0001341318-18-000050.txt : 20181113 0001341318-18-000050.hdr.sgml : 20181113 20181113134541 ACCESSION NUMBER: 0001341318-18-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 81 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAKE SHORE BANCORP, INC. CENTRAL INDEX KEY: 0001341318 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 204729288 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-51821 FILM NUMBER: 181177019 BUSINESS ADDRESS: STREET 1: 31 EAST FOURTH STREET CITY: DUNKIRK STATE: NY ZIP: 14048 BUSINESS PHONE: 716-366-4070 MAIL ADDRESS: STREET 1: 31 EAST FOURTH STREET CITY: DUNKIRK STATE: NY ZIP: 14048 FORMER COMPANY: FORMER CONFORMED NAME: Lake Shore Bancorp, Inc. DATE OF NAME CHANGE: 20051012 10-Q 1 lsbk-20180930x10q.htm 10-Q lsbk 20180930 10Q





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 September 30, 2018



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)



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 6,019,919 shares of the registrant’s common stock, $0.01 par value per share, outstanding at November 8, 2018.









 

 

 

 


 



 

TABLE OF CONTENTS

 



 

 

 

ITEM

 

PART I

PAGE



 

 

 

1

FINANCIAL STATEMENTS

 



-

Consolidated Statements of Financial Condition as of September 30, 2018 (Unaudited) and December 31, 2017

1



-

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

2



-

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

3



-

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018 and  2017 (Unaudited)

4



-

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and  2017 (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

53

4

CONTROLS AND PROCEDURES

53



 

 

 



 

PART II

 



 

 

 

1A

RISK FACTORS

54

2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

54

6

EXHIBITS 

54

SIGNATURES

 

 

55



 

 





 

 


 

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary











 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

(Unaudited)



 

(Dollars in thousands, except share data)



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

7,792 

 

$

7,709 

Interest earning deposits

 

 

2,459 

 

 

6,570 

Federal funds sold

 

 

27,818 

 

 

26,634 

Cash and Cash Equivalents

 

 

38,069 

 

 

40,913 

Securities available for sale

 

 

83,147 

 

 

80,421 

Federal Home Loan Bank stock, at cost

 

 

1,545 

 

 

1,631 

Loans receivable, net of allowance for loan losses 2018 $3,388; 2017 $3,283

 

 

388,437 

 

 

365,063 

Premises and equipment, net

 

 

9,383 

 

 

9,373 

Accrued interest receivable

 

 

2,044 

 

 

1,801 

Bank owned life insurance

 

 

20,100 

 

 

18,077 

Other assets

 

 

3,428 

 

 

1,698 

Total Assets

 

$

546,153 

 

$

518,977 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

              Interest bearing

 

$

376,892 

 

$

350,535 

              Non-interest bearing

 

 

59,009 

 

 

54,618 

Total Deposits

 

 

435,901 

 

 

405,153 

Long-term debt

 

 

24,650 

 

 

26,950 

Advances from borrowers for taxes and insurance

 

 

1,625 

 

 

3,000 

Other liabilities

 

 

5,176 

 

 

5,499 

Total Liabilities

 

$

467,352 

 

$

440,602 

Stockholders' Equity

 

 

 

 

 

 

Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,827,741 shares issued and 6,046,819 shares outstanding at September 30, 2018 and 6,827,741 shares issued and 6,098,323 shares outstanding at December 31, 2017

 

$

68 

 

$

68 

Additional paid-in capital

 

 

30,870 

 

 

30,719 

Treasury stock, at cost (780,922 shares at September 30, 2018 and 729,418 shares at December 31, 2017)

 

 

(8,137)

 

 

(7,309)

Unearned shares held by ESOP

 

 

(1,471)

 

 

(1,535)

Unearned shares held by compensation plans

 

 

(273)

 

 

(540)

Retained earnings

 

 

58,339 

 

 

56,181 

Accumulated other comprehensive (loss) income

 

 

(595)

 

 

791 

Total Stockholders' Equity

 

 

78,801 

 

 

78,375 

Total Liabilities and Stockholders' Equity

 

$

546,153 

 

$

518,977 



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 



 









1


 

Lake Shore Bancorp, Inc. and Subsidiary



 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

 

2017

 

2018

 

2017



(Unaudited)



(Dollars in thousands, except per share data)

