Lake Shore Bancorp, Inc.
Annual Report 2012

Plain-text annual report

About the Cover Living in an area in which all four seasons are present provides one with a keen awareness of the ever-revitalizing process of nature. Autumn leaves, winter snows, apple blossoms and fruit of the vine are all a unique part of living in Chautauqua and Erie Counties. Our cover is a reminder to enjoy the beauty of each season, as well as the progression from one season to another. Our successful branch expansions throughout Chautauqua and Erie Counties are a testament to Lake Shore Savings ability to recognize and seize the opportunities presented by the changing landscape that each season has to offer. Lake Shore Bancorp, Inc. Lake Shore Bancorp, Inc. Corporate Profile Lake Shore Bancorp, Inc. is the parent company of Lake Shore Savings Bank, originally chartered as a savings and loan association in New York State in 1891. Lake Shore Savings Bank is a commu- nity-oriented bank dedicated to serving the financial needs of consumers and businesses in Western New York. In April 2006, the Bank converted into the federal mutual holding company struc- ture. As part of that process, Lake Shore Bancorp, Inc. conducted an initial public offering and became a public company. Total assets as of December 31, 2012 were $482.4 million. In 2012, Lake Shore Savings Bank celebrated more than 121 years of service to the community since opening its first branch in Dunkirk, New York. The Bank opened its 2nd branch office in Fredonia, New York in 1987, and will open its 11th branch office in Snyder, New York during the second quarter of 2013. The Bank’s 11 full service branches and 18 ATMs are located through- out Chautauqua and Erie counties. The Bank maintains its corporate headquarters in Dunkirk, New York. Lake Shore Savings Bank serves customers’ financial needs at every stage of life – from the first savings account, to home mortgages, to small business loans, to retirement accounts. The Bank specializes in high-quality, personal customer service. Its primary business is in residential mortgages and com- mercial real estate loans to small business customers. Lake Shore Savings Bank supports its markets through a Community Reinvestment Fund. This program makes money available to area clubs, sports teams, civic groups, schools, charitable organizations and other non-profit groups. After all, we’re dedicated to “Putting People First” throughout the communities we serve. To Our Shareholders Daniel P. Reininga President and Chief Executive Officer Lake Shore Bancorp, Inc. Lake Shore Savings Bank continues to deliver high quality cus- tomer service and to build financial strength as a locally-operated community savings bank in Western New York. In 2012 we welcomed new customers, cultivated new lending relationships, invested in efficient technology upgrades and navigated regula- tory changes in a year of intense strategic focus. Our success in maintaining best-in-class asset quality, while also growing commercial loans and core deposits beyond our budgeted goals, positions us well to execute the strategic plan we have developed for 2013 and beyond. 2012: Delivering Solid Results in a Strategic Year of Change 2012 marked a year of very solid financial performance for our organization. In 2012 we earned net income of $3.6 million, or $0.64 per diluted share, which was consistent with the record earn- ings we had in 2011, despite the confines of low interest rates and a weak economic environment during 2012. Furthermore, our efforts to manage non-interest expenses resulted in an efficiency ratio of 69.16%, which beat our expectations. We are very pleased with our ability to deliver solid and stable earnings, which enabled the Bank to build capital in this uncertain regulatory environment. Our efforts in 2012 to build scale in our commercial lending port- folio allowed us to realize meaningful growth with originations of $22.2 million, once again exceeding our targeted goal. Over the past year we have communicated a clear focus on growing this portfolio, which offers higher yields and shorter loan terms than our traditional lending focus, residential mortgages. Our lenders and community business partners responded enthusiastically which helped to drive our progress toward meeting this growth initiative. We are very proud of our success in reaching this strategic goal of diversifying our balance sheet and managing interest rate risk in a prolonged low-rate environment. As part of our strategy to diversify the Company’s loan portfolio, we’ve aimed to attract and secure business banking customers who can potentially provide low-cost core deposits as part of their borrower relationships. Importantly, we grew core deposits, which increased $20.1 million, or 12.6%, from the end of 2011 to December 31, 2012. Fortunately, while interest rates continue to pressure margins, our superior asset quality continues to improve and to bolster our financial position. From December 31, 2011 to December 31, 2012, non-performing loans as a percentage of total net loans fell 13 basis points to 0.89% - well