 

 

Three Months Ended June 30,



 

 

2019

 

2018



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

805 

 

 

1,006 

Other Comprehensive Income (Loss), net of tax expense (benefit):

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit)

 

 

 

626 

 

 

(297)

Reclassification adjustments related to:

 

 

 

 

 

 

 

Recovery on  previously impaired investment securities included in net income, net of tax expense

 

 

 

(11)

 

 

(54)

Total Other Comprehensive Income (Loss)

 

 

 

615 

 

 

(351)

Total Comprehensive Income

 

 

$

1,420 

 

$

655 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

Six Months Ended June 30,



 

 

2019

 

2018



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

1,703 

 

$

1,942 

Other Comprehensive Income (Loss), net of tax expense (benefit):

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit)

 

 

 

1,264 

 

 

(977)

Reclassification adjustments related to:

 

 

 

 

 

 

 

Recovery on previously impaired investment securities included in net income, net of tax expense

 

 

 

(21)

 

 

(71)

Total Other Comprehensive Income (Loss)

 

 

 

1,243 

 

 

(1,048)

Total Comprehensive Income

 

 

$

2,946 

 

$

894 



 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 





3


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2019 and 2018 (Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Unearned

 

Unearned Shares

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Additional

 

 

 

 

Shares

 

Held by

 

 

 

 

Other

 

 

 



 

Common

 

Paid-In

 

Treasury

 

Held by

 

Compensation

 

Retained

 

Comprehensive

 

 

 



 

Stock

 

Capital

 

Stock

 

ESOP

 

Plans

 

Earnings

 

Income (Loss)

 

Total



 

(Dollars in thousands, except share and per share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2018

 

$

68 

 

$

30,719 

 

$

(7,309)

 

$

(1,535)

 

$

(540)

 

$

56,181 

 

$

791 

 

$

78,375 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,942 

 

 

 -

 

 

1,942 

Other comprehensive income, net of tax benefit of $278

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,048)

 

 

(1,048)

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(156)

 

 

156 

 

 

 -

ESOP shares earned (3,968 shares)

 

 

 -

 

 

24 

 

 

 -

 

 

43 

 

 

 -

 

 

 -

 

 

 -

 

 

67 

Stock based compensation

 

 

 -

 

 

22 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22 

Compensation plan shares granted (5,329 shares)

 

 

 -

 

 

 -

 

 

51 

 

 

 -

 

 

(51)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (9,638 shares)

 

 

 -

 

 

 -

 

 

(91)

 

 

 -

 

 

91 

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (13,942 shares)

 

 

 -

 

 

54 

 

 

 -

 

 

 -

 

 

147 

 

 

 -

 

 

 -

 

 

201 

Purchase of treasury stock, at cost (34,300 shares)

 

 

 -

 

 

 -

 

 

(572)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(572)

Cash dividends declared ($0.20 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(458)

 

 

 -

 

 

(458)

Balance - June 30, 2018

 

$

68 

 

$

30,819 

 

$

(7,921)

 

$

(1,492)

 

$

(353)

 

$

57,509 

 

$

(101)

 

$

78,529 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2019

 

$

68 

 

$

30,916 

 

$

(8,805)

 

$

(1,449)

 

$

(200)

 

$

59,145 

 

$

129 

 

$

79,804 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,703 

 

 

 -

 

 

1,703 

Other comprehensive income, net of tax expense of $331

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,243 

 

 

1,243 

Cumulative effect of adoption of ASU 2016-02 Leases (Topic 842) (net of $2 tax benefit effect)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(10)

 

 

 -

 

 

(10)

ESOP shares earned (3,968 shares)

 

 

 -

 

 

16 

 

 

 -

 

 

42 

 

 

 -

 

 

 -

 

 

 -

 

 

58 

Stock based compensation

 

 

 -

 

 

22 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22 

Compensation plan shares granted (5,186 shares)

 

 

 -

 

 

 -

 

 

49 

 

 

 -

 

 

(49)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (760 shares)

 

 

 -

 

 

 -

 

 

(8)

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (11,625 shares)

 

 

 -

 

 

41 

 

 

 -

 

 

 -

 

 

118 

 

 

 -

 

 

 -

 

 

159 

Purchase of treasury stock, at cost (51,200 shares)

 

 

 -

 

 

 -

 

 

(783)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(783)

Cash dividends declared ($0.24 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(532)

 

 

 -

 

 

(532)

Balance - June 30, 2019

 

$

68 

 

$

30,995 

 

$

(9,547)

 

$

(1,407)

 

$

(123)

 

$

60,306 

 

$

1,372 

 

$

81,664 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



































4


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows



 

 

 

 

 

 



 

Six Months Ended June 30,



 

2019

 

2018



 

(Unaudited)



 

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

1,703 

 

$

1,942 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Net amortization of investment securities

 

 

27 

 

 

46 

Net amortization of deferred loan costs

 

 

296 

 

 

277 

Provision for loan losses

 

 

425 

 

 

190 

Recovery on previously impaired investment securities

 

 

(26)

 

 

(90)

Unrealized gain on equity securities

 

 

(35)

 

 

(14)

Unrealized loss on interest rate swap

 

 

94 

 

 

 -

Originations of loans held for sale

 

 

(166)

 

 

(434)

Proceeds from sales of loans held for sale

 

 

168 

 

 

440 

Gain on sale of loans held for sale

 

 

(2)

 

 

(6)

Depreciation and amortization

 

 

397 

 

 

384 

Increase in bank owned life insurance, net

 

 

(242)

 

 

(170)

ESOP shares committed to be released

 

 

58 

 

 

67 

Stock based compensation expense

 

 

181 

 

 

223 

Increase in accrued interest receivable

 

 

(215)

 

 

(27)

(Increase) Decrease in other assets

 

 

(202)

 

 

95 

Decrease in other liabilities

 

 

(421)

 

 

(698)

Net Cash Provided by Operating Activities

 

 

2,040 

 

 

2,225 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Activity in available for sale securities:

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

9,411 

 

 

4,299 

Purchases

 

 

 -

 

 

(10,072)

Purchases of Federal Home Loan Bank Stock

 

 

(285)

 

 

(20)

Redemptions of Federal Home Loan Bank Stock

 

 

 -

 

 

106 

Loan origination and principal collections, net

 

 

(48,523)

 

 

(17,805)

Additions to premises and equipment

 

 

(338)

 

 

(379)

Net Cash Used in Investing Activities

 

 

(39,735)

 

 

(23,871)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net increase in deposits

 

 

25,014 

 

 

27,158 

Net increase in advances from borrowers for taxes and insurance

 

 

22 

 

 

28 

Increase in short term borrowings

 

 

8,000 

 

 

 -

Proceeds from issuance of long-term debt

 

 

1,050 

 

 

1,500 

Repayment of long-term debt

 

 

(4,050)

 

 

(3,800)

Purchase of treasury stock

 

 

(783)

 

 

(572)

Cash dividends paid

 

 

(532)

 

 

(458)

Net Cash Provided by Financing Activities

 

 

28,721 

 

 

23,856 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

(8,974)

 

 

2,210 

CASH AND CASH EQUIVALENTS - BEGINNING

 

 

30,751 

 

 

40,913 

CASH AND CASH EQUIVALENTS - ENDING

 

$

21,777 

 

$

43,123 

SUPPLEMENTARY CASH FLOWS INFORMATION

 

 

 

 

 

 

Interest paid

 

$

2,384 

 

$

1,619 

Income taxes paid

 

$

305 

 

$

277 

Right of Use Asset Recognized

 

$

904 

 

$

 -

Right of Use Liability Recognized

 

$

916 

 

$

 -



 

 

 

 

 

 

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Foreclosed real estate acquired in settlement of loans

 

$

98 

 

$

82 



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

5


 



Lake Shore Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)



Note 1 – Basis of Presentation



The interim consolidated financial statements include the accounts of Lake Shore Bancorp, Inc. (the “Company”, “us”, “our”, or “we”) and Lake Shore Savings Bank (the “Bank”), its wholly owned subsidiary.  All intercompany accounts and transactions of the consolidated subsidiary have been eliminated in consolidation.



The interim consolidated financial statements included herein as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all information or footnotes necessary for a complete presentation of the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated statement of financial condition at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.  The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading.  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  The consolidated statements of income for the three and six months ended June 30, 2019 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2019.



To prepare these consolidated financial statements in conformity with GAAP, management of the Company made a number of estimates and assumptions relating to the reporting of assets and liabilities and the reporting of revenue and expenses.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, securities valuation estimates, evaluation of impairment of securities and income taxes.



The Company has evaluated events and transactions occurring subsequent to the statement of financial condition as of June 30, 2019 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.



Leases



The Company leases certain properties and equipment under operating and finance leases. For operating leases in effect upon adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” at January 1, 2019 and for any leases commencing thereafter, the Company recognized a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset(s) during the lease term, the “right-of-use (“ROU”) asset.” The lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate. The ROU asset is measured at the initial amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent, any unamortized initial direct costs, and any impairment of the ROU asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments that are not included in the lease liability, and any impairment of the ROU asset. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations. 

6


 

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and nonlease components as a single component and account for it as a lease.



The Company’s leases are not complex; therefore there were no significant assumptions or judgements made in applying the requirements of Topic 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and nonlease components, and the determination of the discount rates for the leases.



Note 2 – New Accounting Standards



Impact of Adoption of Recent Accounting Standards



The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) on January 1, 2019.  ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated statements of financial condition for leases with lease terms of more than 12 months.  Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income. ASU 2016-02 provides for a modified retrospective transition approach basis to record the impact of adopting ASU 2016-02 on financial statements. The modified retrospective transition approach allows the lessee to recognize and measure leases on the consolidated statements of financial condition at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to recognize and measure leases on the consolidated statements of financial condition at the beginning of the period of adoption presented in our financial statements, or January 1, 2019, and will not restate prior periods.  Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $916,000 and the recognition of ROU assets totaling $904,000 as of the date of adoption. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. The initial gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. The most significant effects of adoption relate to the recognition of new ROU assets and lease liabilities on our consolidated statements of financial condition for two operating leases related to branch office space; and providing additional new disclosures about the Company’s leasing activities. The Company does not expect a significant change in its leasing activities due to the adoption of ASU 2016-02. Upon adoption of ASU 2016-02, the Company recognized a cumulative effect adjustment to beginning retained earnings of $10,000. Refer to Note 5 for more information related to the adoption of ASU 2016-02. 



The Company adopted FASB ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)” (“ASU 2017-08”) on January 1, 2019. ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Under previous GAAP, entities generally amortized the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The adoption of ASU 2017-08 did not have a material impact on the Company’s consolidated financial statements or results of operations.



Accounting Standards to be Adopted



In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments” (ASU 2016-13).  ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model).  Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.  Further, ASU 2016-

7


 

13 made certain targeted amendments to the existing impairment standards for available for sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  ASU 2016-13 is effective for public companies that are U.S. Securities and Exchange Commission (“SEC”) filers for fiscal periods beginning after December 15, 2019, including interim reporting periods within those periods.  An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company has determined its data requirements and is developing its methodologies for calculating the expected credit losses under the new guidance which has allowed the Company to run parallel loss reserve calculations. Data integrity associated with these methodologies is being reviewed and enhancements to the current process are being considered.  We expect that the new guidance will result in an increase to the allowance for loan losses given that the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss under the current accounting standard.  The extent of this increase is still being evaluated.  We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial reporting procedures.



In July 2019, the FASB decided to add a project to its technical agenda to propose staggered effective dates for certain accounting standards, including ASU 2016-13.  The FASB has proposed an approach that ASU 2016-13 will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.   For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies).  The FASB is currently in the process of drafting a proposed ASU for this project to be voted upon by FASB members after a 30 day comment period.  The Company is currently a smaller reporting company, and if this proposal is approved and becomes effective, the Company’s expected adoption date for ASU 2016-13 would change from fiscal years beginning after December 15, 2019 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 



8


 

Note 3 – Investment Securities

Debt Securities



The amortized cost and fair value of securities are as follows:



 

 

 

 

 

 

 

 

 

 

 

 



 

June 30, 2019



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

2,011 

 

$

86 

 

$

 -

 

$

2,097 

Municipal bonds

 

 

38,323 

 

 

882 

 

 

 -

 

 

39,205 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

25 

 

 

 

 

 -

 

 

26 

Collateralized mortgage obligations-government sponsored entities

 

 

30,296 

 

 

457 

 

 

(172)

 

 

30,581 

Government National Mortgage Association

 

 

175 

 

 

12 

 

 

 -

 

 

187 

Federal National Mortgage Association

 

 

2,158 

 

 

72 

 

 

(1)

 

 

2,229 

Federal Home Loan Mortgage Corporation

 

 

3,569 

 

 

153 

 

 

 -

 

 

3,722 

Asset-backed securities-private label

 

 

 -

 

 

247 

 

 

 -

 

 

247 

Asset-backed securities-government sponsored entities

 

 

36 

 

 

 

 

 -

 

 

38 

Total Debt Securities

 

$

76,593 

 

$

1,912 

 

$

(173)

 

$

78,332 

Equity Securities

 

 

23 

 

 

35 

 

 

 -

 

 

58 

Total Securities Available for Sale

 

$

76,616 

 

$

1,947 

 

$

(173)

 

$

78,390 









9


 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

2,012 

 

$

 -

 

$

(51)

 

$

1,961 

Municipal bonds

 

 

44,546 

 

 

521 

 

 

(125)

 

 

44,942 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

27 

 

 

 -

 

 

 -

 

 

27 

Collateralized mortgage obligations-government sponsored entities

 

 

32,987 

 

 

152 

 

 

(686)

 

 

32,453 

Government National Mortgage Association

 

 

191 

 

 

 

 

 -

 

 

199 

Federal National Mortgage Association

 

 

2,367 

 

 

41 

 

 

(23)

 

 

2,385 

Federal Home Loan Mortgage Corporation

 

 

3,833 

 

 

64 

 

 

(9)

 

 

3,888 

Asset-backed securities-private label

 

 

 -

 

 

270 

 

 

 -

 

 

270 

Asset-backed securities-government sponsored entities

 

 

43 

 

 

 

 

 -

 

 

44 

Total Debt Securities

 

$

86,006 

 

$

1,057 

 

$

(894)

 

$

86,169 

Equity Securities

 

 

22 

 

 

 

 

 -

 

 

24 

Total Securities Available for Sale

 

$

86,028 

 

$

1,059 

 

$

(894)

 

$

86,193 



Debt Securities

All of our collateralized mortgage obligations are backed by one- to four-family residential mortgages.

At June 30, 2019, thirty-two municipal bonds with a cost of $10.6 million and fair value of $10.9 million were pledged under a collateral agreement with the Federal Reserve Bank (“FRB”) of New York for liquidity borrowing. At December 31, 2018 thirty-two municipal bonds with a cost of $11.0 million and fair value of $11.2 million were pledged with the FRB. In addition, at June 30, 2019 and December 31, 2018, twenty-two municipal bonds with a cost of $5.2 million and $5.6 million, respectively, and fair value of $5.4 million and $5.6 million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.                