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

   Loans, including fees

 

$

4,663 

 

$

4,289 

 

$

13,480 

 

$

12,456 

   Investment securities, taxable

 

 

267 

 

 

189 

 

 

753 

 

 

597 

   Investment securities, tax-exempt

 

 

403 

 

 

388 

 

 

1,193 

 

 

1,259 

   Other

 

 

157 

 

 

81 

 

 

439 

 

 

167 

         Total Interest Income

 

 

5,490 

 

 

4,947 

 

 

15,865 

 

 

14,479 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

   Deposits

 

 

783 

 

 

523 

 

 

2,101 

 

 

1,499 

   Long-term debt

 

 

134 

 

 

139 

 

 

413 

 

 

328 

   Other

 

 

38 

 

 

20 

 

 

77 

 

 

62 

         Total Interest Expense

 

 

955 

 

 

682 

 

 

2,591 

 

 

1,889 

         Net Interest Income

 

 

4,535 

 

 

4,265 

 

 

13,274 

 

 

12,590 

Provision for Loan Losses

 

 

125 

 

 

75 

 

 

315 

 

 

450 

         Net Interest Income after Provision for Loan Losses

 

 

4,410 

 

 

4,190 

 

 

12,959 

 

 

12,140 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

   Service charges and fees

 

 

457 

 

 

441 

 

 

1,371 

 

 

1,353 

   Earnings on bank owned life insurance

 

 

103 

 

 

91 

 

 

273 

 

 

268 

   Unrealized (loss) gain on equity securities

 

 

(5)

 

 

 -

 

 

 

 

 -

   Recovery on previously impaired investment securities

 

 

34 

 

 

25 

 

 

124 

 

 

96 

   Gain on sale of securities available for sale

 

 

 -

 

 

22 

 

 

 -

 

 

244 

   Net gain on sale of loans

 

 

 

 

 

 

10 

 

 

10 

   Other

 

 

36 

 

 

37 

 

 

89 

 

 

83 

         Total Non-Interest Income

 

 

629 

 

 

617 

 

 

1,876 

 

 

2,054 

Non-Interest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

   Salaries and employee benefits

 

 

2,083 

 

 

1,898 

 

 

6,182 

 

 

5,610 

   Occupancy and equipment

 

 

587 

 

 

565 

 

 

1,735 

 

 

1,740 

   Data processing

 

 

337 

 

 

320 

 

 

1,000 

 

 

937 

   Professional services

 

 

237 

 

 

231 

 

 

716 

 

 

703 

   Advertising

 

 

151 

 

 

127 

 

 

473 

 

 

439 

   Postage and supplies

 

 

71 

 

 

53 

 

 

189 

 

 

197 

   FDIC Insurance

 

 

40 

 

 

38 

 

 

114 

 

 

111 

   Other

 

 

331 

 

 

381 

 

 

968 

 

 

955 

         Total Non-Interest Expenses

 

 

3,837 

 

 

3,613 

 

 

11,377 

 

 

10,692 

         Income before Income Taxes

 

 

1,202 

 

 

1,194 

 

 

3,458 

 

 

3,502 

Income Tax Expense

 

 

144 

 

 

254 

 

 

458 

 

 

704 

         Net Income

 

$

1,058 

 

$

940 

 

$

3,000 

 

$

2,798 

Basic and diluted earnings per common share

 

$

0.17 

 

$

0.15 

 

$

0.49 

 

$

0.46 

Dividends declared per share

 

$

0.10 

 

$

0.08 

 

$

0.30 

 

$

0.24 



 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 





















2


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income









 

 

 

 

 

 

 



 

 

Three Months Ended September 30,



 

 

2018

 

2017



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

1,058 

 

 

940 

Other Comprehensive Loss, net of tax benefit:

 

 

 

 

 

 

 

Unrealized holding losses on securities available for sale, net of tax benefit

 

 

 

(467)

 

 

(60)

Reclassification adjustments related to:

 

 

 

 

 

 

 

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

 

 

 

(27)

 

 

(16)

Net gain on sale of securities included in net income, net of tax expense

 

 

 

 -

 

 

(15)

Total Other Comprehensive Loss

 

 

 

(494)

 

 

(91)

Total Comprehensive Income

 

 

$

564 

 

$

849 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

Nine Months Ended September 30,



 