below the overall industry average, as well as the average for our peers. Credit losses as a percent- age of average loans was only 8 basis points in 2012, while our provision for loan losses was increased in order to ensure the loan loss allowance appropriately supports new, conservatively under- written commercial real estate loan growth. Banking in Today’s Economic and Regulatory Environment Our solid 2012 results are particularly satisfying in light of con- tinued and new challenges experienced by the banking industry during the year. The slow economic recovery continues to stifle loan growth for all banks, but particularly for smaller banks in slow- er growth markets. Competition for quality credits remains high, and many banks have lowered pricing to gain volume. Our com- mercial loan growth success in 2012 demonstrates that a proven commitment to outstanding service can effectively win over cus- tomers of larger banks, even those offering lower rates. We are very proud of our commitment to selling with service; we have not and will not stray from conservative, common sense pricing. Implementation of the Dodd-Frank Act continues in a choppy and inconsistent manner and has created a burdensome regulatory en- vironment for community savings banks. As a result of Dodd-Frank, we have operated under dual regulatory oversight, with the Office of the Comptroller of the Currency overseeing Lake Shore Savings Bank and the Federal Reserve Board overseeing our savings and loan holding companies, Lake Shore, MHC and Lake Shore Bancorp, Inc. We have implemented procedures and measurement tools to ensure sound enterprise risk management practices and enhance compliance with new regulations under the Dodd-Frank Act. More important to our investors, than our current regulatory structure, was the 2012 implementation of an interim final regula- tion by the Federal Reserve Board under which a mutual holding company (MHC) is no longer able to waive the receipt of dividends without the prior approval of a majority of the eligible votes of the MHC’s members – our depositors. This policy change has consid- erable implications for our ability to pay a meaningful dividend to public shareholders and to appropriately plan for the capital we generate from earnings. This change in regulation led to the Board’s decision in January 2013 to hold a special meeting of our MHC members on February 26, 2013 to seek authorization for the MHC to waive its rights to receive dividends. As announced on February 28, 2013, our MHC members approved the proposal and the proposal was filed with the Federal Reserve Board for their non-objection. On March 25, 2013, Lake Shore, MHC received the non-objection of the Federal Reserve Board to waive its right to receive dividends paid by the Company during the twelve months ending February 26, 2014. With more than 3.6 million MHC shares outstanding, it’s appar- ent why your Board considered this a vitally important issue to address. Without a dividend waiver, the MHC would receive an annual payment in excess of $1 million, assuming an annual divi- dend of $0.28 per share. We continue to believe that reinvesting this capital in growing our business offers a stronger outcome for Lake Shore Savings Bank and for our shareholders. We will con- tinue to communicate our concerns to the Federal Reserve Board regarding this interim regulation and we hope that the Federal Reserve Board will make revisions which will eliminate the require- ment for an annual vote of the MHC members to waive dividends at the MHC level, as it is costly and inefficient. 2013: Strategically Positioned for a Season of Growth Since 2007 the banking industry has operated in a “winter” of sorts, adapting to remain strong against a chilling recession, low interest rates and regulatory changes which have been at times both rapid and frozen, due to delays in issuance of final rulings. With little as- surance as to when a “thaw” will come, Lake Shore has consistent- ly focused on those things within our control: lending within our communities, enhancing our customers’ access to mobile banking, and ensuring the most efficient delivery of services across all of our platforms. This resolute focus on our customers and our commu- nities is our foundational strength, and it is the grounding force behind our strategic plan for growth in 2013 and beyond. We constantly assess how we can best serve our customers in the future, and the answer grows clearer and louder each year: efficient electronic services. To date, we have been very successful with our conservative approach to expanding our branch network, opening up new markets for customers to receive the trademark service for which we’re known. In fact, we’ll open our 11th branch in Snyder, New York in the second quarter of 2013, bringing a superior level of personal service to local families and businesses in yet another Western New York community. We are now working to extend that same level of convenience and service to our customers through enhanced electronic services. We are investing appropriately to- day, knowing it will make both