10


 

The following table sets forth the Company’s investment in debt securities available for sale with gross unrealized losses of less than twelve months and gross unrealized losses of twelve months or more and associated fair values as of the dates indicated:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Less than 12 months

 

12 months or more

 

Total



 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross



 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized



 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses



 

(Dollars in thousands)

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

 -

 

$

 -

 

$

13,031 

 

$

(173)

 

$

13,031 

 

$

(173)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

 -

 

$

 -

 

$

1,961 

 

$

(51)

 

$

1,961 

 

$

(51)

Municipal bonds

 

 

1,531 

 

 

(5)

 

 

4,299 

 

 

(120)

 

 

5,830 

 

 

(125)

Mortgage-backed securities

 

 

736 

 

 

(5)

 

 

23,065 

 

 

(713)

 

 

23,801 

 

 

(718)



 

$

2,267 

 

$

(10)

 

$

29,325 

 

$

(884)

 

$

31,592 

 

$

(894)



The Company reviews all investment securities on an ongoing basis for the presence of other-than-temporary-impairment (“OTTI”) with formal reviews performed quarterly.    



At June 30, 2019, the Company had several securities in the “unrealized losses twelve months or more” category. Management has the intent and ability to hold these securities until maturity. Management believes the temporary impairments were due to declines in fair value resulting from changes in interest rates and/or increased credit liquidity spreads since the securities were purchased.

 

The unrealized losses on debt securities shown in the previous tables were recorded as a component of other comprehensive income (loss), net of tax expense (benefit) on the Company’s Consolidated Statements of Stockholders’ Equity.

The following table presents a summary of the credit-related OTTI charges recognized as components of income:



 

 

 

 

 

 



 

For The Six Months Ended June 30,



 

2019

 

2018



 

(Dollars in thousands)

Beginning balance

 

$

347 

 

$

435 

Additions:

 

 

 

 

 

 

Credit loss not previously recognized

 

 

 -

 

 

 -

Reductions:

 

 

 

 

 

 

Losses realized during the period on OTTI previously recognized

 

 

 -

 

 

 -

Receipt of cash flows on previously recorded OTTI

 

 

(26)

 

 

(48)

Ending balance

 

$

321 

 

$

387 



A deterioration in credit quality and/or other factors that may limit the liquidity of a security in our portfolio might adversely affect the fair values of the Company’s investment portfolio and may increase the potential that certain unrealized losses will be designated as “other-than-temporary” and that the Company may incur additional write-downs in future periods.



During the six months ended June 30, 2019 and 2018, the Company did not sell any available for sale debt securities.  



11


 

Equity Securities



At June 30, 2019 and December 31, 2018, available for sale equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock. During the three months ended June 30, 2019 and 2018, the Company recognized an unrealized loss of $1,000 and an unrealized gain of $6,000, respectively, on the equity securities, which was recorded in non-interest income in the consolidated statements of income. During the six months ended June 30, 2019 and 2018, the Company recognized an unrealized gain of $35,000 and $14,000, respectively. There were no sales of equity securities during the six months ended June 30, 2019.



Scheduled contractual maturities of available for sale securities are as follows:





 

 

 

 

 

 



 

Amortized

 

Fair



 

Cost

 

Value



 

(Dollars in thousands)

June 30, 2019:

 

 

 

 

 

 

Less than one year

 

$

360 

 

$

362 

After one year through five years

 

 

7,385 

 

 

7,509 

After five years through ten years

 

 

17,769 

 

 

18,053 

After ten years

 

 

14,820 

 

 

15,378 

Mortgage-backed securities

 

 

36,223 

 

 

36,745 

Asset-backed securities

 

 

36 

 

 

285 

Equity securities

 

 

23 

 

 

58 



 

$

76,616 

 

$

78,390 

               

Note 4 - Allowance for Loan Losses



Management segregates the loan portfolio into loan types and analyzes the risk level for each loan type when determining its allowance for loan losses.  The loan types are as follows:



Real Estate Loans:

·

One- to Four-Family – are loans secured by first lien collateral on residential real estate primarily held in the Western New York region.  These loans can be affected by economic conditions and the value of underlying properties.  Western New York’s housing market has consistently demonstrated stability in home prices despite economic conditions. Furthermore, the Company has conservative underwriting standards and its residential lending policies and procedures ensure that its one- to four-family residential mortgage loans generally conform to secondary market guidelines.  

·

Home Equity - are loans or lines of credit secured by first or second liens on owner-occupied residential real estate primarily held in the Western New York region.  These loans can also be affected by economic conditions and the values of underlying properties. Home equity loans may have increased risk of loss if the Company does not hold the first mortgage resulting in the Company being in a secondary position in the event of collateral liquidation.  The Company does not originate interest only home equity loans.  

·

Commercial Real Estate – are loans used to finance the purchase of real property, which generally consists of developed real estate that is held as first lien collateral for the loan.  These loans are secured by real estate properties that are primarily held in the Western New York region.  Commercial real estate lending involves additional risks compared with one- to four-family residential lending, because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, and repayment of such loans may be subject to adverse conditions in the real estate market or economic conditions to a greater extent than one- to four-family residential mortgage loans.  Also, commercial real estate loans typically involve relatively large loan balances concentrated with single borrowers or groups of related borrowers.

12


 

·

Construction – are loans to finance the construction of either one- to four-family owner occupied homes or commercial real estate.  At the end of the construction period, the loan automatically converts to either a one- to four-family or commercial mortgage, as applicable.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion compared to the actual cost of construction. The Company limits its risk during construction as disbursements are not made until the required work for each advance has been completed and an updated lien search is performed.  The completion of the construction progress is verified by a Company loan officer or through inspections performed by an independent appraisal firm.  Construction loans also expose us to the risk of construction delays which may impair the borrower’s ability to repay the loan.



Other Loans:

·

Commercial – includes business installment loans, lines of credit, and other commercial loans.  Most of our commercial loans have fixed interest rates, and are for terms generally not in excess of 5 years.  Whenever possible, we collateralize these loans with a lien on business assets and equipment and require the personal guarantees from principals of the borrower.  Commercial loans generally involve a higher degree of credit risk, as commercial loans can also involve relatively large loan balances to a single borrower or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation of the commercial business and the income stream of the borrower.  Such risks can be significantly affected by economic conditions.  Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment because the equipment or other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial loan depends primarily on the credit worthiness of the borrowers (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

·

Consumer – consist of loans secured by collateral such as an automobile or a deposit account, unsecured loans and lines of credit.  Consumer loans tend to have a higher credit risk due to the loans being either unsecured or secured by rapidly depreciable assets.  Furthermore, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.



The allowance for loan losses is a valuation account that reflects the Company’s evaluation of the losses inherent in its loan portfolio. In order to determine the adequacy of the allowance for loan losses, the Company estimates losses by loan type using historical loss factors, as well as other environmental factors, such as trends in loan volume and loan type, loan concentrations, changes in the experience, ability and depth of the Company’s lending management, and national and local economic conditions. The Company's determination as to the classification of loans and the amount of loss allowances are subject to review by bank regulators, which can require the establishment of additional loss allowances.



The Company also reviews all loans on which the collectability of principal may not be reasonably assured, by reviewing payment status, financial conditions and estimated value of loan collateral. These loans are assigned an internal loan grade, and the Company assigns an amount of loss allowances to these classified loans based on loan grade.



Although the allocations noted below are by loan type, the allowance for loan losses is general in nature and is available to offset losses from any loan in the Company’s portfolio. The unallocated component of the allowance for loan losses reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for existing specific and general losses in the portfolio.



13


 

The following tables summarize the activity in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of June 30, 2019 and December 31, 2018:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Real Estate Loans

 

Other Loans

 

 

 

 

 

 



 

One- to Four-Family(2)

 

Home Equity

 

Commercial

 

Construction - Commercial

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

(Dollars in thousands)

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – April 1, 2019

 

$

489 

 

$

122 

 

$

2,042 

 

$

330 

 

$

414 

 

$

28 

 

$

90 

 

$

3,515 

  Charge-offs

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

(7)

 

 

 -

 

 

(7)

  Recoveries

 

 

 -

 

 

 

 

 

 

 -

 

 

 

 

 

 

 

 -

 

 

  Provision (Credit)

 

 

(100)

 

 

21 

 

 

734 

 

 

49 

 

 

(281)

 

 

 

 

(79)

 

 

350 

Balance – June 30, 2019

 

$

389 

 

$

144 

 

$

2,777 

 

$

379 

 

$

133 

 

$

30 

 

$

11 

 

$

3,863 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – January 1, 2019

 

$

471 

 

$

91 

 

$

2,020 

 

$

250 

 

$

507 

 

$

25 

 

$

84 

 

$

3,448 

  Charge-offs

 

 

 -

 

 

(4)

 

 

 -

 

 

 -

 

 

 -

 

 

(21)

 

 

 -

 

 

(25)

  Recoveries

 

 

 

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

15 

  Provision (Credit)

 

 

(90)

 

 

56 

 

 

755 

 

 

129 

 

 

(374)

 

 

22 

 

 

(73)

 

 

425 

Balance – June 30, 2019

 

$

389 

 

$

144 

 

$

2,777 

 

$

379 

 

$

133 

 

$

30 

 

$

11 

 

$

3,863 

Ending balance: individually evaluated for impairment

 

$

 -

 

$

 -

 

$

40 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

40 

Ending balance: collectively evaluated for impairment

 

$

389 

 

$

144 

 

$

2,737 

 

$

379 

 

$

133 

 

$

30 

 

$

11 

 

$

3,823 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Loans Receivable (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

155,546 

 

$

42,985 

 

$

192,161 

 

$

28,071 

 

$

20,823 

 

$

1,066 

 

$

 -

 

$

440,652 

Ending balance: individually evaluated for impairment

 

$

174 

 

$

 -

 

$

294 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

468 

Ending balance: collectively evaluated for impairment

 

$

155,372 

 

$

42,985 

 

$

191,867 

 

$

28,071 

 

$

20,823 

 

$

1,066 

 

$

 -

 

$

440,184 



(1)

Gross Loans Receivable does not include allowance for loan losses of $(3,863) or deferred loan costs of $3,386.

(2)

Includes one- to four-family construction loans.



14


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Real Estate Loans

 

Other Loans

 

 

 

 

 

 



 

One- to Four-Family(1)

 

Home Equity

 

Commercial

 

Construction - Commercial

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(Dollars in thousands)

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – April 1, 2018

 

$

476 

 

$

128 

 

$

1,705 

 

$

350 

 

$

630 

 

$

30 

 

$

48 

 

$

3,367 

  Charge-offs

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(11)

 

 

 -

 

 

(11)

  Recoveries

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

  Provision (Credit)

 

 

(36)

 

 

(43)

 

 

182 

 

 

(21)

 

 

27 

 

 

10 

 

 

(4)

 

 

115 

Balance – June 30, 2018

 

$

440 

 

$

86 

 

$

1,887 

 

$

329 

 

$

658 

 

$

30 

 

$

44 

 

$

3,474 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – January 1, 2018

 

$

511 

 

$

122 

 

$

1,663 

 

$

347 

 

$

544 

 

$

35 

 

$

61 

 

$

3,283 

  Charge-offs

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(23)

 

 

 -

 

 

(23)

  Recoveries

 

 

18 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

24 

  Provision (Credit)

 

 

(89)

 

 

(37)

 

 

224 

 

 

(18)

 

 

113 

 

 

14 

 

 

(17)

 

 

190 

Balance – June 30, 2018

 

$

440 

 

$

86 

 

$

1,887 

 

$

329 

 

$

658 

 

$

30 

 

$

44 

 

$

3,474 



(1)

Includes one– to four-family construction loans.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Real Estate Loans

 

 

Other Loans

 

 

 

 

 

 



 

One- to Four-Family(2)

 

Home Equity

 

Commercial

 

Construction - Commercial

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

(Dollars in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – December 31, 2018

 

$

471 

 

$

91 

 

$

2,020 

 

$

250 

 

$

507 

 

$

25 

 

$

84 

 

$

3,448 

Ending balance: individually evaluated for impairment

 

$

 -

 

$

 -

 

$

30 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

30 

Ending balance: collectively evaluated for impairment

 

$

471 

 

$

91 

 

$

1,990 

 

$

250 

 

$

507 

 

$

25 

 

$

84 

 

$

3,418 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Loans Receivable (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

155,024 

 

$

41,830 

 

$

150,475 

 

$

22,252 

 

$

21,825 

 

$

1,156 

 

$

 -

 

$

392,562 

Ending balance: individually evaluated for impairment

 

$

178 

 

$

 -

 

$

382 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

560 

Ending balance: collectively evaluated for impairment

 

$

154,846 

 

$

41,830 

 

$

150,093 

 

$

22,252 

 

$

21,825 

 

$

1,156 

 

$

 -

 

$

392,002 



(1)

Gross Loans Receivable does not include allowance for loan losses of $(3,448) or deferred loan costs of $3,357.

(2)

Includes one- to four-family construction loans.

   



A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled payments when due. Impairment is measured on a loan-by-

15


 

loan basis for commercial real estate loans and commercial loans. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, home equity, or one- to four-family loans for impairment disclosure, unless they are subject to a troubled debt restructuring. 



The following is a summary of information pertaining to impaired loans at or for the periods indicated:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest



 

Recorded

 

Principal

 

Related

 

Recorded

 

Income



 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized



 

 

 

 

 

 

 

 

 

 

For the Six Months Ended



 

At June 30, 2019

 

June 30, 2019



 

(Dollars in thousands)

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family

 

$

174 

 

$

174 

 

$

 -

 

$

176 

 

$

Commercial real estate(1)

 

 

 -

 

 

 -

 

 

 -

 

 

76 

 

 

 -

Total impaired loans with no related allowance

 

 

174 

 

 

174 

 

 

 -

 

 

252 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

294 

 

 

294 

 

 

40 

 

 

302 

 

 

 -

Total impaired loans with an allowance

 

 

294 

 

 

294 

 

 

40 

 

 

302 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total of impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family

 

 

174 

 

 

174 

 

 

 -

 

 

176 

 

 

Commercial real estate

 

 

294 

 

 

294 

 

 

40 

 

 

378 

 

 

 -

Total impaired loans

 

$

468 

 

$

468 

 

$

40 

 

$

554 

 

$



(1)This loan was paid off during the six months ended June 30, 2019.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest



 

Recorded

 

Principal

 

Related

 

Recorded

 

Income



 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized



 

 

 

 

 

 

 

 

 

 

For the Year Ended



 

At December 31, 2018

 

December 31, 2018



 

(Dollars in thousands)

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family

 

$

178 

 

$

178 

 

$

 -

 

$

180 

 

$

12 

Home equity (1)

 

 

 -

 

 

 -

 

 

 -

 

 

17 

 

 

 -

Commercial real estate

 

 

134 

 

 

134 

 

 

 -

 

 

356 

 

 

 -

Commercial loans

 

 

 -

 

 

 -

 

 

 -

 

 

59 

 

 

Total impaired loans with no related allowance

 

 

312 

 

 

312 

 

 

 -

 

 

612 

 

 

13 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate (2)

 

 

248 

 

 

248 

 

 

30 

 

 

1,249 

 

 

Total impaired loans with an allowance

 

 

248 

 

 

248 

 

 

30 

 

 

1,249 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total of impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family

 

 

178 

 

 

178 

 

 

 -

 

 

180 

 

 

12 

Home equity

 

 

 -

 

 

 -

 

 

 -

 

 

17 

 

 

 -

Commercial real estate

 

 

382 

 

 

382 

 

 

30 

 

 

1,605 

 

 

Commercial loans

 

 

 -

 

 

 -

 

 

 -

 

 

59 

 

 

Total impaired loans

 

$

560 

 

$

560 

 

$

30 

 

$

1,861 

 

$

17 



(1)These loans were either paid off or foreclosed upon during the year ended December 31, 2018.

