United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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
(State or Other Jurisdiction
of Incorporation or Organization)
20-4729288
(I.R.S. Employer Identification No.)
31 East Fourth Street, Dunkirk, NY 14048
(Address of Principal Executive Offices, including zip code)
(716) 366-4070
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common stock, par value $0.01 per share
Trading
Symbol(s)
LSBK
Name of each exchange on which registered
The Nasdaq Stock Market LLC
No
No
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
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
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.
No
No
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
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.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2023 was $18,262,409 based on the per share
closing price as of June 30, 2023 on the Nasdaq Global Market for the registrant’s common stock, which was $10.77.
There were 5,684,784 shares of the registrant’s common stock, $.01 par value per share, outstanding at March 18, 2024.
No
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement for the 2024 Annual Meeting of Stockholders
Part of 10-K
where incorporated
III
'
LAKE SHORE BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2023
TABLE OF CONTENTS
ITEM
PART I
PAGE
1
1A
1B
1C
2
3
4
5
6
7
7A
8
9
9A
9B
9C
10
11
12
13
14
15
16
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
CYBERSECURITY
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
RESERVED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
1
27
37
37
39
39
39
40
40
41
52
52
52
52
53
53
53
53
53
53
54
55
56
57
Item 1. Business.
PART I
Forward-Looking Statements
This annual report contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on Lake Shore Bancorp, Inc.’s current expectations regarding its business
strategies, intended results and future performance. Words such as anticipates, expects, intends, plans, believes, estimates
and variations of such words and expressions are intended to identify forward-looking statements. Such statements reflect
management's current views of future events and operations. These forward-looking statements are based on information
currently available as of the date of this report. It is important to note that these forward-looking statements are not
guarantees of future performance and involve and are subject to significant risks, contingencies, and uncertainties, many of
which are difficult to predict and are generally beyond our control. Potential risks and uncertainties that could cause our
actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, compliance
with the Bank’s Consent Order and an Individual Minimum Capital Requirement both issued by the Office of the
Comptroller of the Currency, the Agreement with the Federal Reserve Bank of Philadelphia, data loss or other security
breaches, including a breach of our operational or security systems, policies or procedures, including cyber-attacks on us or
on our third party vendors or service providers, economic conditions, the effect of changes in monetary and fiscal policy,
inflation, unanticipated changes in our liquidity position, climate change, increased unemployment, deterioration in the
credit quality of the loan portfolio and/or the value of the collateral securing repayment of loans, reduction in the value of
investment securities, the cost and ability to attract and retain key employees, regulatory or legal developments, tax policy
changes, and our ability to implement and execute our business plan and strategy and expand our operations. These factors
should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements,
as our financial performance could differ materially due to various risks or uncertainties. We do not undertake to publicly
update or revise our forward-looking statements if future changes make it clear that any projected results expressed or
implied therein will not be realized.
General
Lake Shore Bancorp, Inc. (“Lake Shore Bancorp,” the “Company,” “us,” or “we”) operates as a mid-tier, federally
chartered savings and loan holding company for Lake Shore Savings Bank (“Lake Shore Savings” or the “Bank”). A
majority of Lake Shore Bancorp’s issued and outstanding common stock (63.96% as of December 31, 2023) is held by Lake
Shore, MHC (the “MHC”), a federally chartered mutual holding company, which serves as the parent company to Lake
Shore Bancorp. The remaining shares of common stock are owned by public stockholders and Lake Shore Saving Bank’s
Employee Stock Ownership Plan (“ESOP”). Our common stock is traded on the Nasdaq Global Market under the symbol
“LSBK”. Unless the context otherwise requires, all references herein to Lake Shore Bancorp or Lake Shore Savings include
Lake Shore Bancorp and Lake Shore Savings on a consolidated basis.
Lake Shore, MHC
Lake Shore, MHC was organized in 2006 as a federally chartered mutual holding company. The MHC does not
engage in any substantial business activity other than its investment in a majority of the common stock of Lake Shore
Bancorp. The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) is the regulator for the
MHC. Federal law and regulations require that as long as the MHC is in existence, it must own at least a majority of Lake
Shore Bancorp’s common stock.
Lake Shore Bancorp, Inc.
Lake Shore Bancorp, Inc. was organized in 2006 for the purpose of acting as the savings and loan holding company
for Lake Shore Savings Bank in connection with the Company’s initial public stock offering. The Company, a federal
corporation, is regulated by the Federal Reserve Board. The Company owns all of the issued and outstanding capital stock
of Lake Shore Savings Bank.