our customers’ banking transactions and our Company’s operations more efficient tomorrow. To this end, we have developed a five-year plan which outlines how we’ll put in place cost effective and efficient digital services to meet our customer’s technology needs, to focus on attracting new cus- tomers, and to improve the Company’s operational efficiency. We are very excited to be complementing our “bricks” with new cost-ef- fective “clicks.” We believe that in order to serve our customers best, we must first ensure our internal efficiency. We are currently in the process of negotiating our core systems vendor contract, and the enhanced savings resulting from the negotiation process will be invested in operational system enhancements in order to enhance our custom- er-facing services as well as, allowing for faster credit decisions and easier access to customer information. As we move through 2013, a key priority will be to implement a web-based ACH product for our business banking customers, as well as researching ways to improve electronic banking for this segment of our customer base.  During 2013, we will be research- ing cost-efficient mobile banking solutions to enhance customer service.  Building off the momentum of our recently re-designed website, we are excited to announce the implementation of an improved electronic mortgage application system during 2013 for our retail customers which will provide an even higher level of personal service for our new and loyal customers. Additionally, as we mentioned above, recent economic conditions have underscored the importance of maintaining a strong bal- ance sheet in 2013 and beyond. We remain committed to adding well-collateralized, adjustable-rate commercial loans to help us manage interest rate risk. Customers seeking commercial loans in amounts less than $2 million have been very receptive to our ap- proach, and our strategic plan focuses on extending both our credit and our trademark service to these “sweet spot” customers, at ac- ceptable yields, in the future. Conclusion We are proud of our solid financial performance in 2012, and as always very proud of the exceptional service our employees pro- vide our customers. We enter 2013 fully committed to executing on our strategic plan and continuing to build value for our sharehold- ers, while working within the confines of the current economic and regulatory environment. Our strategic growth plans could not be realized without the tremendous support of our entire Lake Shore Savings team, and we look forward to 2013 with a renewed energy and passion for “Putting People First.” This passion is exemplified by the tremendous leadership of our Board of Directors , which will undergo some changes in 2013. On behalf of the Board of Directors, I would like to thank our outgo- ing Chairman, Michael Brunecz, for his 20 years of service as Chair- man and 29 years as a director. I would also like to thank James Foley for his 30 years of service as a director. Both Mike and Jim have reached the mandatory retirement age and will be stepping down from the board on May 22, 2013. During their tenure, and under their leadership and guidance, the Company has grown from approximately $60 million in total assets with one branch office to $482 million in total assets with 11 branch locations through- out Chautauqua and Erie counties. Both Mike and Jim have been respected members of our board and have made significant contributions to the Company. We wish them both well on their retirement. I am pleased to introduce our incoming Chairman, Gary Winger, on the following page, and we look forward to working together to continue with the Company’s track record of success in growth and earnings. Regardless of the many operational challenges facing the banking industry, our entire team is enthusiastic about our prospects for 2013, and beyond, and I look forward to updating you on our progress throughout the year. As always, your Board, management team and all of Lake Shore’s employees greatly appreciate your continued support. Sincerely, Daniel P. Reininga President and Chief Executive Officer Lake Shore Savings Board of Directors [back row, standing left to right] Sharon E. Brautigam: Partner, Brautigam & Brautigam, LLP, Kevin M. Sanvidge: former Executive Vice President of Administration and Supply Chain at Cliffstar Corporation, Tracy S. Bennett: former Vice President of Administration, SUNY Fredonia, Reginald S. Corsi: former Executive Vice President and Chief Operations Officer of Lake Shore Bancorp, Inc., Daniel P. Reininga: President and Chief Executive Officer, Susan C. Ballard: Sales Manager at Essex Homes of Western New York, Inc., and James P. Foley: DDS. (front row, seated left to right) Michael E. Brunecz: Chairman of the Board and President of Office Concepts, Inc., Gary W. Winger: Vice Chairman of the Board and Principal of Compass Consulting, Inc., Nancy L. Yocum: CPA and former partner of Brumfield & Associates, and David C. Mancuso: former President and Chief Executive Officer of Lake Shore Bancorp, Inc. Our Appreciation for Their Dedicated Service Lake