(2)Two commercial real estate loans with a combined recorded investment of $1.4 million and a related allowance of $60,000 were foreclosed upon during the year ended December 31, 2018. 

16


 



The following tables provide an analysis of past due loans and non-accruing loans as of the dates indicated:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total Past

 

 

Current

 

Total Loans

 

Loans on Non-



 

Past Due

 

Past Due

 

Past Due

 

Due

 

 

Due

 

Receivable

 

Accrual



 

(Dollars in thousands)

June 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family(1)

 

$

703 

 

$

378 

 

$

1,101 

 

$

2,182 

 

$

153,364 

 

$

155,546 

 

$

2,399 

Home equity

 

 

135 

 

 

87 

 

 

608 

 

 

830 

 

 

42,155 

 

 

42,985 

 

 

675 

Commercial

 

 

283 

 

 

 -

 

 

294 

 

 

577 

 

 

191,584 

 

 

192,161 

 

 

294 

Construction - Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

28,071 

 

 

28,071 

 

 

 -

Other Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

20,823 

 

 

20,823 

 

 

 -

Consumer

 

 

 

 

 -

 

 

 

 

10 

 

 

1,056 

 

 

1,066 

 

 

Total

 

$

1,123 

 

$

465 

 

$

2,011 

 

$

3,599 

 

$

437,053 

 

$

440,652 

 

$

3,376 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total Past

 

 

Current

 

Total Loans

 

Loans on Non-



 

Past Due

 

Past Due

 

Past Due

 

Due

 

 

Due

 

Receivable

 

Accrual



 

(Dollars in thousands)

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family(1)

 

$

851 

 

$

342 

 

$

1,361 

 

$

2,554 

 

$

152,470 

 

$

155,024 

 

$

2,310 

Home equity

 

 

211 

 

 

187 

 

 

333 

 

 

731 

 

 

41,099 

 

 

41,830 

 

 

337 

Commercial

 

 

76 

 

 

 -

 

 

306 

 

 

382 

 

 

150,093 

 

 

150,475 

 

 

382 

Construction - Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22,252 

 

 

22,252 

 

 

 -

Other Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

15 

 

 

15 

 

 

21,810 

 

 

21,825 

 

 

15 

Consumer

 

 

 

 

 -

 

 

 -

 

 

 

 

1,151 

 

 

1,156 

 

 

 -

Total

 

$

1,143 

 

$

529 

 

$

2,015 

 

$

3,687 

 

$

388,875 

 

$

392,562 

 

$

3,044 





(1)

Includes one- to four-family construction loans.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. A loan does not have to be 90 days delinquent in order to be classified as non-accrual. When interest accrual is discontinued, all unpaid accrued interest is reversed. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.  Interest income not recognized on non-accrual loans during the six month periods ended June 30, 2019 and 2018 was $73,000 and $143,000, respectively. 

The Company’s policies provide for the classification of loans as follows:

·

Pass/Performing;

·

Special Mention – does not currently expose the Company to a sufficient degree of risk but does possess credit deficiencies or potential weaknesses deserving the Company’s close attention;

·

Substandard – has one or more well-defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A substandard asset would be one inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral, if applicable;

·

Doubtful – has all the weaknesses inherent in substandard loans with the additional characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss; and

·

Loss – loan is considered uncollectible and continuance without the establishment of a specific valuation reserve is not warranted.





17


 

The Company’s Asset Classification Committee is responsible for monitoring risk ratings and making changes as deemed appropriate.  Each commercial loan is individually assigned a loan classification.  The Company’s consumer loans, including residential one- to four-family loans and home equity loans, are not classified as described above.  Instead, the Company uses the delinquency status as the basis for classifying these loans.  Generally, all consumer loans more than 90 days past due are classified and placed in non-accrual. Such loans that are well-secured and in the process of collection will remain in accrual status.



The following tables summarize the internal loan grades applied to the Company’s loan portfolio as of June 30, 2019 and December 31, 2018:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Pass/Performing

 

Special Mention

 

Substandard

 

Doubtful

 

Loss

 

Total



 

(Dollars in thousands)

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family(1)

 

$

153,016 

 

$

-

 

$

2,530 

 

$

-

 

$

-

 

$

155,546 

Home equity

 

 

41,967 

 

 

-

 

 

1,018 

 

 

-

 

 

-

 

 

42,985 

Commercial

 

 

188,588 

 

 

2,657 

 

 

916 

 

 

-

 

 

-

 

 

192,161 

Construction - Commercial

 

 

28,071 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

28,071 

Other Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

20,694 

 

 

129 

 

 

-

 

 

-

 

 

-

 

 

20,823 

Consumer

 

 

1,056 

 

 

-

 

 

10 

 

 

-

 

 

-

 

 

1,066 

            Total

 

$

433,392 

 

$

2,786 

 

$

4,474 

 

$

-

 

$

-

 

$

440,652 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Pass/Performing

 

Special Mention

 

Substandard

 

Doubtful

 

Loss

 

Total



 

(Dollars in thousands)

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family(1)

 

$

152,039 

 

$

-

 

$

2,985 

 

$

-

 

$

-

 

$

155,024 

Home equity

 

 

41,346 

 

 

-

 

 

484 

 

 

-

 

 

-

 

 

41,830 

Commercial

 

 

148,149 

 

 

376 

 

 

1,950 

 

 

-

 

 

-

 

 

150,475 

Construction - Commercial

 

 

22,252 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

22,252 

Other Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

20,722 

 

 

61 

 

 

1,042 

 

 

-

 

 

-

 

 

21,825 

Consumer

 

 

1,153 

 

 

-

 

 

 

 

-

 

 

-

 

 

1,156 

            Total

 

$

385,661 

 

$

437 

 

$

6,464 

 

$

-

 

$

-

 

$

392,562 

 

(1)

Includes one- to four-family construction loans.



Troubled debt restructurings (“TDRs”) occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. A concession is made when the terms of the loan modification are more favorable than the terms the borrower would have received in the current market under similar financial difficulties. These concessions may include, but are not limited to, modifications of the terms of the debt, the transfer of assets or the issuance of an equity interest by the borrower to satisfy all or part of the debt, or the addition of borrower(s). The Company identifies loans for potential TDRs primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports.  Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. Generally, we will not return a TDR to accrual status until the borrower has demonstrated the ability to make principal and interest payments under the restructured terms for at least six consecutive months. The Company’s TDRs are impaired loans, which may result in specific allocations and subsequent charge-offs if appropriate.



Some loan modifications classified as TDRs may not ultimately result in full collection of principal and interest, as modified, which may result in potential losses.  These potential losses have been factored into our overall estimate of the allowance for loan losses.

18


 



The following table summarizes the loans that were classified as TDRs as of the dates indicated:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Non-Accruing

 

Accruing

 

TDRs That Have Defaulted on Modified Terms Year to Date



Number of Loans

 

Recorded Investment

 

Number of Loans

 

Recorded Investment

 

Number of Loans

 

Recorded Investment

 

Number of Loans

 

Recorded Investment



(Dollars in thousands)

At June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family

 

 

$

174 

 

 

 

$

32 

 

 

 

$

142 

 

 

 -

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family

 

 

$

178 

 

 

 

$

34 

 

 

 

$

144 

 

 

 

$

34 



No additional loan commitments were outstanding to these borrowers at June 30, 2019 and December 31, 2018.

There were no loans restructured and classified as TDRs during the three and six month periods ended June 30, 2019 and 2018.



Foreclosed real estate consists of property acquired in settlement of loans which is carried at its fair value less estimated selling costs. Write-downs from cost to fair value less estimated selling costs are recorded at the date of acquisition or repossession and are charged to the allowance for loan losses. Foreclosed real estate was $752,000 and $678,000 at June 30, 2019 and December 31, 2018, respectively, and was included as a component of other assets on the consolidated statements of financial condition. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $1.0 million and $1.1 million at June 30, 2019 and December 31, 2018, respectively.

   

Note 5 – Leases



Operating leases with terms longer than 12 months in which we are the lessee are recorded as ROU assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated statements of financial condition under ASU 2016-02.   Finance leases in which we are the lessee are recorded in premises and equipment on the consolidated statements of financial condition.  Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income.

 

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income.

 

The Company leases certain branch offices under operating or finance leases.   Certain lease arrangements contain extension options which are typically for 5 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of June 30, 2019, operating lease ROU assets and liabilities were $840,000 and $859,000, respectively. 

19


 

Operating lease costs that were recorded in occupancy and equipment expense on the consolidated statements of income for the three months ended June 30, 2019 and 2018 were $38,000 and $35,000, respectively.  Operating lease costs for the six months ended June 30, 2019 and 2018, were $76,000 and $69,000, respectively.

There were no sale and leaseback transactions, leveraged leases, lease transactions with related parties or leases that had not yet commenced during the six months ended June 30, 2019.



The table below summarizes information related to our lease liabilities at or for the six months ended June 30, 2019 and 2018:





 

 

 

 

 

 

 

 



 

For the Six Months Ended June 30,

(in thousands, except for percent and period data)

 

2019

 

2018



 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

69 

 

 

$

69 

 

Operating cash flows from finance leases

 

 

63 

 

 

 

59 

 



 

 

 

 

 

 

 

 

Weighted-average remaining lease term, operating leases, in years

 

 

6.1 

 

 

 

1.4 

 

Weighted-average discount rate – operating leases

 

 

2.61 

%

 

 

N/A

 



The Company also has one long-term finance lease agreement for a branch location that was not impacted by the adoption of ASU 2016-02. The outstanding balance of the finance lease (included in other liabilities) at June 30, 2019 and December 31, 2018 was $771,000 and $797,000, respectively, with a weighted-average discount rate of 9.22%. The remaining term of this lease is 9.0 years. The asset related to this capital lease is included in premises and equipment and consists of the cost of $1.1 million less accumulated depreciation of approximately $569,000 and $548,000 at June 30, 2019 and December 31, 2018, respectively.



The table below summarizes the maturity of remaining lease liabilities as of June 30, 2019:







 

 

 

 

 

 



 

Operating

 

Finance



 

Leases

 

Lease



 

      (Dollars in thousands)

2019

 

$

68 

 

$

63 

2020

 

 

145 

 

 

126 

2021

 

 

157 

 

 

126 

2022

 

 

157 

 

 

126 

2023

 

 

157 

 

 

131 

2024 and thereafter

 

 

247 

 

 

612 

Total Lease Payments

 

$

931 

 

$

1,184 

Less: Amounts representing interest

 

 

(72)

 

 

(413)

Present value of lease liabilities

 

$

859 

 

$

771 









Note 6 – Earnings per Share

 

Earnings per share was calculated for the three and six months ended June 30, 2019 and 2018, respectively. Basic earnings per share is based upon the weighted average number of common shares outstanding, exclusive of unearned shares held by the Employee Stock Ownership Plan of Lake Shore Bancorp, Inc. (the “ESOP”), unearned shares held by the Lake Shore Bancorp, Inc. 2006 Recognition and Retention Plan (“RRP”), and unearned shares held by the Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan (“EIP”). Diluted earnings per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. Stock options are regarded as potential

20


 

common stock and are considered in the diluted earnings per share calculations to the extent they would be dilutive and computed using the treasury stock method.

The calculated basic and diluted earnings per share are as follows:



 

 

 

 

 

 



 

Three Months Ended June 30,



 

2019

 

2018

Numerator – net income

 

$

805,000 

 

$

1,006,000 

Denominator:

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

6,013,599 

 

 

6,084,737 

Increase in weighted average shares outstanding due to:

 

 

 

 

 

 

Stock options

 

 

8,550 

 

 

14,838 

Diluted weighted average shares outstanding (1)

 

 

6,022,149 

 

 

6,099,575 



 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.13 

 

$

0.17 

Diluted

 

$

0.13 

 

$

0.16 



 

 

 

 

 

 



 

Six Months Ended June 30,



 

2019

 

2018

Numerator – net income

 

$

1,703,000 

 

$

1,942,000 

Denominator:

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

6,022,869 

 

 

6,092,041 

Increase in weighted average shares outstanding due to:

 

 

 

 

 

 

Stock options

 

 

8,618 

 

 

13,078 

Diluted weighted average shares outstanding (1)

 

 

6,031,487 

 

 

6,105,119 



 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.28 

 

$

0.32 

Diluted

 

$

0.28 

 

$

0.32 



(1)

Stock options to purchase 64,547 shares under the Company’s 2006 Stock Option Plan and 20,000 shares under the EIP at $14.38 for each plan were outstanding during the three and six month periods ended June 30, 2019, but were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.  







Note 7 – Commitments to Extend Credit



The Company has commitments to extend credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments.  There were no loss reserves associated with these commitments at June 30, 2019 and December 31, 2018. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

21


 

The following commitments to extend credit were outstanding as of the dates specified:



 

 

 

 

 

 



 

Contract Amount



 

June 30,

 

December 31,



 

2019

 

2018



 

(Dollars in thousands)



 

 

 

 

 

 

Commitments to grant loans

 

$

39,489 

 

$

41,901 

Unfunded commitments under lines of credit

 

$

59,201 

 

$

52,371 



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.



Note 8 – Stock-based Compensation

As of June 30, 2019, the Company had four stock-based compensation plans, which are described below. The compensation cost that has been recorded under salary and benefits expense in the non-interest expense section of the consolidated statements of income for these plans was $119,000 and $152,000 for the three months ended June 30, 2019 and 2018, respectively. The compensation cost that has been recorded for the six months ended June 30, 2019 and 2018 was $239,000 and $290,000, respectively.               

2006 Stock Option Plan

The Company’s 2006 Stock Option Plan (the “Stock Option Plan”), which was approved by the Company’s stockholders, permitted the grant of options to its employees and non-employee directors for up to 297,562 shares of common stock. The Stock Option Plan expired on October 24, 2016, and grants of options can no longer be awarded.