 

2018

 

2017



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

3,000 

 

$

2,798 

Other Comprehensive Loss, net of tax benefit:

 

 

 

 

 

 

 

Unrealized holding losses on securities available for sale, net of tax benefit

 

 

 

(1,444)

 

 

(34)

Reclassification adjustments related to:

 

 

 

 

 

 

 

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

 

 

 

(98)

 

 

(63)

Net gain on sale of securities included in net income, net of tax expense

 

 

 

 -

 

 

(161)

Total Other Comprehensive Loss

 

 

 

(1,542)

 

 

(258)

Total Comprehensive Income

 

 

$

1,458 

 

$

2,540 



 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 





3


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2018 and 2017 (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, 2017

 

$

68 

 

$

30,532 

 

$

(7,300)

 

$

(1,620)

 

$

(578)

 

$

53,546 

 

$

1,382 

 

$

76,030 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,798 

 

 

 -

 

 

2,798 

Other comprehensive loss, net of tax benefit of $133

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(258)

 

 

(258)

ESOP shares earned (5,951 shares)

 

 

 -

 

 

30 

 

 

 -

 

 

64 

 

 

 -

 

 

 -

 

 

 -

 

 

94 

Stock based compensation

 

 

 -

 

 

33 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

33 

Compensation plan shares granted (27,348 shares)

 

 

 -

 

 

 -

 

 

270 

 

 

 -

 

 

(270)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (1,104 shares)

 

 

 -

 

 

 -

 

 

(10)

 

 

 -

 

 

10 

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (20,569 shares)

 

 

 -

 

 

72 

 

 

 -

 

 

 -

 

 

220 

 

 

 -

 

 

 -

 

 

292 

Purchase of treasury stock, at cost (17,100 shares)

 

 

 -

 

 

 -

 

 

(269)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(269)

Cash dividends declared ($0.24 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(559)

 

 

 -

 

 

(559)

Balance - September 30, 2017

 

$

68 

 

$

30,667 

 

$

(7,309)

 

$

(1,556)

 

$

(618)

 

$

55,785 

 

$

1,124 

 

$

78,161 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2018

 

$

68 

 

$

30,719 

 

$

(7,309)

 

$

(1,535)

 

$

(540)

 

$

56,181 

 

$

791 

 

$

78,375 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,000 

 

 

 -

 

 

3,000 

Other comprehensive loss, net of tax benefit of $410

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,542)

 

 

(1,542)

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

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(156)

 

 

156 

 

 

 -

ESOP shares earned (5,951 shares)

 

 

 -

 

 

36 

 

 

 -

 

 

64 

 

 

 -

 

 

 -

 

 

 -

 

 

100 

Stock based compensation

 

 

 -

 

 

33 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

33 

Compensation plan shares granted (5,329 shares)

 

 

 -

 

 

 -

 

 

51 

 

 

 -

 

 

(51)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (10,433 shares)

 

 

 -

 

 

 -

 

 

(99)

 

 

 -

 

 

93 

 

 

 -

 

 

 -

 

 

(6)

Compensation plan shares earned (21,366 shares)

 

 

 -

 

 

82 

 

 

 -

 

 

 -

 

 

225 

 

 

 -

 

 

 -

 

 

307 

Purchase of treasury stock, at cost (46,400 shares)

 

 

 -

 

 

 -

 

 

(780)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(780)

Cash dividends declared ($0.30 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(686)

 

 

 -

 

 

(686)

Balance - September 30, 2018

 

$

68 

 

$

30,870 

 

$

(8,137)

 

$

(1,471)

 

$

(273)

 

$

58,339 

 

$

(595)

 

$

78,801 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

































4


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows



 

 

 

 

 

 



 

Nine Months Ended September 30,



 

2018

 

2017



 

(Unaudited)



 

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

3,000 

 

$

2,798 

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

 

 

 

 

 

 

Net amortization of investment securities

 

 

66 

 

 

88 

Net amortization of deferred loan costs

 

 

423 

 

 

425 

Provision for loan losses

 

 

315 

 

 

450 

Recovery on previously impaired investment securities

 

 

(124)

 

 

(96)

Unrealized gain on equity securities

 

 

(9)

 

 

 -

Gain on sale of investment securities

 

 

 -

 

 

(244)

