The following interview was conducted by Banking on Profit's Tim Melvin. To learn more about investing in under the radar bank stocks, check out Tim's product on Marketfy.

Tim Melvin: We’re on today with Daniel Reininga, the President and CEO, and Rachel Foley, the CFO, of Lake Shore Bancorp, Inc. (NASDAQ: LSBK) up in Dunkirk, New York. First guys, thanks for being on with us today.

Daniel Reininga: Thank you. Glad to be here.

Tim Melvin: Now, let’s touch on real quick, you guys are 125 years old and you’re a mutual holding company with 60% of the shares owned by the mutual holding company. Now, a lot of folks aren’t familiar with that particular ownership structure. Could you just kind of explain it real quick?

Daniel Reininga: The traditional operating model for Lake Shore Savings up until the year 2006 was as a mutual bank, fully owned by the depositors. In 2005, we determined that we had an opportunity to expand our footprint to the Erie County marketplace in western New York. In order to take advantage of the opportunity, we needed capital to grow the balance sheet and generate business or market share.

As a result, we completed a first step transaction to raise capital by converting to the mutual holding company structure. Under a mutual holding company structure, the mid-tier holding company, Lake Shore Bancorp, Inc. owns 100% of the stock of Lake Shore Savings Bank. Then the mid-tier Bancorp sells 40% of its own common stock to public shareholders and the common stock is listed on the NASDAQ; whereas the remaining 60% of the common stock is held by the top-tier mutual holding company, Lake Shore, MHC, which is under the control of the bank’s depositors. This afforded us the opportunity to raise enough capital to grow our balance sheet by approximately $250 million.

Tim Melvin: Now let’s talk about your marketplace a little bit and what’s going on up there. The recovery from the great credit crisis has been “uneven” let’s call it, with different parts of the country participating at different rates. You guys are in Chautauqua County and Erie County, which of course includes the Buffalo market. How’s the economy up in that area of the country right now?

Daniel Reininga: We are in two distinct marketplaces. Recently, we have had bright spots on the horizon for Chautauqua County, resulting from Governor Cuomo’s initiatives to attract businesses in upstate and western New York. That being said, due to limited growth opportunities in the Chautauqua County market area, we have focused our growth efforts on the Erie County marketplace.

Erie County has been growing by leaps and bounds with business opportunities. That’s the reason we are more aggressively deploying our loan strategy on the commercial side of our business in this market area. Our balance sheet has traditionally been a thrift balance sheet, primarily composed of residential lending assets. We are now transitioning to a larger commercial profile with the right risk metrics attached, by originating C&I or pure commercial real estate backed loans. The Buffalo marketplace is experiencing growth due to the “eds, beds and meds” phenomenon. Recently there has been radical growth in medical related jobs and office space in the Buffalo marketplace. Potentially 17,000 new jobs are expected to be realized in a medical corridor that’s being developed, which includes construction of a new location for the University at Buffalo Medical School in downtown Buffalo.

This is generating demand and need for multi-family units, resulting in developers purchasing older commercial buildings to be renovated into residential units. We’re starting to see a little bit of excess inflation which obviously brings with it bubble concerns, but at the same time a lot of sustainable jobs are being created. Erie County’s growth is also supported by a pledge from Governor Andrew Cuomo to provide resources to grow industry and sustainable jobs in western New York. As an example, the governor has announced that a new production facility will be constructed that will bring anywhere between 900 to 1,400 jobs in the City of Dunkirk. The governor has also announced similar plans of a much larger scale for the Buffalo and Erie County marketplace, including support for the construction of a manufacturing facility for SolarCity Corp (NASDAQ: SCTY).

Tim Melvin: Are you guys engaging in some multi family lending?

Daniel Reininga: Yes, we are.

Tim Melvin: I know that’s been a real hot area. That’s also an area where people are a little concerned about a bubble there. Do you see any signs of that in the Buffalo market at this point in time?

Daniel Reininga: Not at this time. The growth is stable. The investors are very high net worth individuals who have a lot of real estate experience and are not speculative by any means. We remain tuned in to acquiring and bringing in quality assets with respect to properties that we finance. We are transitioning from what I call C properties to B+ or B- properties. We require the investors to provide capital improvement money and evidence of sufficient sustainable rent.

Tim Melvin: It sounds like you know the good and the bad aspects of the local market, as well as who the players are and who the good guys are and the not so good guys are. That’s a real advantage as a banker.

Daniel Reininga: Yes. I think the key for anybody who invests in Lake Shore, regardless of what we’re doing, we have a very appropriate enterprise risk management function, and we bring that into our credit policy and into our overall perspective on anything we do. We’re not chasing loans. We’re not chasing yields. We’re rotating the right kind of assets that are sustainable with the right credit metrics, so it’s not reaching critical threat by any means, so we’re going to get the goal for our investors.

Tim Melvin: I wanted to touch on that a little bit because I noticed when I was going through your reports this morning that you have done a very nice job of growing the commercial real estate and the C&I book over the last 3 or 4 years. But you’re non- performing loans as a percentage of the commercial and the C&I portfolio is well below industry averages. How are you guys pulling it off?

Daniel Reininga: It’s asset quality, asset metrics. It’s knowing our borrowers and managing things properly. Of course we have some residential delinquencies in there. We tend to lag the rest of the marketplace by about 18 months. So if globally you see rates go up, you’ll see changes in our asset quality later than in other parts of the country. Our asset quality will hover lower and then eventually creep up a little bit, but we’re usually relatively low compared to peers. We do have 2 commercial loans that are currently a challenge in our loan portfolio, but we have a transition plan for one where the loan was sold to another individual owner.

Tim Melvin: You guys have what appears to be a pretty strong dividend and buy back plan in place for shareholders. Can you talk about those a little bit?

Rachel Foley: We have had a buy back plan in place for several years now. Our goal is to buy back shares around our tangible book value to create value for our shareholders. Furthermore, our dividend policy provides a solid return to our shareholders. We have a lot of community members who are shareholders and by providing a dividend, we are able to give them a tangible return on their investment. Our Board of Directors feels that it is important to give back to the investors who have invested in us and helped us grow.

Tim Melvin: Now, looking out to the future, growth plans for Lake Shore Bankcorp. What are you guys thinking now?

Daniel Reininga: Well, we’re always talking about “clicks instead of bricks” and continuing to globalize our digital strategy. We do want to be able to be effective so that you as a customer of ours can do anything you want to with that mobile device that you have. So digital relevance is key for us.

Tim Melvin: Final wrap up question here. Both of you guys have been with Lake Shore for a period of time and in the industry and of course in real estate development before that, so definitely involved with banking at that level. The industry is changing and it’s changing pretty quickly. We’re seeing continued compression through mergers and acquisition activities. We’ve talked a little bit today about the rapid technology change. Where do you see the banking industry going over the next several years?

Daniel Reininga: Well from my perspective, Fintech opportunities are going to continue and the fact that the industry can become very efficient through Fintech or electronic interface will allow products to become very commoditized. This will create challenges for profitability if you cannot keep up with the rapidly changing technology.

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