Both incentive stock options and non-qualified stock options have been granted under the Stock Option Plan. The exercise price of each stock option equals the market price of the Company’s common stock on the date of grant and an option’s maximum term is ten years. The stock options generally vest over a five year period.



A summary of the status of the Stock Option Plan during the six months ended June 30, 2019 and 2018 is presented below:

:



 

 

 

 

 

 

 

 

 

 



June 30, 2019

June 30, 2018



Options

 

 

Weighted Average Exercise Price

Remaining Contractual Life

Options

 

 

Weighted Average Exercise Price

Remaining Contractual Life

Outstanding at beginning of year

82,321 

 

$

12.98 

 

82,321 

 

$

12.98 

 

Granted

 -

 

 

 -

 

 -

 

 

 -

 

Exercised

 -

 

 

 -

 

 -

 

 

 -

 

Outstanding at end of period

82,321 

 

$

12.98 

5.9 years

82,321 

 

$

12.98 

6.9 years



 

 

 

 

 

 

 

 

 

 

Options exercisable at end of period

43,591 

 

$

11.73 

5.9 years

30,681 

 

$

10.61 

6.9 years



 

 

 

 

 

 

 

 

 

 

Fair value of options granted

 

 

$

 -

 

 

 

$

 -

 



At June 30, 2019, stock options outstanding had an intrinsic value of $162,000 and there were no remaining options available for grant under the Stock Option Plan. There were no stock options exercised during the three and six months ended June 30, 2019 and 2018. Compensation expense related to the Stock Option Plan for the three month period ended June 30, 2019 and 2018 was $8,000. Compensation expense related to the Stock

22


 

Option Plan for the six month period ended June 30, 2019 and 2018 was $17,000. At June 30, 2019, $79,000 of unrecognized compensation cost related to the Stock Option Plan is expected to be recognized over a period of 28 months.            



2006 Recognition and Retention Plan

The Company’s 2006 Recognition and Retention Plan (“RRP”), which was approved by the Company’s stockholders, permitted the grant of restricted stock awards (“Awards”) to employees and non-employee directors for up to 119,025 shares of common stock. The RRP expired on October 24, 2016, and as of October 24, 2016, all shares permitted under the plan have been granted.

As of June 30, 2019, there were 108,837 shares vested or distributed to eligible participants under the RRP. Compensation expense amounted to $22,000 for the three months ended June 30, 2019 and 2018. Compensation expense amounted to $44,000 for the six months ended June 30, 2019 and 2018. At June 30, 2019, $64,000 of unrecognized compensation cost related to the RRP is expected to be recognized over a period of 28 months.

A summary of the status of unvested shares under the RRP for the six months ended June 30, 2019 and 2018 is as follows:



 

 

 

 

 

 

 

 

 

 



 

2019

 

 

Weighted Average Grant Price (per Share)

 

2018

 

 

Weighted Average Grant Price (per Share)

Unvested shares outstanding at beginning of year

 

10,188 

 

$

13.27 

 

17,119 

 

$

13.06 

Granted

 

 -

 

 

 -

 

 -

 

 

 -

Vested

 

 -

 

 

 -

 

 -

 

 

 -

Unvested shares outstanding at end of period

 

10,188 

 

$

13.27 

 

17,119 

 

$

13.06 



2012 Equity Incentive Plan



The Company’s 2012 Equity Incentive Plan (the “EIP”), which was approved by the Company’s stockholders on May 23, 2012, authorizes the issuance of up to 180,000 shares of common stock pursuant to grants of restricted stock awards and up to 20,000 shares of common stock pursuant to grants of incentive stock options and non-qualified stock options, subject to permitted adjustments for certain corporate transactions. Employees and directors of Lake Shore Bancorp or its subsidiaries are eligible to receive awards under the EIP, except that non-employees may not be granted incentive stock options.



The Board of Directors granted restricted stock awards under the EIP during the six months ended June 30, 2019 as follows:





 

 

 

 

 

 

 

 

 

Grant Date

 

Number of Restricted Stock Awards

 

Vesting

 

 

Fair Value per Share of Award on Grant Date

 

Awardees



 

 

 

 

 

 

 

 

 

February 6, 2019

 

5,186 

 

100% on December 13, 2019

 

$

15.89 

 

Non-employee directors



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



23


 

A summary of the status of unvested restricted stock awards under the EIP for the six months ended June 30, 2019 and 2018 is as follows:



 

 

 

 

 

 

 

 

 

 



 

2019

 

 

Weighted Average Grant Price (per Share)

 

2018

 

 

Weighted Average Grant Price (per Share)

Unvested shares outstanding at beginning of year

 

25,321 

 

$

15.28 

 

42,915 

 

$

14.40 

Granted

 

5,186 

 

 

15.89 

 

5,329 

 

 

17.00 

Vested

 

 -

 

 

 -

 

 -

 

 

 -

Forfeited

 

760 

 

 

15.90 

 

 -

 

 

 -

Unvested shares outstanding at end of period

 

29,747 

 

$

15.37 

 

48,244 

 

$

14.69 



As of June 30, 2019, there were 53,925 shares of restricted stock that vested or was distributed to eligible participants under the EIP. Compensation expense related to unvested restricted stock awards under the EIP amounted to $59,000 and $85,000 for the three months ended June 30, 2019 and 2018, respectively. Compensation expense related to unvested EIP restricted stock awards during the six months ended June 30, 2019 and 2018 was $115,000 and $157,000, respectively. At June 30, 2019, $101,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 6 months.



A summary of the status of stock options under the EIP for the six months ended June 30, 2019 and 2018 is presented below:



 

 

 

 

 

 

 

 

 

 



June 30, 2019

June 30, 2018



Options

 

 

Exercise Price

Remaining Contractual Life

Options

 

 

Exercise Price

Remaining Contractual Life

Outstanding at beginning of year

20,000 

 

$

14.38 

 

20,000 

 

$

14.38 

 

Granted

 -

 

 

 -

 

 -

 

 

 -

 

Exercised

 -

 

 

 -

 

 -

 

 

 -

 

Forfeited

 -

 

 

 -

 

 -

 

 

 -

 

Outstanding at end of period

20,000 

 

$

14.38 

7.3 years

20,000 

 

$

14.38 

8.3 years



 

 

 

 

 

 

 

 

 

 

Options exercisable at end of period

7,997 

 

$

14.38 

7.3 years

3,998 

 

$

14.38 

8.3 years



 

 

 

 

 

 

 

 

 

 

Fair value of options granted

 

 

 

 -

 

 

 

 

 -

 



At June 30, 2019, stock options outstanding had an intrinsic value of $11,000 and there were no remaining options available for grant under the EIP. Compensation expense related to stock options outstanding under the EIP amounted to $3,000 for the three months ended June 30, 2019 and 2018, and amounted to $5,000 for the six months ended June 30, 2019 and 2018. At June 30, 2019, $24,000 of unrecognized compensation cost related to unvested stock options is expected to be recognized over a period of 28 months.



Employee Stock Ownership Plan (“ESOP”)

The Company established the ESOP for the benefit of eligible employees of the Company and Bank. All Company and Bank employees meeting certain age and service requirements are eligible to participate in the ESOP. Participants’ benefits become fully vested after five years of service once the employee is eligible to participate in the ESOP. The Company utilized $2.6 million of the proceeds of its 2006 stock offering to extend a loan to the ESOP and the ESOP used such proceeds to purchase 238,050 shares of stock on the open market at an average price of $10.70 per share, plus commission expenses. As a result of the purchase of shares by the ESOP, total stockholders’ equity of the Company was reduced by $2.6 million. As of June 30, 2019, the balance of the loan to the ESOP was $1.4 million and the fair value of unallocated shares was $2.0 million. As of June 30, 2019, there were 72,891 allocated shares and 134,895 unallocated shares compared to 70,031 allocated shares and 142,830 unallocated shares at June 30, 2018. The ESOP compensation expense was $27,000 for the

24


 

three months ended June 30, 2019 and $34,000 for the three months ended June 30, 2018 based on 1,984 shares earned in each of those quarters. The ESOP compensation expense was $58,000 for the six months ended June 30, 2019 and $67,000 for the six months ended June 30, 2018 based on 3,968 shares earned in each of those periods.



Note 9 - Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of June 30, 2019 and December 31, 2018 and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  The estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported here.



The measurement of fair value under FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities measurements (Level 1) and the lowest priority to unobservable input measurements (Level 3).  The three levels of the fair value hierarchy under ASC Topic 820 are as follows:



Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.



Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.



Level 3:  Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.



An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.



The Company’s consolidated statement of financial condition contains investment securities available for sale and derivative instruments that are recorded at fair value on a recurring basis.  For financial instruments 

25


 

measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2019 and December 31, 2018 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements at June 30, 2019



 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Other Unobservable Inputs



 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

(Dollars in thousands)

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

2,097 

 

$

2,097 

 

$

 -

 

$

 -

Municipal bonds

 

 

39,205 

 

 

 -

 

 

39,205 

 

 

 -

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

26 

 

 

 -

 

 

26 

 

 

 -

Collateralized mortgage obligations-government sponsored entities

 

 

30,581 

 

 

 -

 

 

30,581 

 

 

 -

Government National Mortgage Association

 

 

187 

 

 

 -

 

 

187 

 

 

 -

Federal National Mortgage Association

 

 

2,229 

 

 

 -

 

 

2,229 

 

 

 -

Federal Home Loan Mortgage Corporation

 

 

3,722 

 

 

 -

 

 

3,722 

 

 

 -

Asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Private label

 

 

247 

 

 

 -

 

 

247 

 

 

 -

  Government sponsored entities

 

 

38 

 

 

 -

 

 

38 

 

 

 -

Total Debt Securities

 

$

78,332 

 

$

2,097 

 

$

76,235 

 

$

 -

Equity Securities

 

 

58 

 

 

 -

 

 

58 

 

 

 -

Total Securities Available for Sale

 

$

78,390 

 

$

2,097 

 

$

76,293 

 

$

 -

Interest Rate Swap(1)

 

$

(141)

 

$

 -

 

$

(141)

 

$

 -



(1)

Included in Other Assets and Other Liabilities on the consolidated statements of financial condition.



26


 



 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements at December 31, 2018



 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Other Unobservable Inputs



 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

(Dollars in thousands)

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

1,961 

 

$

1,961 

 

$

 -

 

$

 -

Municipal bonds

 

 

44,942 

 

 

 -

 

 

44,942 

 

 

 -

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

27 

 

 

 -

 

 

27 

 

 

 -

Collateralized mortgage obligations-government sponsored entities

 

 

32,453 

 

 

 -

 

 

32,453 

 

 

 -

Government National Mortgage Association

 

 

199 

 

 

 -

 

 

199 

 

 

 -

Federal National Mortgage Association

 

 

2,385 

 

 

 -

 

 

2,385 

 

 

 -

Federal Home Loan Mortgage Corporation

 

 

3,888 

 

 

 -

 

 

3,888 

 

 

 -

Asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Private label

 

 

270 

 

 

 -

 

 

270 

 

 

 -

Government sponsored entities

 

 

44 

 

 

 -

 

 

44 

 

 

 -

Total Debt Securities

 

$

86,169 

 

$

1,961 

 

$

84,208 

 

$

 -

Equity Securities

 

 

24 

 

 

 -

 

 

24 

 

 

 -

Total Securities Available for Sale

 

$

86,193 

 

$

1,961 

 

$

84,232 

 

$

 -

Interest Rate Swap(1)

 

$

(47)

 

$

 -

 

$

(47)

 

$

 -



(1)

Included in Other Assets and Other Liabilities on the consolidated statements of financial condition



Any transfers between levels would be recognized as of the actual date of event or change in circumstances that caused the transfer.  There were no reclassifications between the Level 1 and Level 2 categories for the six months ended June 30, 2019 and for the year ended December 31, 2018.



During the six months ended June 30, 2018, asset-backed securities – private label were transferred from the Level 3 category to the Level 2 category. These securities were transferred to Level 2 because the Company changed its method of valuing these securities and that method now uses Level 2 inputs. These securities are now valued using Level 2 inputs because the price volatility associated with these securities has been reduced and management considers the quoted market price for these securities to be reasonable. 



Level 2 inputs for assets or liabilities measured at fair value on a recurring basis might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment projections, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. The following is a description of valuation methodologies used for financial assets recorded at fair value on a recurring basis:





27


 

·

Investment securities available for sale – the fair values are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, live trading levels, trade execution date, market consensus prepayment projections, credit information and the security’ terms and conditions, among other things.  Level 2 securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, who use third party data service providers.    



·

Interest Rate Swap – the fair value is based on a discounted cash flow model.  The model’s key assumptions include the contractual term of the derivative contract, including the period to maturity, and the use of observable market based inputs, such as interest rates, yield curves, nonperformance risk and implied volatility.



The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3), specifically, asset-backed securities - private label, for the six months ended June 30, 2018:



 

 

 



 

June 30, 2018



 

(Dollars in thousands)

Beginning Balance

 

$

344 

Total gains - realized/unrealized:

 

 

 

Included in earnings

 

 

 -

Included in other comprehensive loss

 

 

 -

Total losses - realized/unrealized:

 

 

 -

Included in earnings

 

 

 -

Included in other comprehensive loss

 

 

 -

Sales

 

 

 -

Principal paydowns

 

 

 -

Transfers to (out of) Level 3

 

 

(344)

Ending Balance

 

$

 -



Both observable and unobservable inputs may be used to determine the fair value of assets and liabilities measured on a recurring basis that the Company has classified within the Level 3 category. As a result, any unrealized gains and losses for assets within the Level 3 category may include changes in fair value attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs. 



In addition to disclosure of the fair value of assets on a recurring basis, ASC Topic 820 requires disclosures for assets and liabilities measured at fair value on a non-recurring basis, such as impaired assets and foreclosed real estate. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Non-recurring adjustments also include certain impairment amounts for collateral-dependent loans calculated as required by ASC Topic 310, “Receivables – Loan Impairment,” when establishing the allowance for loan losses. An impaired loan is carried at fair value based on either a recent appraisal less estimated selling costs of underlying collateral or discounted cash flows based on current market conditions.



28


 

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2019 and December 31, 2018 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements



 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Other Unobservable Inputs



 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

(Dollars in thousands)

Measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

286 

 

$

 -

 

$

 -

 

$

286 

Foreclosed real estate

 

 

221 

 

 

 -

 

 

 -

 

 

221 



 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

252 

 

$

 -

 

$

 -

 

$

252 

Foreclosed real estate

 

 

184 

 

 

 -

 

 

 -

 

 

184 



The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:





 

 

 

 

 

 

 

 



Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

At June 30, 2019

 

 

 

 

 

 

 

 

Impaired loans

$

286 

 

Market valuation of underlying collateral (1)

 

Direct Disposal Costs (2)

 

7.00-20.83%

Foreclosed real estate

 

221 

 

Market valuation of property (1)

 

Direct Disposal Costs (2)

 

7.00-10.00%

At December 31, 2018

 

 

 

 

 

 

 

 

Impaired loans

$

252 

 

Market valuation of underlying collateral (1)

 

Direct Disposal Costs (2)

 

7.00-20.33%

Foreclosed real estate

 

184 

 

Market valuation of property (1)

 

Direct Disposal Costs (2)

 

7.00-10.00%



(1)

Fair value is generally determined through independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.

