Lake Shore Bancorp(LSBK) - 2020 Q4 - Annual Report

Loan Portfolio and Originations - Total loans outstanding at the end of 2020 increased to $526.6 million, up from $471.5 million at the end of 2019, representing an increase of 11.7%[52] - Loan originations for 2020 totaled $188.5 million, a 11.4% increase compared to $169.2 million in 2019[52] - Commercial real estate loans reached $257.3 million, accounting for 48.9% of the total loan portfolio as of December 31, 2020[54] - One- to four-family residential loans totaled $150.7 million, representing 28.6% of the total loan portfolio[62] - Construction loans amounted to $28.9 million, making up 5.5% of the total loan portfolio[59] - The company originated $26.9 million in Paycheck Protection Program (PPP) loans, which are 100% guaranteed by the SBA[53] - Jumbo loans totaled $9.0 million, or 5.9% of the one- to four-family residential mortgage portfolio[66] - As of December 31, 2020, home equity loans and lines of credit totaled $47.6 million, representing 9.0% of the total loan portfolio[74] - At December 31, 2020, commercial business loans amounted to $40.8 million, or 7.7% of the total loan portfolio[77] - Consumer loans totaled $1.4 million, or less than 1% of the total loan portfolio, as of December 31, 2020[80] Loan Repayments and Modifications - The company reported principal repayments of $114.2 million in 2020, compared to $86.6 million in 2019, reflecting a 31.8% increase[52] - The company implemented a loan modification program in 2020, allowing customers affected by COVID-19 to defer loan payments, with expectations that the number of modifications will decrease in 2021[95] Allowance for Loan Losses - The allowance for loan losses increased to $5,857 million in 2020 from $4,267 million in 2019, reflecting adjustments for qualitative factors due to the uncertain impact of COVID-19 on economic conditions and borrowers' ability to repay loans[106] - The total allocated allowance for loan losses was $5,707 million, representing 97.4% of the total allowance, with commercial loans accounting for 69.2% of the allocated allowance[105] - The percentage of loans classified as "Substandard" increased from 10.2% in 2019 to 5.9% in 2020 for residential, one- to four-family loans, while commercial loans saw a decrease from 62.9% to 69.2%[105] - The company maintains a general component of the allowance for loan losses based on historical loss experience, adjusted for qualitative and environmental factors, reflecting ongoing economic conditions[102] Investment Portfolio - The investment portfolio is designed to manage interest rate sensitivity and maintain liquidity, with a focus on U.S. Government obligations and mortgage-backed securities[108] - The company’s investment policy requires routine monitoring of the investment portfolio to mitigate credit quality risks[108] - The fair values of available-for-sale securities are based on a market approach, with unrealized gains and losses reported as a separate component of equity[111] - The company recaptured $73,000 and $54,000 of prior year other-than-temporary impairment charges in 2020 and 2019, respectively[116] Deposits and Borrowings - At December 31, 2020, the Bank had $106.1 million in time deposits with remaining terms to maturity of less than one year, compared to $90.1 million in 2019[125] - The Bank had $89.4 million in uninsured deposits exceeding the FDIC insurance limit of $250,000 as of December 31, 2020[126] - Long-term borrowings from the Federal Home Loan Bank of NY decreased from $34.7 million in 2019 to $29.8 million in 2020[126] - The Bank's total time deposits at December 31, 2020, amounted to $159.3 million, a decrease from $170.5 million in 2019[125] - The Bank's cash flows from operations, loan repayments, and mortgage-backed securities principal repayments are stable sources of funds[120] Regulatory Compliance and Capital Requirements - The bank raised the eligibility for the 18-month exam cycle from $1 billion to $3 billion in assets[146] - The community bank leverage ratio was established at a minimum of 9% for institutions under $10 billion in assets, with a temporary reduction to 8% due to the CARES Act[152][154] - As of December 31, 2020, Lake Shore Savings met the criteria for being considered "well-capitalized"[156] - The bank maintained a ratio of liquid assets not subject to pledge as a percentage of deposits and borrowings of 15% or greater[167] - The bank's capital requirements assign higher risk weights to asset categories believed to present greater risk, with a risk weight of 100% assigned to commercial and consumer loans[150] - The OCC requires savings banks to maintain detailed records of all transactions with affiliates to ensure compliance with regulations[171] Employee and Community Engagement - As of December 31, 2020, 20.8% of employees had been with the Bank for 15 years or longer, indicating strong employee retention[131] - The Bank's employee health care premiums are competitive, with employees covering 20% of the premiums[136] - The Bank's management emphasizes employee safety and wellness, implementing protocols in response to the COVID-19 pandemic[133] - Lake Shore Savings received a "satisfactory" rating under the Community Reinvestment Act in its most recent federal examination[169] Impact of COVID-19 and Economic Conditions - The CARES Act provided over $2 trillion to combat the COVID-19 pandemic, impacting the company's operations significantly[184] - The Federal Reserve Board reduced reserve requirement ratios to zero in March 2020, with no plans to re-impose them unless conditions warrant[187] Corporate Governance and Compliance - Lake Shore Bancorp common stock is registered under the Securities Exchange Act of 1934 and is subject to various regulatory requirements[202] - The Sarbanes-Oxley Act requires the CEO and CFO of Lake Shore Bancorp to certify the accuracy of quarterly and annual reports filed with the SEC[204] - Lake Shore Bancorp is enhancing its policies and procedures to ensure compliance with Sarbanes-Oxley regulations[204]