Shore’s success as a mission-driven community institution is truly attributable to the superb and active leadership of our Board of Directors. Our Chairman, Mr. Michael E. Brunecz, who has dedicated considerable amounts of time, energy and effort into guiding the growth of our institution has reached the mandatory retirement age and will be leaving the Board on May 22, 2013. The effectiveness of our Board has been greatly influenced by the superior leadership of Mr. Brunecz, who has served as our Chairman since 1993. He has chaired our Board and the Bank through the most tumultu- ous economic period of our lifetimes. His visionary guidance and steadfast commitment to our mission of service has been instrumental to the growth of our Company and prosperity of our customers. We are also sincerely appreciative of the significant contributions of Dr. James P. Foley, a respected member of our Board since 1983. Dr. Foley’s operational leadership and depth of knowledge of community bank lending will be truly missed upon his retirement from our Board on May 22, 2013, as a result of reaching the mandatory retirement age. Our Board of Directors and shareholders, our management and employees and the communities we serve, all wish Mr. Brunecz and Dr. Foley a healthy, fulfilling and well-deserved retirement and thank them for their tremendous service to Lake Shore Bancorp and to Lake Shore Savings Bank. Michael E. Brunecz Dr. James P. Foley Welcome We are excited to welcome our incoming Chairman, Gary W. Winger, who has served on our Board since 1997. As Vice Chairman since 2010, he has truly exemplified Lake Shore Savings Bank’s mission of “Putting People First.” His contributions to our strategic planning process are rooted in his many years of working in higher education administration and financial governance. Mr. Winger was previously the Dean of Administration and Chief Financial Officer for Jamestown Community College, as well as the Chief Development Officer and Executive Director of the Jamestown Community College Foundation. Mr. Winger is currently a principal of Compass Consulting, Inc., a firm that provides consulting services in the area of higher education. During his tenure on the Board of Directors, Mr. Winger has served as the Chairman of the Compensa- tion Committee and as a member of the ALCO, Governance and Audit Com- mittees. We look forward to a prosperous and dynamic 2013 and beyond under Mr. Winger’s very capable leadership. Selected Financial Data Our selected consolidated financial and other data is set forth below, which is derived in part from, and should be read in conjunction with, our audited consolidated financial statements and notes thereto, beginning on page F-1 of our 2012 Annual Report on Form 10-K. (Dollars in thousands) Selected Financial Condition Data: Total assets Loans, net Securities available for sale Federal Home Loan Bank stock Total cash and cash equivalents Total deposits Short-term borrowings Long-term debt Total stockholders’ equity Allowance for loan losses Non-performing loans Non-performing assets (Dollars in thousands, except per share data) Selected Operating Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Total non-interest income Total non-interest expense Income before income taxes Income taxes Net income Basic and diluted earnings per common share Dividends declared per share As of December 31, 2012 2011 2010 2009 2008 $ 482,387 $ 488,597 $ 479,047 $ 425,656 $ 407,833 272,933 159,368 1,852 19,765 275,068 164,165 2,219 23,704 263,031 153,924 2,401 33,514 259,174 118,381 2,535 22,064 240,463 112,863 2,890 29,038 378,543 379,798 375,785 318,414 293,248 11,200 14,400 66,985 1,806 2,420 3,000 6,910 27,230 63,947 1,366 2,798 3,113 5,000 34,160 55,210 953 2,341 2,645 6,850 36,150 55,446 1,564 1,677 1,999 5,500 46,460 54,228 1,476 1,651 1,699 For the year ended December 31, 2012 2011 2010 2009 2008 $ 19,650 $ 20,765 $ 19,926 $ 19,693 $ 19,983 4,603 15,047 656 14,391 2,030 11,811 4,610 984 5,636 15,129 415 14,714 1,666 11,307 5,073 1,393 6,316 13,610 2,115 11,495 3,454 11,533 3,416 373 7,929 11,764 265 11,499 2,415 11,035 2,879 718 8,778 11,205 391 10,814 600 9,602 1,812 342 $ 3,626 $ 3,680 $ 3,043 $ 2,161 $ 1,470 $ 0.64 $ 0.25 $ 0.65 $ 0.28 $ 0.53 $ 0.24 $ 0.37 $ 0.20 $ 0.24 $ 0.19 Selected Financial Ratios and Other Data Performance Ratios: Return on average assets Return on average equity Dividend payout ratio (1) Interest rate spread (2) Net interest margin (3) Efficiency ratio (4) Non-interest expense to average total assets Average interest-earning assets to average interest-bearing liabilities Capital Ratios: Total risk-based capital to risk weighted assets (5) Tier 1 risk-based capital to risk weighted assets (5) Tangible capital to tangible assets (5) Tier 1 leverage (core) capital to adjustable tangible assets (5) Equity to total assets Asset Quality Ratios: Non-performing loans as a percent of total net loans Non-performing assets as a percent of total assets Allowance for loan losses as a percent of total net loans Allowance for loan losses as a percent of non-performing loans Other Data: Number of full service offices As of December 31, 2012 2011 2010 2009 2008 0.74% 5.47% 39.06% 3.07% 3.26% 69.16% 0.76% 6.15% 43.08% 3.14% 3.34% 67.32% 0.67% 5.32% 0.52% 3.93% 0.39% 2.76% 45.28% 54.05% 79.17% 2.98% 3.21% 2.70% 3.03% 2.75% 3.19% 67.59% 77.83% 81.34% 2.40% 2.34% 2.54% 2.65% 2.53% 119.69% 116.58% 115.39% 116.16% 117.53% 23.77% 21.81% 20.44% 20.33% 21.78% 23.04% 12.14% 12.14% 13.89% 21.27% 11.18% 11.18% 13.09% 20.05% 10.28% 10.28% 11.52% 19.95% 10.85% 10.85% 13.03% 21.35% 11.20% 11.20% 13.30% 0.89% 1.02% 0.89% 0.65% 0.69% 0.62% 0.64% 0.55% 0.47% 0.42% 0.66% 0.50% 0.36% 0.60% 0.61% 74.63% 48.82% 40.71% 93.26% 89.40% 10 10 10 9 9 (1) (2) (3) (4) (5) Represents dividends declared per share as a percent of earnings per share. Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year. Represents the net interest income as a percent of average interest-earning assets for the year. Represents non-interest expense divided by the sum of net interest income and non-interest income. Represents the capital ratios of Lake Shore Savings Bank since Lake Shore Bancorp, Inc., as a savings and loan holding company, is not currently subject to formula-based requirements at the holding company level. Cautionary Statement The statements contained herein that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which state- ments generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “target,” “plan,” “project” or “continue” or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management’s current plans and analyses of our business and the industry in which we operate as a whole. These factors in some cases have affected, and in the future could affect, our financial performance and could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Information on factors that could affect the Company’s business and results are discussed in the Company’s periodic reports filed with the Securities and Exchange Commission including the Company’s annual report on Form 10-K for 2012. We do not undertake to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Welcoming Our Newest Branch A new season begins, as winter thaws and the spring of 2013 arrives, bringing with it the continued and successful expansion of Lake Shore Savings through- out Erie County. Uniquely positioned to service the Snyder-Williamsville area, our newest branch shows great promise in being a welcome addition to the community. Branch Locations CHAUTAUQUA COUNTY BRANCH LOCATIONS 4950 Main Street Snyder, N Y 14226 Phone: 716-898-2101 Fax: 716-839-1404 ERIE COUNTY BRANCH LOCATIONS 128 East Fourth Street Dunkirk, New York 14048 Phone: 716-366-4070 Fax: 716-366-2965 30 East Main Street Fredonia, New York 14063 Phone: 716-673-9555 Fax: 716-679-0696 115 East Fourth Street Jamestown, New York 14701 Phone: 716-664-1103 Fax: 716-664-1183 1 Green Avenue, WE Lakewood, New York 14701 Phone: 716-483-3400 Fax: 716-483-3468 106 East Main Street Westfield, New York 14787 Phone: 716-326-4414 Fax: 716-326-4422 570 Dick Road Depew, New York 14043 Phone: 716-898-2022 Fax: 716-684-5069 5751 Transit Road East Amherst, New York 14051 Phone: 716-688-6114 Fax: 716-688-5941 59 Main Street Hamburg, New York 14075 Phone: 716-646-9480 Fax: 716-646-9481 3438 Delaware Avenue Kenmore, New York 14217 Phone: 716-898-2010 Fax: 716-874-2057 3111 Union Road Orchard Park, New York 14127 Phone: 716-674-2066 Fax: 716-674-4347 Welcoming Our Newest Branch Lake Shore Bancorp, Inc. CORPORATE HEADQUARTERS 31 East Fourth Street Dunkirk, NY 14048 Phone: 716-366-4070 Fax: 716-366-3010 www.lakeshoresavings.com Lake Shore Savings Bank Officers Daniel P. Reininga President and Chief Executive Officer Rachel A. Foley Chief Financial Officer and Treasurer Janinne Fiegl Dugan Vice President, Human Resource Officer Nicole May Compliance Officer Steven Schiavone Controller Beverly J. Sutton Internal Auditor Lori F. Danforth Corporate Secretary Louis P. DiPalma Vice President George H. Gardner Vice President John P. Huber Vice President Nancy L. LaTulip Vice President Beverley J. Mulkin Vice President Sonia N. Ortolano Vice President David P. Warren Vice President Charles D. Brooks Assistant Vice President Theresa M. Campanella Assistant Vice President Adam J. Dimitri Assistant Vice President Gabriele J. Maddalena Assistant Vice President Nancy L. March Assistant Vice President Sally A. Pyne Assistant Vice President Barbara M. Fancher Assistant Vice President Shareholder Information Annual Shareholders Meeting May 22, 2013 8:30 a.m. Clarion Hotel The Lighthouse Room 30 Lake Shore Drive East Dunkirk, NY 14048 Stock Listing The NASDAQ Global Market under the symbol LSBK Special Counsel Luse Gorman Pomerenk & Schick, PC 5335 Wisconsin Avenue, NW Suite 780 Washington, DC 20015 Lake Shore Bancorp, Inc. Independent Auditors ParenteBeard LLC 20 Stanwix Street Suite 800 Pittsburgh, PA 15222 Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 800-368-5948 Lake Shore Bancorp, Inc. Lake Shore Bancorp, Inc. 31 East Fourth Street | Dunkirk, NY 14048 | 716.366.4070 www.lakeshoresavings.com 

Continue reading text version or see original annual report in PDF format above