(2)

The fair value basis of impaired loans and foreclosed real estate may be adjusted to reflect management estimates of disposal costs including, but not necessarily limited to, real estate brokerage commissions, legal fees, and delinquent property taxes.



At June 30, 2019, impaired loans valued using Level 3 inputs had a carrying amount of $326,000 and valuation allowances of $40,000. By comparison at December 31, 2018, impaired loans valued using Level 3 inputs had a carrying amount of $282,000 and valuation allowances of $30,000.  



Once a loan is determined to be impaired, the fair value of the loan continues to be evaluated based upon the market value of the underlying collateral securing the loan or by using a discounted future cash flow method if the loan is not collateral dependent. At June 30, 2019, impaired loans with a carrying amount that had been written down utilizing Level 3 inputs during the six months ended June 30, 2019 comprised of one loan with a fair value of $81,000 and resulted in an additional provision for loan losses of $10,000. At December 31, 2018, impaired loans whose carrying amount was written down utilizing Level 3 inputs during the year ended

29


 

December 31, 2018 comprised of one loan with a fair value of $226,000 and resulted in an additional provision for loan losses of $30,000.   



At June 30, 2019, foreclosed real estate valued using Level 3 inputs had a carrying amount of $321,000 and valuation allowances of $100,000. At December 31, 2018, foreclosed real estate valued using level 3 inputs had a carrying amount of $260,000 and valuation allowances of $76,000.    



Once a loan is foreclosed, the fair value of the real estate owned continues to be evaluated based upon the market value of the repossessed real estate originally securing the loan. At June 30, 2019, foreclosed real estate with a carrying value that had been written down utilizing Level 3 inputs during the six months ended June 30, 2019 comprised of one property with a fair value of $40,000 and resulted in subsequent write-downs through non-interest expense of $24,000.  At December 31, 2018, foreclosed real estate with a carrying value that had been written down utilizing Level 3 inputs during the year ended December 31, 2018 comprised of two properties with a fair value of $203,000 and resulted in an additional provision for loan losses of $20,000 and subsequent write-downs recorded in non-interest expense of $40,000.



The carrying amount and estimated fair value of the Company’s financial instruments, whether carried at cost or fair value, are as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements at June 30, 2019



 

Carrying

 

Estimated

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Other Unobservable Inputs



 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

(Dollars in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,777 

 

$

21,777 

 

$

21,777 

 

$

 -

 

$

 -

Securities available for sale

 

 

78,390 

 

 

78,390 

 

 

2,097 

 

 

76,293 

 

 

 -

Federal Home Loan Bank stock

 

 

1,830 

 

 

1,830 

 

 

 -

 

 

1,830 

 

 

 -

Loans receivable, net

 

 

440,175 

 

 

431,565 

 

 

 -

 

 

 -

 

 

431,565 

Accrued interest receivable

 

 

2,128 

 

 

2,128 

 

 

 -

 

 

2,128 

 

 

 -

Interest Rate Swap

 

 

(141)

 

 

(141)

 

 

 -

 

 

(141)

 

 

 -

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

457,472 

 

 

461,069 

 

 

 -

 

 

461,069 

 

 

 -

Short-term borrowings

 

 

8,000 

 

 

8,000 

 

 

 -

 

 

8,000 

 

 

 -

Long-term debt

 

 

21,650 

 

 

21,707 

 

 

 -

 

 

21,707 

 

 

 -

Accrued interest payable

 

 

72 

 

 

72 

 

 

 -

 

 

72 

 

 

 -

Off-balance-sheet financial instruments

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -





30


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements at December 31, 2018



 

Carrying

 

Estimated

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Other Unobservable Inputs



 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

(Dollars in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,751 

 

$

30,751 

 

$

30,751 

 

$

 -

 

$

 -

Securities available for sale

 

 

86,193 

 

 

86,193 

 

 

1,961 

 

 

84,232 

 

 

 -

Federal Home Loan Bank stock

 

 

1,545 

 

 

1,545 

 

 

 -

 

 

1,545 

 

 

 -

Loans receivable, net

 

 

392,471 

 

 

376,774 

 

 

 -

 

 

 -

 

 

376,774 

Accrued interest receivable

 

 

1,913 

 

 

1,913 

 

 

 -

 

 

1,913 

 

 

 -

Interest Rate Swap

 

 

(47)

 

 

(47)

 

 

 -

 

 

(47)

 

 

 -

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

432,458 

 

 

435,547 

 

 

 -

 

 

435,547 

 

 

 -

Long-term debt

 

 

24,650 

 

 

24,292 

 

 

 -

 

 

24,292 

 

 

 -

Accrued interest payable

 

 

63 

 

 

63 

 

 

 -

 

 

63 

 

 

 -

Off-balance-sheet financial instruments

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -





Note 10 – Treasury Stock

 

During the three months ended June 30, 2019, the Company repurchased 43,900 shares of common stock at an average cost of $15.32 per share. During the six months ended June 30, 2019, the Company repurchased 51,200 shares of common stock at an average cost of $15.30 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase program. As of June 30, 2019, there were 16,990 shares remaining to be repurchased under the existing stock repurchase program. During the six months ended June 30, 2019, the Company transferred 5,186 shares of common stock out of treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.39 per share to fund awards that had been granted under the plan. During the six months ended June 30, 2019, there were 760 shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.88 per share due to stock forfeitures.



During the three months ended June 30, 2018, the Company repurchased 14,300 shares of common stock at an average cost of $16.94 per share. During the six months ended June 30, 2018, the Company repurchased 34,300 shares of common stock at an average cost of $16.66 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase program. As of June 30, 2018, there were 120,190 shares remaining to be repurchased under the existing stock repurchase program. During the six months ended June 30, 2018, the Company transferred 5,329 shares of common stock out of the treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.39 per share to fund awards that had been granted under the plan. During the six months ended June 30, 2018 there were 9,368 shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per share due to stock forfeitures.



31


 

Note 11 – Other Comprehensive Income (Loss)



In addition to presenting the Consolidated Statements of Comprehensive Income herein, the following table shows the tax effects allocated to the Company’s single component of other comprehensive income (loss) for the periods presented:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended June 30, 2019

 

For The Three Months Ended June 30, 2018



 

Pre-Tax Amount

 

Tax (Expense) Benefit

 

Net of Tax Amount

 

Pre-Tax Amount

 

Tax Benefit

 

Net of Tax Amount



 

(Unaudited)



 

(Dollars in thousands)

Net unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net unrealized gains (losses) arising during the period

 

$

792 

 

$

(166)

 

$

626 

 

$

(376)

 

$

79 

 

$

(297)

Less: reclassification adjustment related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recovery on  previously impaired investment securities included in net income

 

 

(13)

 

 

 

 

(11)

 

 

(68)

 

 

14 

 

 

(54)

Total Other Comprehensive Income (Loss)

 

$

779 

 

$

(164)

 

$

615 

 

$

(444)

 

$

93 

 

$

(351)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Six Months Ended June 30, 2019

 

For The Six Months Ended June 30, 2018



 

Pre-Tax Amount

 

Tax Expense

 

Net of Tax Amount

 

Pre-Tax Amount

 

Tax Benefit

 

 

Net of Tax Amount



 

(Dollars in thousands)

Net unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net unrealized gains (losses) arising during the period

 

$

1,600 

 

$

(336)

 

$

1,264 

 

$

(1,236)

 

$

259 

 

$

(977)

Less: reclassification adjustment related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recovery on previously impaired investment securities included in net income

 

 

(26)

 

 

 

 

(21)

 

 

(90)

 

 

19 

 

 

(71)

Total Other Comprehensive Income (Loss)

 

$

1,574 

 

$

(331)

 

$

1,243 

 

$

(1,326)

 

$

278 

 

$

(1,048)





 

 The following table presents the amounts reclassified out of the single component of the Company’s accumulated other comprehensive income for the indicated periods:







 

 

 

 

 

 

 



Amounts Reclassified from Accumulated Other

 

 

Details about Accumulated Other

Comprehensive Income

 

Affected Line Item

Comprehensive Income

for the three months ended June 30,

 

on the Consolidated

Components

2019

 

2018

 

Statements of Income



(Dollars in thousands)

 

 

Net unrealized gains and losses on securities available for sale:

 

 

 

 

 

 

 

Recovery on  previously impaired investment securities

$

(13)

 

$

(68)

 

Recovery on previously impaired investment securities



 

(13)

 

 

(68)

 

 

Provision for income tax expense

 

 

 

14 

 

Income Tax Expense

Total reclassification for the period

$

(11)

 

$

(54)

 

Net Income







 

 

 

 

 

 

 

32


 



Amounts Reclassified from Accumulated Other

 

 

Details about Accumulated Other

Comprehensive Income

 

Affected Line Item

Comprehensive Income

for the six months ended June 30,

 

on the Consolidated

Components

2019

 

2018

 

Statements of Income



(Dollars in thousands)

 

 

Net unrealized gains and losses on securities available for sale:

 

 

 

 

 

 

 

Recovery on  previously impaired investment securities

$

(26)

 

$

(90)

 

Recovery on previously impaired investment securities



 

(26)

 

 

(90)

 

 

Provision for income tax expense

 

 

 

19 

 

Income Tax Expense

Total reclassification for the period

$

(21)

 

$

(71)

 

Net Income





















Note 12 – Revenue Recognition



The Company’s non-interest revenue streams primarily result from services it provides to its deposit customers.  When a customer makes a deposit, the Company records a liability under ASC 405 “Liabilities” because the Company has an obligation to deliver cash to its customer on demand. A contract between the Company and a deposit account customer is typically documented in writing and is often terminable at will by the customer alone or by both the customer and the Company without penalty. The term of a deposit contract between a customer and the Company will likely be day-to-day or minute-to-minute, and the termination clause is likely similar to a renewal right where each day or minute represents the renewal of the contract. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying ASC Topic 606 "Revenue from Contracts with Customers" ("Topic 606") on the determination of the amount and timing of revenue. The Company’s primary non-interest revenue streams within the scope of ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") are described in further detail below.  The Company has no material unsatisfied performance obligations as of June 30, 2019. 



Service Charges on Deposit Accounts

Service charges and fees on deposit accounts consist of transaction-based fees, account maintenance fees, and overdraft service fees for various retail and business deposit customers.   Transaction-based fees, such as stop payment charges, are recognized at the time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are withdrawn directly from the customer’s account balance.



Fees, Interchange Income, and Other Service Charges

Fees, interchange income, and other service charges are primarily comprised of debit card income, ATM fees, merchant services income and other service charges.  Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are used to purchase goods or services from a merchant via a card payment network, such as MasterCard.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value.  ATM fees are comprised of fees earned whenever a Company’s ATM or debit card is used at a non-Company ATM or a non-Company cardholder uses a Company ATM.  ATM fees represent a fixed fee for the convenience to cardholders for accessibility of funds.  Merchant services income mainly represents fees charged to merchants serviced by a third party vendor under contract with the Company for debit or credit card processing, and represents a percentage of the underlying transaction value.  Other service charges include revenue from services provided to our retail or business customers, which may include fees for wire transfer processing, bill pay services, cashier’s checks and other services. The Company’s performance obligation for fees, interchange income and other service charges are largely satisfied, and related

33


 

revenue recognized, when the services are rendered or upon completion. Payment is typically immediately or in the following month.



Other

Other non-interest income consists of safe deposit rental fees. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.



Gain/Losses on Sale of OREO

The Company records a gain or loss from the sale of other real estate owned (“OREO”) when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company may need to adjust the transaction price and related gain (loss) on sale if a significant financing component is present. Gains (losses) on the sale of OREO are generally recorded in non-interest expense on the consolidated statement of income as an offset to OREO expenses.  There were no sales of OREO during the six months ended June 30, 2019 and 2018 where the Company financed the sale of the property.

Contract Balances

The Company’s non-interest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2019 and December 31, 2018, the Company did not have any significant contract balances.



The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2019 and 2018:











 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended June 30,

 

For the six months ended June 30,



 

2019

 

2018

 

2019

 

2018



 

(Dollars in thousands)

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

In-Scope of Topic 606:

 

 

 

 

 

 

 

 

 

 

 

 

  Service charges on deposit accounts

 

$

201 

 

$

219 

 

$

393 

 

$

437 

  Fees, interchange income and other service charges

 

 

216 

 

 

206 

 

 

402 

 

 

392 

  Other

 

 

10 

 

 

10 

 

 

21 

 

 

22 

Non-interest Income (in-scope of Topic 606)

 

 

427 

 

 

435 

 

 

816 

 

 

851 

Non-interest Income (out of scope of Topic 606)

 

 

119 

 

 

222 

 

 

319 

 

 

396 

Total Non-Interest Income

 

$

546 

 

$

657 

 

$

1,135 

 

$

1,247 













Note 13 – Subsequent Events



On July 24, 2019, the Board of Directors declared a quarterly cash dividend of $0.12 per share on the Company’s common stock, payable on August 16, 2019 to shareholders of record as of August 5, 2019. Lake Shore, MHC (the “MHC”), which holds 3,636,875 shares, or approximately 61.1% of the Company’s total outstanding stock, elected to waive its right to receive $0.06 per share of this cash dividend, or approximately $218,000. On March 7, 2019, the MHC received the non-objection of the Federal Reserve Bank of Philadelphia

34


 

to waive its right to receive dividends paid by the Company during the twelve months ending February 6, 2020, aggregating up to $0.48 per share. This quarter, the MHC elected to receive $0.06 per share of this cash dividend, or approximately $218,000, to replenish cash at the top tier holding company for operating expenses. The MHC waived $437,000 of dividends during the three months ended June 30, 2019 and $873,000 of dividends during the six months ended June 30, 2019. Cumulatively the MHC has waived approximately $11.7 million of cash dividends as of June 30, 2019. The dividends waived by the MHC are considered a restriction on the retained earnings of the Company.



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.



Forward-Looking Statements



This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements may be identified by words such as “believe,” “will,” “expect,” “project,” “may,” “could,” “anticipate,” “estimate,” “intend,” “plan,” “targets” and similar expressions.  These statements are based upon our current beliefs and expectations and are subject to significant risks and uncertainties.  Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors.



The following factors, including the factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q (if applicable) and in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements:



·

general and local economic conditions;



·

changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values and competition;



·

the ability of our customers to make loan payments;



·

the effect of competition on rates of deposit and loan growth and net interest margin;



·

our ability to continue to control costs and expenses;



·

changes in accounting principles, policies or guidelines;



·

our success in managing the risks involved in our business;



·

inflation, and market and monetary fluctuations;



·

the impact of more stringent capital requirements being imposed by banking regulators;



·

changes in legislation or regulation, including the implementation of the Dodd-Frank Act; and



·

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.



Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may differ from actual outcomes.  They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties.  Consequently, no forward-looking statement can be guaranteed.  We undertake no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise. For a more complete discussion of certain risks, uncertainties and other factors affecting the Company, refer to the Company’s Risk Factors, contained in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

35


 



Overview

The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations.  It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith.  The detailed discussion focuses on our consolidated financial condition as of June 30, 2019 compared to the consolidated financial condition as of December 31, 2018 and the consolidated results of operations for the three and six months ended June 30, 2019 and 2018.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on loans and investments and the interest expense we pay on deposits, borrowings and other interest-bearing liabilities.  Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on these balances.  

Our operations are also affected by non-interest income, such as service charges and fees and gains and losses on the sales of securities and loans, our provision for loan losses and non-interest expenses which include salaries and employee benefits, occupancy and equipment costs, data processing, professional services, advertising and other general and administrative expenses. 

Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government.  Lending activities are influenced by the demand for and supply of housing and commercial real estate, competition among lenders, interest rate conditions, and funds availability.  Our operations and lending are principally concentrated in the Western New York area, and our operations and earnings are influenced by local economic conditions.  Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences, and levels of personal income and savings in our primary market area. Operations are also significantly impacted by government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact the Company.  



To operate successfully, we must manage various types of risk, including but not limited to, interest rate risk, credit risk, liquidity risk, operational and information technology risks, strategic risk, reputation risk and compliance risk.   A significant form of market risk for the Company is interest rate risk, as the Company’s assets and liabilities are sensitive to changes in interest rates.  Interest rate risk is the exposure of our net interest income to adverse movements in interest rates. Net interest income is our primary source of revenue and interest rate risk is a significant non-credit related risk to which our Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of our assets and liabilities. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancing, the flow and mix of deposits and the fair value of available for sale securities.  In recent years, the Company has adjusted its strategies to manage interest rate risk by originating a greater volume of shorter-term, adjustable rate commercial real estate and commercial business loans and increasing its concentration of core deposits, which are less interest rate sensitive. In the third quarter of 2018, the Company entered into an interest rate swap arrangement with a notional amount of $3.0 million to convert a portion of its fixed rate residential, one- to four-family real estate loans into adjustable rate interest-earning assets, to manage its exposure to movements in interest rates.

Credit risk is the risk to our earnings and stockholders’ equity that results from customers, to whom loans have been made, and from issuers of debt securities in which the Company has invested, failing to repay their obligations. The magnitude of this risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased.  This risk is managed by policies approved by the Company’s Board of Directors, review of compliance with the policies and periodic reporting and evaluation of loans or securities that are non-performing or demonstrate other characteristics of potential loss.



36


 

Management Strategy

There have been no material changes in the Company’s management strategy from what was disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.



Critical Accounting Policies

Disclosure of the Company’s significant accounting policies is included in the notes to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Some of these policies require significant judgment, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses, as well as management’s evaluation of securities valuation, impairment of securities and income taxes. There have been no material changes in critical accounting policies since December 31, 2018.  



Analysis of Net Interest Income

Net interest income represents the difference between the interest we earn on our interest-earning assets, such as commercial and residential mortgage loans and investment securities, and the expense we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on them.



Average Balances, Interest and Average Yields. The following tables set forth certain information relating to our average balance sheets and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses, but include non-accrual loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to

37


 

yields. Interest income on securities does not include a tax equivalent adjustment for bank qualified municipal bonds.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended

 

For the Three Months Ended



 

June 30, 2019

 

June 30, 2018



 

Average

 

Interest Income/

 

Yield/

 

Average

 

Interest Income/

 

Yield/



 

Balance

 

Expense

 

Rate(2)

 

Balance

 

Expense

 

Rate(2)



 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits & federal funds sold

 

$

22,043 

 

$

137 

 

2.49% 

 

$

39,577 

 

$

169 

 

1.71% 

Securities(1)

 

 

83,674 

 

 

647 

 

3.09% 

 

 

83,831 

 

 

653 

 

3.12% 

Loans

 

 

417,435 

 

 

5,168 

 

4.95% 

 

 

374,571 

 

 

4,445 

 

4.75% 

Total interest-earning assets

 

 

523,152 

 

 

5,952 

 

4.55% 

 

 

497,979 

 

 

5,267 

 

4.23% 

Other assets

 

 

43,328 

 

 

 

 

 

 

 

38,219 

 

 

 

 

 

Total assets

 

$

566,480 

 

 

 

 

 

 

$

536,198 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand & NOW accounts

 

$

51,048 

 

$

13 

 

0.10% 

 

$

50,581 

 

$

14 

 

0.11% 

Money market accounts

 

 

118,348 

 

 

307 

 

1.04% 

 

 

115,484 

 

 

198 

 

0.69% 

Savings accounts

 

 

54,391 

 

 

 

0.06% 

 

 

53,769 

 

 

 

0.05% 

Time deposits

 

 

168,488 

 

 

776 

 

1.84% 

 

 

149,216 

 

 

482 

 

1.29% 

Borrowed funds & other interest-bearing liabilities

 

 

27,187 

 

 

165 

 

2.43% 

 

 

27,273 

 

 

159 

 

2.33% 

Total interest-bearing liabilities

 

 

419,462 

 

 

1,269 

 

1.21% 

 

 

396,323 

 

 

860 

 

0.87% 

Other non-interest bearing liabilities

 

 

65,413 

 

 

 

 

 

 

 

61,258 

 

 

 

 

 

Stockholders' equity

 

 

81,605 

 

 

 

 

 

 

 

78,617 

 

 

 

 

 

Total liabilities & stockholders' equity

 

$

566,480 

 

 

 

 

 

 

$

536,198 

 

 

 

 

 

Net interest income

 

 

 

 

$

4,683 

 

 

 

 

 

 

$

4,407 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.34% 

 

 

 

 

 

 

 

3.36% 

Net interest margin

 

 

 

 

 

 

 

3.58% 

 

 

 

 

 

 

 

3.54% 



(1)

The tax equivalent adjustment for bank qualified municipal securities results in rates of 3.56% and 3.62% for the three months ended June 30, 2019 and 2018, respectively.

(2)

Annualized.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38


 



 

For the Six Months Ended

 

For the Six Months Ended



 

June 30, 2019

 

June 30, 2018



 

Average

 

Interest Income/

 

Yield/

 

Average

 

Interest Income/

 

Yield/



 

Balance

 

Expense

 

Rate(2)

 

Balance

 

Expense

 

Rate(2)



 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits & federal funds sold

 

$

21,632 

 

$

252 

 

2.33% 

 

$

36,034 

 

$

282 

 

1.57% 

Securities(1)

 

 

85,323 

 

 

1,339 

 

3.14% 

 

 

82,304 

 

 

1,276 

 

3.10% 

Loans

 

 

406,484 

 

 

10,023 

 

4.93% 

 

 

372,014 

 

 

8,817 

 

4.74% 

Total interest-earning assets

 

 

513,439 

 

 

11,614 

 

4.52% 

 

 

490,352 

 

 

10,375 

 

4.23% 

Other assets

 

 

42,819 

 

 

 

 

 

 

 

38,075 

 

 

 

 

 

Total assets

 

$

556,258 

 

 

 

 

 

 

$

528,427 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand & NOW accounts

 

$

50,219 

 

$

26 

 

0.10% 

 

$

50,081 

 

$

27 

 

0.11% 

Money market accounts

 

 

118,360 

 

 

584 

 

0.99% 

 

 

109,789 

 

 

334 

 

0.61% 

Savings accounts

 

 

53,489 

 

 

16 

 

0.06% 

 

 

53,195 

 

 

15 

 

0.06% 

Time deposits

 

 

163,899 

 

 

1,450 

 

1.77% 

 

 

149,323 

 

 

942 

 

1.26% 

Borrowed funds & other interest-bearing liabilities

 

 

26,318 

 

 

317 

 

2.41% 

 

 

27,528 

 

 

318 

 

2.31% 

Total interest-bearing liabilities

 

 

412,285 

 

 

2,393 

 

1.16% 

 

 

389,916 

 

 

1,636 

 

0.84% 

Other non-interest bearing liabilities

 

 

62,864 

 

 

 

 

 

 

 

59,889 

 

 

 

 

 

Stockholders' equity

 

 

81,109 

 

 

 

 

 

 

 

78,622 

 

 

 

 

 

Total liabilities & stockholders' equity

 

$

556,258 

 

 

 

 

 

 

$

528,427 

 

 

 

 

 

Net interest income

 

 

 

 

$

9,221 

 

 

 

 

 

 

$

8,739 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.36% 

 

 

 

 

 

 

 

3.39% 

Net interest margin

 

 

 

 

 

 

 

3.59% 

 

 

 

 

 

 

 

3.56% 



(1)

The tax equivalent adjustment for bank qualified municipal securities results in a rate of 3.61% for the six months ended June 30, 2019 and 2018.

(2)

Annualized.









Rate Volume Analysis.  The following tables analyze the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.  The tables show the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest rates.  The effect of a change in volume is measured by applying the average rate during the first period to the volume change between the two periods.  The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period.

39


 

Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.







 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30, 2019



 

Compared to



 

Three Months Ended June 30, 2018



 

Rate

 

Volume

 

Net Change



 

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Interest-earning deposits & federal funds sold

 

$

60 

 

$

(92)

 

$

(32)

Securities

 

 

(5)

 

 

 -

 

 

(5)

Loans, including fees

 

 

198 

 

 

525 

 

 

723 

Total interest-earning assets

 

 

253 

 

 

433 

 

 

686 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Demand & NOW accounts

 

 

(1)

 

 

 -

 

 

(1)

Money market accounts

 

 

105 

 

 

 

 

110 

Savings accounts

 

 

 

 

 -

 

 

Time deposits

 

 

224 

 

 

69 

 

 

293 

Total deposits

 

 

329 

 

 

74 

 

 

403 

Other interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Borrowed funds & other interest-bearing liabilities

 

 

 

 

(1)

 

 

Total interest-bearing liabilities

 

 

337 

 

 

73 

 

 

410 

Total change in net interest income

 

$

(84)

 

$

360 

 

$

276 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 



 

Six Months Ended June 30, 2019



 

Compared to



 

Six Months Ended June 30, 2018



 

Rate

 

Volume

 

 

Net Change



 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Interest-earning deposits & federal funds sold

 

$

107 

 

$

(137)

 

$

(30)

Securities

 

 

16 

 

 

47 

 

 

63 

Loans, including fees

 

 

366 

 

 

840 

 

 

1,206 

Total interest-earning assets

 

 

489 

 

 

750 

 

 

1,239 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Demand & NOW accounts

 

 

(1)

 

 

 -

 

 

(1)

Money market accounts

 

 

222 

 

 

28 

 

 

250 

Savings accounts

 

 

 

 

 -

 

 

Time deposits

 

 

409 

 

 

99 

 

 

508 

Total deposits

 

 

631 

 

 

127 

 

 

758 

Other interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Borrowed funds & other interest-bearing liabilities

 

 

14 

 

 

(15)

 

 

(1)

Total interest-bearing liabilities

 

 

645 

 

 

112 

 

 

757 

Total change in net interest income

 

$

(156)

 

$

638 

 

$

482 



























Net interest margin increased four basis points to 3.58% for the three months ended June 30, 2019 from 3.54% for the three months ended June 30, 2018. The interest rate spread decreased by two basis points to 3.34% during the three months ended June 30, 2019 as compared to the second quarter of 2018.  The net interest margin for the 2019 second quarter was primarily impacted by an increased volume of higher-yielding average

40


 

loan balances. The average balance of the loan portfolio increased by $42.9 million, or 11.4%, during the three months ended June 30, 2019 as compared to the second quarter of 2018 primarily due to an increase in the average balance of commercial real estate, one- to four-family residential real estate and home equity loans, partially offset by a decrease in commercial business loans.  Furthermore, the overall average yield on interest-earning assets increased 32 basis points during the second quarter of 2019 when compared to the prior year period primarily due to the growth in higher yielding commercial real estate loans. The increase in the average yield earned on interest earning assets was partially offset by a 34 basis points increase in the average interest rate paid on interest bearing liabilities.  The increase in the average interest rate paid on interest bearing liabilities was primarily due to higher rates being paid on time deposit accounts and money market accounts as a result of increased market rates and competition for deposit accounts. 



Net interest margin increased three basis points to 3.59% for the six months ended June 30, 2019 from 3.56% for the six months ended June 30, 2018. The interest rate spread decreased by three basis points to 3.36% during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.  The net interest margin for the six months ended June 30, 2019 was primarily impacted by an increased volume of higher-yielding average loan balances. The average balance of the loan portfolio increased by $34.5 million, or 9.3%, during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 primarily due to an increase in the average balance of commercial real estate, one- to four-family residential real estate and home equity loans, partially offset by a decrease in commercial business loans.  Furthermore, the overall average yield on interest-earning assets increased 29 basis points during the six months ended June 30, 2019 when compared to the prior year period primarily due to the growth in higher yielding commercial real estate loans. The increase in average yield earned on interest earning assets was partially offset by a 32 basis points increase in the average interest rate paid on interest bearing liabilities.  The increase in the average interest rate paid on interest bearing liabilities was primarily due to higher rates being paid on time deposit accounts and money market accounts as a result of increased market rates and competition for deposit accounts.



Comparison of Financial Condition at June 30, 2019 and December 31, 2018



Total assets at June 30, 2019 were $578.1 million, an increase of $32.3 million, or 5.9%, from $545.7 million at December 31, 2018.  The increase in total assets was primarily due to a $47.7 million increase in loans receivable, net partially offset by a $9.0 million decrease in cash and cash equivalents and a $7.8 million decrease in securities available for sale.



Cash and cash equivalents decreased by $9.0 million, or 29.2%, from $30.8 million at December 31, 2018 to $21.8 million at June 30, 2019.  The decrease was primarily due to a $48.5 million net cash outflow relating to net loan originations and principal collections and a $3.0 million decrease in long-term borrowings, partially offset by a $25.0 million increase in deposits, a $9.4 million increase in cash flow on the securities available for sale portfolio due to maturities, prepayments and calls of securities, and an increase in short-term borrowings of $8.0 million during the six months ended June 30, 2019



Securities available for sale decreased by $7.8 million, or 9.1%, to $78.4 million at June 30, 2019 compared to $86.2 million at December 31, 2018.  The decrease was primarily due to the receipt of $9.4 million in maturities, prepayments and calls of securities partially offset by a $1.6 million increase in unrealized gains on the securities portfolio. The unrealized gains on the securities portfolio were primarily due to a decrease in market interest rates during the six months ended June 30, 2019.