Originations of loans held for sale

 

 

(777)

 

 

(796)

Proceeds from sales of loans held for sale

 

 

787 

 

 

806 

Gain on sale of loans

 

 

(10)

 

 

(10)

Depreciation and amortization

 

 

579 

 

 

648 

Increase in bank owned life insurance, net

 

 

(273)

 

 

(268)

ESOP shares committed to be released

 

 

100 

 

 

94 

Stock based compensation expense

 

 

334 

 

 

325 

Increase in accrued interest receivable

 

 

(243)

 

 

(234)

(Increase) decrease in other assets

 

 

(6)

 

 

161 

Decrease in other liabilities

 

 

(323)

 

 

(99)

Net Cash Provided by Operating Activities

 

 

3,839 

 

 

4,048 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Activity in available for sale securities:

 

 

 

 

 

 

Sales

 

 

 -

 

 

6,510 

Maturities, prepayments and calls

 

 

6,215 

 

 

8,980 

Purchases

 

 

(10,826)

 

 

(2,402)

Purchases of Federal Home Loan Bank Stock

 

 

(20)

 

 

(375)

Redemptions of Federal Home Loan Bank Stock

 

 

106 

 

 

84 

Loan origination and principal collections, net

 

 

(25,426)

 

 

(37,384)

Additions to premises and equipment

 

 

(589)

 

 

(1,294)

Purchase of bank owned life insurance

 

 

(1,750)

 

 

 -

Net Cash Used in Investing Activities

 

 

(32,290)

 

 

(25,881)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net increase in deposits

 

 

30,748 

 

 

15,030 

Net decrease in advances from borrowers for taxes and insurance

 

 

(1,375)

 

 

(1,475)

Proceeds from issuance of long-term debt

 

 

1,500 

 

 

9,700 

Repayment of long-term debt

 

 

(3,800)

 

 

(1,700)

Purchase of treasury stock

 

 

(780)

 

 

(269)

Cash dividends paid

 

 

(686)

 

 

(559)

Net Cash Provided by Financing Activities

 

 

25,607 

 

 

20,727 

Net Decrease in Cash and Cash Equivalents

 

 

(2,844)

 

 

(1,106)

CASH AND CASH EQUIVALENTS - BEGINNING

 

 

40,913 

 

 

45,479 

CASH AND CASH EQUIVALENTS - ENDING

 

$

38,069 

 

$

44,373 

SUPPLEMENTARY CASH FLOWS INFORMATION

 

 

 

 

 

 

Interest paid

 

$

2,564 

 

$

1,869 

Income taxes paid

 

$

477 

 

$

750 



 

 

 

 

 

 

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING ACTIVITIES

 

 

 

 

 

 

Foreclosed real estate acquired in settlement of loans

 

$

1,495 

 

$

554 



 

 

 

 

 

 

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 September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 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, 2017 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, 2017.  The consolidated statements of income for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2018.



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 September 30, 2018 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.



Note 2 – New Accounting Standards



The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update ( ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220):  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02) on January 1, 2018.  ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income.  This issue came about from the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017 that changed the Company’s tax rate from 34% to 21%.  ASU 2018-02 allows an entity to elect a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Act.  The amount of that reclassification should include the effect of tax rate changes on the deferred tax amount, any related valuation allowance and other income tax effects on the items in AOCI. Upon adoption of ASU 2018-02, the Company reclassified the income tax effect of the Tax Act from AOCI to retained earnings. The reclassification increased AOCI and decreased retained earnings by $156,000, with zero net effect on total shareholders’ equity. The Company uses the individual security approach for all available for sale securities when releasing income tax effects remaining in AOCI.



In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”).  ASU 2018-11 makes targeted improvements in order to provide relief to an entity’s costs to implement certain aspects of ASU 2016-02 “Leases” (Topic 842)” (“ASU 2016-02”). ASU 2018-11 allows lessors to combine

6


 

lease and associated non-lease components by class of underlying asset in contracts that meet certain criteria. For a lessor to qualify for this practical expedient, the lease and related non-lease components must have the same timing and pattern of transfer, and the lease component, if accounted for on a stand-alone basis, would be classified as an operating lease. ASU 2018-11 also provides entities with an optional transition method   that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the ASU 2016-02 adoption period.  This method eliminates the requirement for entities to restate the comparative periods presented to comply with ASU 2016-02. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. The amount of assets and liabilities to be added to the balance sheet under ASU 2016-02 and ASU 2018-11 are not expected to have a material impact on the Company’s consolidated financial statements per preliminary estimates.