41


 

Net loans receivable increased during the six months ended June 30, 2019 as shown in the table below:





 

 

 

 

 

 

 

 

 

 

 

 



 

At June 30,

 

At December 31,

 

Change



 

2019

 

2018

 

$

 

%



 

(Dollars in thousands)

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential, one- to four-family(1)

 

$

155,546 

 

$

155,024 

 

$

522 

 

0.3 

%

Home equity

 

 

42,985 

 

 

41,830 

 

 

1,155 

 

2.8 

%

Commercial

 

 

192,161 

 

 

150,475 

 

 

41,686 

 

27.7 

%

Construction - Commercial

 

 

28,071 

 

 

22,252 

 

 

5,819 

 

26.2 

%

Total real estate loans

 

 

418,763 

 

 

369,581 

 

 

49,182 

 

13.3 

%

Other Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

20,823 

 

 

21,825 

 

 

(1,002)

 

(4.6)

%

Consumer

 

 

1,066 

 

 

1,156 

 

 

(90)

 

(7.8)

%

Total gross loans

 

 

440,652 

 

 

392,562 

 

 

48,090 

 

12.3 

%

Allowance for loan losses

 

 

(3,863)

 

 

(3,448)

 

 

(415)

 

12.0 

%

Net deferred loan costs

 

 

3,386 

 

 

3,357 

 

 

29 

 

0.9 

%

Loans receivable, net

 

$

440,175 

 

$

392,471 

 

$

47,704 

 

12.2 

%



(1)

Includes one- to four-family construction loans.



During 2019, we continue to remain strategically focused on originating shorter duration, adjustable rate commercial real estate loans to diversify our asset mix, to reduce interest rate risk and to increase our net interest margin.





42


 

Loans Past Due and Non-Performing Assets.  The following table presents information regarding our non-accrual loans, accruing loans delinquent 90 days or more, non-performing loans, foreclosed real estate, and non-performing and performing loans classified as troubled debt restructurings, as of the dates indicated.

























 

 

 

 

 

 

 



 

At June 30,

 

At December 31,

 



 

2019

 

2018

 



 

(Dollars in thousands)

 

Loans past due 90 days or more but still accruing:

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

Residential, one- to four-family

 

$

 -

 

$

174 

 

Home equity

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

Construction – Commercial and Residential, one- to four-family

 

 

 -

 

 

 -

 

Other loans:

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

Consumer

 

 

 -

 

 

 -

 

Total

 

$

 -

 

$

174 

 

Loans accounted for on a non-accrual basis:

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

Residential, one- to four-family

 

$

2,399 

 

$

2,310 

 

Home equity

 

 

675 

 

 

337 

 

Commercial

 

 

294 

 

 

382 

 

Construction – Commercial and Residential, one- to four-family

 

 

 -

 

 

 -

 

Other loans:

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

15 

 

Consumer

 

 

 

 

 -

 

Total non-accrual loans

 

 

3,376 

 

 

3,044 

 

Total non-performing loans

 

 

3,376 

 

 

3,218 

 

Foreclosed real estate

 

 

752 

 

 

678 

 

Total non-performing assets

 

$

4,128 

 

$

3,896 

 

Ratios:

 

 

 

 

 

 

 

Non-performing loans as a percent of total loans:

 

 

0.77 

%

 

0.82 

%

Non-performing assets as a percent of total assets:

 

 

0.71 

%

 

0.71 

%

Troubled debt restructuring:

 

 

 

 

 

 

 

Loans accounted for on a non-accrual basis

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

Residential, one- to four-family

 

$

32 

 

$

34 

 

Performing loans

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

Residential, one- to four-family

 

$

142 

 

$

144 

 















Total non-performing loans increased by $158,000, or 4.9%, to $3.4 million at June 30, 2019 from $3.2 million at December 31, 2018, primarily due to an increase in non-accrual home equity loans during the first six months of 2019.







43


 

The following table sets forth activity in our allowance for loan losses and other ratios at or for the dates indicated:



 

 

 

 

 

 



 

At or for the Six Months Ended June 30,



 

2019

 

2018



 

(Dollars in thousands)

Balance at beginning of year

 

$

3,448 

 

$

3,283 

Provision for loan losses

 

  

425 

 

 

190 

Charge-offs:

 

  

 

 

  

 

Real estate loans:

 

  

 

 

  

 

Residential, one- to four-family

 

  

 -

 

  

 -

Home equity

 

  

(4)

 

  

 -

Commercial

 

  

 -

 

  

 -

Construction – Commercial and Residential, one- to four-family

 

  

 -

 

  

 -

Other loans:

 

  

 

 

  

 

Commercial

 

  

 -

 

  

 -

Consumer

 

  

(21)

 

  

(23)

Total charge-offs

 

  

(25)

 

  

(23)

Recoveries:

 

  

 

 

  

 

Real estate loans:

 

  

 

 

  

 

Residential, one- to four-family

 

  

 

 

18 

Home equity

 

  

 

 

Commercial

 

  

 

  

 -

Construction – Commercial and Residential, one- to four-family

 

  

 -

 

  

 -

Other loans:

 

  

 

 

  

 

Commercial

 

  

 -

 

  

Consumer

 

  

 

  

Total recoveries

 

  

15 

 

  

24 

Net (charge-offs) recoveries

 

  

(10)

 

  

Balance at end of period

 

$

3,863 

 

$

3,474 

Average loans outstanding

 

$

406,484 

 

$

372,014 

Allowance for loan losses as a percent of total net loans

 

 

0.88% 

 

 

0.91% 

Allowance for loan losses as a percent of non-performing loans

 

 

114.43% 

 

 

72.88% 

Ratio of net (charge-offs) recoveries to average loans outstanding (1) 

 

  

0.00% 

 

  

0.00% 



(1) Annualized

44


 

Other assets increased $734,000, or 37.7%, from $1.9 million at December 31, 2018 to $2.7 million at June 30, 2019.  The increase was primarily due to the recognition of lease assets on the consolidated statements of financial condition as a result of the adoption of ASU 2016-02 on January 1, 2019. 



The table below shows changes in deposit balances by type of deposit account between June 30, 2019 and December 31, 2018:





 

 

 

 

 

 

 

 

 

 

 

 



 

At June 30,

 

At December 31,

 

Change



 

2019

 

2018

 

$

 

%



 

(Dollars in thousands)

Core Deposits

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and NOW accounts:

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

61,765 

 

$

55,327 

 

$

6,438 

 

11.6 

%

Interest bearing

 

 

51,577 

 

 

50,211 

 

 

1,366 

 

2.7 

%

Money market

 

 

119,422 

 

 

119,885 

 

 

(463)

 

(0.4)

%

Savings

 

 

54,323 

 

 

52,050 

 

 

2,273 

 

4.4 

%

Total core deposits

 

 

287,087 

 

 

277,473 

 

 

9,614 

 

3.5 

%

Non-core Deposits

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

170,385 

 

 

154,985 

 

 

15,400 

 

9.9 

%

Total deposits

 

$

457,472 

 

$

432,458 

 

$

25,014 

 

5.8 

%



The increase in total deposits was primarily due to an overall increase in time deposits as a result of increased customer demand driven by volatility in interest rates as well as competition for funding.  The growth in total core deposits was the result of the Company’s continued strategic focus on growing lower-cost core deposits among its retail and commercial customers in an effort to manage interest expense and strengthen customer relationships.



Our borrowings, consisting of advances from the Federal Home Loan Bank of New York (“FHLBNY”), increased by $5.0 million, or 20.3%, from $24.7 million at December 31, 2018 to $29.7 million at June 30, 2019. Short-term borrowings increased by $8.0 million, while long-term borrowings decreased by $3.0 million during the first six months of 2019. The purpose of the net increase in borrowings was to fund loan originations.



Total stockholders’ equity increased $1.9 million, or 2.3%, from $79.8 million at December 31, 2018 to $81.7 million at June 30, 2019.  The increase in stockholders’ equity was primarily due to net income of $1.7 million and a $1.2 million increase in accumulated other comprehensive income, partially offset by dividends paid of $783,000 and the repurchase of common stock for $532,000 during the six months ended June 30, 2019.



Comparison of Results of Operations for the Three Months Ended June 30, 2019 and 2018



General.    Net income was $805,000 for the three months ended June 30, 2019, or $0.13 per diluted share, a decrease of $201,000, or 20.0%, compared to net income of $1.0 million, or $0.16 per diluted share, for the three months ended June 30, 2018.  Net income for the three months ended June 30, 2019 primarily reflected a $235,000 increase in provision for loan losses, a $165,000 increase in non-interest expense, and a $111,000 decrease in non-interest income which was partially offset by a $276,000 increase in net interest income and a $34,000 decrease in income tax expense.



Interest Income.  Interest income increased by $685,000, or 13.0%, to $6.0 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to an increase in loan interest income.  Loan interest income increased by $723,000, or 16.3%, to $5.2 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in the average balance of the loan portfolio of $42.9 million, or 11.4%, from $374.6 million for the three months ended June 30, 2018 to $417.4 million for the three months ended June 30, 2019.  The increase in the average balance of

45


 

loans was primarily due to an increase in the average balance of commercial real estate and residential, one- to four-family real estate loans, partially offset by a decrease in the average balance of commercial business loans. The average yield on the loan portfolio increased from 4.75% for the three months ended June 30, 2018 to 4.95% for the three months ended June 30, 2019.  The increase in the average yield was primarily due to an increase in the volume of higher yielding commercial real estate loans and to a 50 basis points increase in the prime rate since June 30, 2018



Other interest income decreased $32,000, or 18.9%, to $137,000 for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.  The average balance of interest-earning deposits decreased by $17.5 million, or 44.3%, for the three months ended June 30, 2019 when compared to the three months ended June 30, 2018, while the average yield increased to 2.49% for the three months ended June 30, 2019 from 1.71% for the three months ended June 30, 2018.  The decrease in the average balance of interest earning deposits was primarily due to the use of excess cash to fund loan originations. The average yield increase was primarily due to a 50 basis points increase in the federal funds sold rate since June 30, 2018.



Interest ExpenseInterest expense increased by $409,000, or 47.6%, to $1.3 million for the three months ended June 30, 2019 compared to $860,000 for the three months ended June 30, 2018.  Interest paid on deposits increased by $403,000, or 57.5%, to $1.1 million for the three months ended June 30, 2019 when compared to the three months ended June 30, 2018. Interest expense on deposits was primarily impacted by a 55 and 35 basis points increase, respectively, in the average interest rates paid on time deposit and money market accounts as a result of the increase in short term interest rates resulting from increases in the fed funds rate and prime rate by the Federal Reserve since June 30, 2018 and increased competition for deposits. The increase was also due to a $23.2 million increase in average interest-bearing deposit balances for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The average balance of interest-bearing deposits for the three months ended June 30, 2019 was $392.3 million with an average rate of 1.13% compared to the average balance of deposits of $369.1 million and an average rate of 0.76% for the three months ended June 30, 2018The increase in average balance of interest-bearing deposits was primarily due to an increase in time deposits and money market accounts as a result of increased customer demand driven by volatility in interest rates as well as competition for funding. 



Provision for Loan Losses.  A $350,000 provision to the allowance for loan losses was recorded during the three months ended June 30, 2019, which was a $235,000, or 204.4%, increase in comparison to the provision recorded during the three months ended June 30, 2018. The $350,000 provision recorded during the three months ended June 30, 2019 was primarily recorded to reflect inherent losses on new loans as a result of the 20.6% growth in the commercial real estate portfolio since March 31, 2019.



We complete a comprehensive quarterly evaluation to determine our provision for loan losses.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors. 



The second quarter 2019 provision reflected a net provision of $783,000 to reflect inherent losses in the commercial real estate portfolio, including commercial construction loans, as a result of organic growth during the quarter, as well as to reflect changes in relevant environmental and economic factors.  The quarterly provision also reflected a $281,000 net credit on the commercial business loan portfolio in order to reflect changes in criticized and classified commercial business loans and changes in environmental factors.  Additional net credits of $152,000 were posted to reflect changes in classified loans on the one- to four- family, home equity and consumer loan portfolios as well as to adjust the unallocated portion of the allowance primarily due to the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.



During the three months ended June 30, 2018, the Company recorded a $115,000 provision to the allowance for loan losses.  The provision consisted of a $182,000 provision for commercial real estate loans, primarily due to a $10.6 million increase in the loan portfolio during the second quarter of 2018 to reflect inherent losses within the portfolio and to reflect an increase in reserves associated with impaired commercial real estate loans.  A $27,000 net provision for commercial business loans was recorded to reflect the downgrade of commercial business loans; which was partially offset for changes in the related environmental factors used to qualitatively

46


 

assess inherent loan losses on commercial business loans. A  $90,000 credit for one-to four-family, home equity and commercial construction loans was recorded to reflect changes in the related environmental factors used to qualitatively assess inherent loan losses on one-to four-family and home equity loans and to reflect a $1.8 million decrease in the commercial – construction loan portfolio during the second quarter of 2018.Lastly a $4,000 unallocated credit to the provision for loan losses was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

   

Refer to Note 4 of the Notes to the Consolidated Financial Statements for additional details on the provision for loan losses.



Non-interest Income. Non-interest income decreased by $111,000, or 16.9%, to $546,000 for the three months ended June 30, 2019, as compared to $657,000 for the three months ended June 30, 2018.  The decrease was primarily due to $61,000 of unrealized losses on a derivative contract, a $55,000 decrease in recoveries on previously impaired securities, a $12,000 decrease in service charges and fees and an $11,000 decrease in other income which were partially offset by a $37,000 increase in earnings on bank owned life insurance.



Non-interest ExpensesNon-interest expenses increased by $165,000, or 4.4%, from $3.8 million for the three months ended June 30, 2018 to $3.9 million for the three months ended June 30, 2019.  Salary and employee benefits increased $103,000, or 5.1%, primarily due to annual salary increases, new hires and higher expenses related to retirement benefits, partially offset by lower expenses related to stock compensation awards.  Occupancy and equipment costs increased by $38,000, or 6.8%, primarily due to increases in software and technology maintenance costs, property taxes and building maintenance costs.  Advertising expenses increased by $25,000, or 14.8%, due to higher costs related to the development of marketing campaigns and sponsorships.  The increase in non-interest expenses was also due to increases in professional services and data processing costs. These increases were partially offset by a decrease in other expenses



Income Taxes Expense.  Income tax expense decreased by $34,000, or 21.1%, from $161,000 for the three months ended June 30, 2018 to $127,000 for the three months ended June 30, 2019.  The income tax expense decrease was primarily due to a decrease in income before taxes.  The effective tax rate for the three months ended June 30, 2019 and 2018 was 13.6% and 13.8%, respectively. 