In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement” (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”).  ASU 2018-13 clarifies the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC”) 820 by adding, eliminating and modifying certain disclosure requirements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This update is not expected to have a material effect on the Company’s consolidated financial statements.



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 2016-13 made certain targeted amendments to the existing impairment 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 business entities 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.  We are currently assessing the potential impact on our consolidated financial statements; however, due to the significant differences in the revised guidance from existing GAAP, the implementation of this guidance may result in material changes in our accounting for credit losses on financial instruments.  We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial reporting.  Alternative methodologies are being considered, data requirements and integrity are being reviewed and enhancements to the current process are being considered.  The Company is continuing to evaluate and implement this guidance.



7


 

Note 3 – Investment Securities

Debt Securities



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



 

 

 

 

 

 

 

 

 

 

 

 





 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 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 

 

$

 -

 

$

(123)

 

$

1,889 

Municipal bonds

 

 

46,174 

 

 

522 

 

 

(265)

 

 

46,431 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

27 

 

 

 -

 

 

 -

 

 

27 

Collateralized mortgage obligations-government sponsored entities

 

 

31,626 

 

 

 

 

(1,165)

 

 

30,465 

Government National Mortgage Association

 

 

196 

 

 

 

 

 -

 

 

202 

Federal National Mortgage Association

 

 

2,477 

 

 

28 

 

 

(37)

 

 

2,468 

Federal Home Loan Mortgage Corporation

 

 

1,314 

 

 

13 

 

 

(29)

 

 

1,298 

Asset-backed securities-private label

 

 

 -

 

 

291 

 

 

 -

 

 

291 

Asset-backed securities-government sponsored entities

 

 

44 

 

 

 

 

 -

 

 

45 

Total Debt Securities

 

$

83,870 

 

$

865 

 

$

(1,619)

 

$

83,116 

Equity Securities

 

 

22 

 

 

 

 

 -

 

 

31 

Total Securities Available for Sale

 

$

83,892 

 

$

874 

 

$

(1,619)

 

$

83,147 







8


 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2017



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

2,013 

 

$

 -

 

$

(26)

 

$

1,987 

Municipal bonds

 

 

44,256 

 

 

1,312 

 

 

(6)

 

 

45,562 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

30 

 

 

 -

 

 

 -

 

 

30 

Collateralized mortgage obligations-government sponsored entities

 

 

28,195 

 

 

28 

 

 

(569)

 

 

27,654 

Government National Mortgage Association

 

 

229 

 

 

16 

 

 

 -

 

 

245 

Federal National Mortgage Association

 

 

2,834 

 

 

95 

 

 

 -

 

 

2,929 

Federal Home Loan Mortgage Corporation

 

 

1,518 

 

 

35 

 

 

 -

 

 

1,553 

Asset-backed securities-private label

 

 

69 

 

 

276 

 

 

(1)

 

 

344 

Asset-backed securities-government sponsored entities

 

 

57 

 

 

 

 

 -

 

 

60 

Total Debt Securities

 

$

79,201 

 

$

1,765 

 

$

(602)

 

$

80,364 

Equity Securities

 

 

22 

 

 

35 

 

 

 -

 

 

57 

Total Securities Available for Sale

 

$

79,223 

 

$

1,800 

 

$

(602)

 

$

80,421 



Debt Securities

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

At September 30, 2018, thirty-two municipal bonds with a cost of $11.0 million and fair value of $11.1 million were pledged under a collateral agreement with the Federal Reserve Bank (“FRB”) of New York for liquidity borrowing. At December 31, 2017, thirty-three municipal bonds with a cost of $11.3 million and fair value of $11.7 million were pledged with the FRB. In addition, at September 30, 2018, twenty-one municipal bonds with a cost and fair value of $5.6 million were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2017, twenty municipal bonds with a cost of $5.1 million and fair value of $5.3 million were pledged as collateral for customer deposits in excess of the FDIC insurance limits.            

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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

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)

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

1,889 

 

$

(123)

 

$

 -

 

$

 -

 

$

1,889 

 

$