Comparison of Results of Operations for the Six Months Ended June 30, 2019 and 2018



General.    Net income was $1.7 million for the six months ended June 30, 2019, or $0.28 per diluted share, a decrease of $239,000, or 12.3%, compared to net income or $1.9 million, or $0.32 per diluted share, for the six months ended June 30, 2018.  Net income for the six months ended June 30, 2019 primarily reflected a $410,000 increase in non-interest expense, a $235,000 increase in provision for loan losses and a $112,000 decrease in non-interest income, which was partially offset by a $482,000 increase in net interest income and a $36,000 decrease in income tax expense.

Interest Income.  Interest income increased by $1.2 million, or 11.9%, to $11.6 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to an increase in loan interest income.  Loan interest income increased by $1.2 million, or 13.7%, to $10.0 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an increase in the average balance of the loan portfolio of $34.5 million, or 9.3%, from $372.0 million for the six months ended June 30, 2018 to $406.5 million for the six months ended June 30, 2019.  The increase in the average balance of loans was primarily due to an increase in the average balance of commercial real estate loans, partially offset by a decrease in the average balance of commercial business loans. The average yield on the loan portfolio increased from 4.74% for the six months ended June 30, 2018 to 4.93% for the six months ended June 30, 2019.  The increase in the average yield was primarily due to an increase in the volume of higher yielding commercial real estate loans and to a 50 basis points increase in the prime rate since June 30, 2018.

 

Investment interest income increased $63,000, or 4.9%, to $1.3 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, due to an increase in the average balance of the investment portfolio from $82.3 million for the six months ended June 30, 2018 to $85.3 million for the six months ended

47


 

June 30, 2019. The average yield on the investment portfolio increased four basis points from 3.10% for the six months ended June 30, 2018 to 3.14% for the six months ended June 30, 2019. The increase in the average balance and average yield of the investment portfolio was primarily due to the purchase of new securities, which was partially offset by paydowns received on lower yielding securities since June 30, 2018.

Other interest income decreased $30,000, or 10.6%, to $252,000 for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.  The average balance of interest-earning deposits decreased by $14.4 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, while the average yield increased to 2.33% for the six months ended June 30, 2019 from 1.57% for the six months ended June 30, 2018.  The decrease in the average balance of interest earning deposits was primarily due to the use of excess cash to fund loan originations. The average yield increased primarily as a result of a 50 basis points increase in the fed funds rate since June 30, 2018.

Interest ExpenseInterest expense increased by $757,000, or 46.3%, to $2.4 million for the six months ended June 30, 2019 compared to $1.6 million for the six months ended June 30, 2018.  Interest paid on deposits increased by $758,000, or 57.5%, to $2.1 million for the six months ended June 30, 2019 when compared to the six months ended June 30, 2018. Interest expense was primarily impacted by a 51 and 38 basis points increase, respectively, in the average interest rates paid on time deposit and money market accounts.  This increase was the result of increases in short term interest rates resulting from increases  in the fed funds rate and prime rate by the Federal Reserve since June 30, 2018 and increased competition for deposits. The increase was also due to a $23.6 million increase in average deposit balances for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The average balance of deposits for the six months ended June 30, 2019 was $386.0 million with an average rate of 1.08% compared to the average balance of deposits of $362.4 million and an average rate of 0.73% for the six months ended June 30, 2018. The increase in average balance of interest-bearing deposits was primarily due to an increase in time deposits and money market accounts as a result of increased customer demand driven by volatility in interest rates as well as competition for funding. 

Provision for Loan Losses.  A $425,000 provision to the allowance for loan losses was recorded during the six months ended June 30, 2019, which was a $235,000, or 123.7%, increase in comparison to the provision recorded during the six months ended June 30, 2018. The $425,000 provision recorded during the six months ended June 30, 2019 was primarily recorded to reflect inherent losses on new loans as a result of the 27.5% growth in the commercial real estate portfolio since December 31, 2018. 



We complete a comprehensive quarterly evaluation to determine our provision for loan losses.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors. 



The six months ended June 30, 2019 evaluation reflected an $884,000 net provision for commercial real estate and commercial construction loans, due to a 27.5% increase in the loan portfolio since December 31, 2018, to reflect inherent losses within the portfolio, and due to changes in the related environmental factors used to qualitatively assess inherent loan losses on commercial real estate and commercial construction loans as well as changes in historical loss experience; which was partially offset by a credit to reflect changes in criticized and classified commercial real estate loans during the six months ended June 30, 2019.  A $374,000 net credit was recorded on the commercial business loan portfolio to reflect changes in criticized and classified commercial business loans during the six months ended June 30, 2019, changes in the related environmental factors used to qualitatively assess inherent loan losses on commercial business loans and changes in the historical average net charge-off rate.  A $12,000 net credit to the provision was recorded for one-to four-family, home equity and consumer loans due to changes in the related environmental factors used to qualitatively assess inherent loan losses on these types of loans, partially offset by a provision to reflect a net increase in classified loans during the six months ended June 30, 2019.  Lastly, a $73,000 credit was recorded on the unallocated provision for loan losses, to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.



During the six months ended June 30, 2018, the Company recorded a $190,000 provision to the allowance for loan losses.  The provision included a $224,000 net provision for commercial real estate loans primarily due to a $14.2 million, or 11.5%, increase in the loan portfolio since December 31, 2017, to reflect inherent losses

48


 

within the portfolio and to reflect a commercial real estate loan which became impaired during the six months ended June 30, 2018;  which was partially offset by a decrease in criticized and classified commercial real estate loans during the six months ended June 30, 2018.  A $113,000 net provision was recorded for commercial business loans to reflect increased reserves on criticized and classified commercial business loans, changes in the related environmental factors used to qualitatively assess inherent loan losses on commercial business loans and inherent risk associated with growth in commercial business loan originations of $2.1 million, or 7.6%, since December 31, 2017; which was partially offset by a credit to reflect a decrease in the historical average net charge-offs for this loan type over the last five years.  A $130,000 credit was recorded for one-to four-family, home equity, commercial construction, and consumer loans  due to changes in the related environmental factors used to qualitatively assess inherent loan losses and to reflect a decrease in the historical average net charge-offs for these loan types over the last five years, to reflect net recoveries recorded during the six months ended June 30, 2018 and to reflect a decrease in the commercial construction loan portfolio during the six months ended June 30, 2018.  Lastly, a $17,000 unallocated credit was recorded to the provision for loan losses, to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.



Refer to Note 4 of the Notes to the Consolidated Financial Statements for additional details on the provision for loan losses.



Non-interest Income.  Non-interest income decreased by $112,000, or 9.0%, to $1.1 million for the six months ended June 30, 2019, as compared to $1.2 million for the six months ended June 30, 2018.  The decrease was primarily due to a $94,000 unrealized loss on a derivative contract, a $64,000 decrease in recoveries on previously impaired securities and a $42,000 decrease in service charges and fees, which were partially offset by a $72,000 increase in earnings on bank owned life insurance and a $21,000 increase in unrealized gains on equity securities.



Non-interest Expenses.  Non-interest expenses increased by $410,000, or 5.4%, from $7.5 million for the six months ended June 30, 2018 to $8.0 million for the six months ended June 30, 2019.  Salary and employee benefits increased $299,000, or 7.3%, primarily due to annual salary increases, new hires and higher expenses related to retirement benefits, partially offset by lower expenses related to stock compensation awards.  Occupancy and equipment costs increased by $75,000, or 6.5%, primarily due to increases in software and technology maintenance costs, property taxes and building maintenance costs.  Advertising expenses increased by $30,000, or 9.3%, due to higher costs related to the development of marketing campaigns and sponsorships. The increase in non-interest expenses was also due to increases in professional services and data processing costs. These increases were partially offset by a decrease in other expenses.

Income Taxes Expense.  Income tax expense decreased by $36,000, or 11.5%, from $314,000 for the six months ended June 30, 2018 to $278,000 for the six months ended June 30, 2019.  The income tax expense decrease was primarily due to a decrease in income before taxes.  The effective tax rate for the six months ended June 30, 2019 and 2018 was 14.0% and 13.9%, respectively.



Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business. Liquidity is primarily needed to fund loan commitments, to pay the deposit withdrawal requirements of our customers as well as to fund current and planned expenditures. Our primary sources of funds consist of deposits, fed funds balances, scheduled amortization and prepayments of loans and securities, maturities and sales of investments and loans, interest earning deposits at other financial institutions and funds provided from operations. We have written agreements with the FHLBNY, which allows us to borrow the maximum lending values designated by the type of collateral pledged. As of June 30, 2019, the maximum amount that we can borrow from the FHLBNY was $111.0 million and was collateralized by a pledge of certain fixed-rate residential, one- to four-family loans. At June 30, 2019, we had outstanding advances under this agreement of $29.7 million. We have a written agreement with the Federal Reserve Bank discount window for overnight borrowings which is collateralized by a pledge of our securities, and allows us to borrow up to the value of the securities pledged, which was equal to a book value of $10.6 million and a fair value of $10.9 million as of June 30, 2019. There were no balances outstanding with the Federal Reserve Bank at June 30, 2019. We have also

49


 

established lines of credits with correspondent banks for $22.0 million, of which $20.0 million is unsecured and the remaining $2.0 million will be secured by a pledge of our securities when a draw is made. There were no borrowings on these lines as of June 30, 2019.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, calls of investment securities, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Our primary investing activities include the origination of loans and the purchase of investment securities.  For the six months ended June 30, 2019, we originated loans of approximately $88.0 million as compared to approximately $54.9 million of loans originated during the six months ended June 30, 2018. Loan originations exceeded principal repayments and other deductions during the first six months of 2019 by $48.5 million. We did not purchase any investment securities during the six months ended June 30, 2019. Purchases of investment securities totaled $10.1 million during the six months ended June 30, 2018. These activities were funded primarily through deposit growth, principal payments received on loans and securities, borrowings and cash reserves.

As described elsewhere in this report, the Company has loan commitments to borrowers and borrowers have unused overdraft lines of protection, unused home equity lines of credit and unused commercial lines of credit that may require funding at a future date. The Company believes it has sufficient funds to fulfill these commitments, including sources of funds available through the use of FHLBNY advances or other liquidity sources. Total deposits were $457.5 million at June 30, 2019, as compared to $432.5 million at December 31, 2018. The increase in total deposits was in time deposits and net core deposits primarily due to increased customer demand for these products as a result of interest rate volatility and a competitive rate environment. Approximately $73.7 million of time deposit accounts are scheduled to mature within one year as of June 30, 2019. Based on our deposit retention experience, current pricing strategy, and competitive pricing policies, we anticipate that a significant portion of these time deposits will remain with us following their maturity.

We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLBNY, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLBNY in the future.

We do not anticipate any material capital expenditures in 2019. We do not have any balloon or other payments due on any long-term obligations, other than the borrowing agreements noted above. 

Capital

 

As of January 1, 2015, new regulations that substantially amended the bank capital requirements became applicable to us.  These regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act, as discussed in the “Supervision and Regulation – Federal Banking Regulation – Capital Requirements” section included in our Annual Report on Form 10-K for the year ended December 31, 2018.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion.  A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.  The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%.  The Federal banking agencies have proposed that the Community Bank Leverage Ratio be set at 9.00%. A financial institution can elect to be subject to this new

50


 

definition. However, until the Federal banking agencies finalize the proposed rule, the Basel III rules remain in effect.

As of June 30, 2019, as shown in the table below, the Bank’s Tier 1 and risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions, as determined by the Office of the Comptroller of the Currency (the “OCC”), our primary regulator.

The Bank’s actual capital amounts and ratios and those required by the regulatory standards in effect as of the dates presented are as follows:



 

 

 

 

 

 

 

 

 

 

 

At June 30, 2019

 

Actual Ratio

 

Minimum For Capital Adequacy Purposes

 

To Be Well Capitalized Under Prompt Corrective Action Provisions

Common Equity Tier 1 ("CET1") capital (to risk-weighted assets)

 

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 

%

At December 31, 2018

 

Actual Ratio

 

Minimum For Capital Adequacy Purposes

 

To Be Well Capitalized Under Prompt Corrective Action Provisions

CET 1 capital (to risk-weighted assets)

 

19.70 

%

 

>=

4.50 

%

 

>=

6.50 

%

Tier 1 capital (to risk-weighted assets)

 

19.70 

%

 

>=

6.00 

%

 

>=

8.00 

%

Total capital (to risk-weighted assets)

 

20.59 

%

 

>=

8.00 

%

 

>=

10.00 

%

Tier 1 Leverage (to adjusted total assets)

 

13.99 

%

 

>=

4.00 

%

 

>=

5.00 

%



In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of June 30, 2019, the Bank's capital conservation buffer was 10.34% exceeding the minimum of 2.50% for 2019.



Off-Balance Sheet Arrangements

Other than loan commitments and an interest rate swap agreement that is not designated as a hedging instrument, as noted above, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.  Refer to Note 7 in the Notes to our Consolidated Financial Statements for a summary of loan commitments outstanding as of June 30, 2019.



Item 3.  Quantitative and Qualitative Disclosures About Market Risk



Not required as the Company is a smaller reporting company.



Item 4.  Controls and Procedures. 

Disclosure Controls and Procedures



The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.



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Changes in Internal Control over Financial Reporting



There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.



PART II



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.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each month of the quarter ended June 30, 2019:



COMPANY PURCHASES OF EQUITY SECURITIES





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (1)



 

 

 

 

 

 

 

 

 

April 1 through April 30, 2019

 

22,500 

 

$

15.59 

 

22,500 

 

38,390 

May 1 through May 31, 2019

 

6,400 

 

 

15.05 

 

6,400 

 

31,990 

June 1 through June 30, 2019

 

15,000 

 

 

15.04 

 

15,000 

 

16,990 

Total

 

43,900 

 

$

15.32 

 

43,900 

 

16,990 

(1)

On May 16, 2018, our Board of Directors approved a new stock repurchase plan pursuant to which we can repurchase up to 121,190 shares of our outstanding common stock. This amount represented approximately 5% of our outstanding common stock not owned by the MHC as of May 16, 2018. The repurchase plan does not have an expiration date and superseded the prior Board of Directors approved stock repurchase plan from December 11, 2015 which had 34,101 shares remaining available to purchase at May 15, 2018.



52


 

Item 6.  Exhibits





 

 

 

 

 



 

 

 

 

 



 

 

31.1

 

Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*



 

 

31.2

 

Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*



 

 

32.1

 

Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*



 

 

32.2

 

Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*



 

 

101.INS

 

XBRL Instance Document*



 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document*



 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document*



 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document*



 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document*



 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document*

________________

*Filed herewith.



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





 

 



 

LAKE SHORE BANCORP, INC.



 

(Registrant)



 

 

August 13, 2019

By:

/s/ Daniel P. Reininga



 

Daniel P. Reininga



 

President and Chief Executive Officer



 

(Principal Executive Officer)



 

 

August 13, 2019

By:

/s/ Rachel A. Foley



 

Rachel A. Foley



 

Chief Financial Officer



 

(Principal Financial Officer)



 

 

August 13, 2019

By:

/s/ Steven W. Schiavone



 

Steven W. Schiavone



 

Controller



 

(Principal Accounting Officer)



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