1
Lake Shore Savings Bank
Lake Shore Savings Bank was chartered as a New York savings and loan association in 1891. In 2006, the Bank
converted from a New York-chartered mutual savings and loan association to a federal savings bank charter. The Bank is
subject to the supervision and regulation of the Office of the Comptroller of the Currency (“OCC”).
Lake Shore Savings Bank’s principal business consists of attracting retail deposits from the general public in the
areas surrounding its branch offices and investing those deposits, together with funds generated from operations, primarily
in commercial real estate loans, one- to four-family residential mortgage loans, home equity lines of credit and, to a lesser
extent, commercial business loans, consumer loans, and investment securities. Our revenues are principally derived from
interest earned on our loans and investment securities. Our primary sources of funds for lending and investments are
deposits, borrowings, brokered deposits, receipts of principal and interest payments on loans and securities, proceeds from
sales of loans or securities, maturities and calls of investment securities and income resulting from operations in prior
periods.
Available Information
Lake Shore Bancorp’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are made available free of charge on our website, www.lakeshoresavings.com, on the “Investor
Relations” page under “About Us”. Such reports are also available on the Securities and Exchange Commission’s website
at www.sec.gov. Information on our website shall not be considered a part of this Form 10-K.
Market Area
Lake Shore Savings Bank is a community bank that offers a variety of banking products to serve the market areas
surrounding our eleven branch offices located within the Western New York region of New York State.
Our geographic market area for loans and deposits is principally located within Erie and Chautauqua Counties of
Western New York. As of the most recent United States Census Bureau population census as of July 1, 2022, Erie and
Chautauqua Counties had an estimated combined population of approximately 1.1 million. Our market area is bounded by
Lake Erie to the west and Canada to the north, and includes the city of Buffalo, the second largest metropolitan area in the
State of New York by population. The market area includes several hospitals, a medical school and a major cancer research
and treatment facility, along with a centralized medical campus to cultivate clinical care, research, education and
entrepreneurship. The area has several colleges and universities, community colleges and various vocational and technical
schools. Western New York is home to professional sports franchises and an international airport. The area hosts a broad
diversity of industry, commercial establishments and financial institutions as well as a skilled and productive workforce.
New York State currently has several incentive programs for businesses to invest in the Western New York region.
One example is the “Start-Up NY” program, which offers tax incentives to start, expand or relocate a qualified business to
a tax-free area within the state, primarily near a university or community college campus, in order to access top talent and
research facilities. Qualified businesses for this program include advance materials & manufacturing, biotech & life
sciences, tech & electronics, and optics & imaging. This program has generated significant interest in Western New York
for new business development due to its proximity to Canada, history of being a strong industrial and manufacturing center,
and the number of quality colleges and universities in the area.
The Erie County region and the City of Buffalo experienced strong economic expansion prior to the onset of the
COVID-19 pandemic, including major growth in the health care and education sectors, and resurgence in the central
business district, which has led to an influx of private investment in development of hotels and housing in the downtown
sector. The Buffalo Niagara Medical Campus has grown significantly with the construction of a new children’s hospital,
expansion of an existing cancer/research hospital and construction of a new medical school by the State University of New
York at Buffalo. Development on the waterfront has centered on redevelopment of property for mixed use, including public
access and private development that includes office space, ice rinks, hotels and restaurants. There has also been an increased
interest in innovative start-up companies, driven by the investment of 43North, which holds an annual competition enhanced
by significant funding to attract innovative start-up companies to relocate to Buffalo, NY. This type of economic
2
development has had a positive impact on the small business and middle-market customers that we focus on and we believe
we will be able to capitalize on opportunities created by this economic growth. Although the COVID-19 pandemic slowed
down certain aspects of economic development and economic activity, the regional economy remains diversified, the
housing market remains strong and various commercial and housing development projects continue to move forward. The
lending opportunities in our market area remain dynamic and we believe that such activity will continue.
Our primary market area has historically been stable, with a diversified base of employers and employment sectors.
The local economies that we serve are not dependent on one key employer. Transportation equipment is a large
manufacturing industry in the Buffalo area, as well as production of automobile component parts. The principal employment
sectors are service-related, wholesale and retail trade, and durable-goods manufacturing.
Our future growth will be influenced by the strength of our regional economy, other demographic trends and the
competitive environment. We believe that we have developed lending products and marketing strategies to address the
credit-related needs of the residents and small businesses we serve in our local market area.
Competition
We face intense competition both in making loans and attracting deposits. Western New York has a significant
number of financial institutions, including a super regional bank which has its headquarters in Buffalo, NY, and branches
of large money centers and regional and super regional banks which have resulted from the consolidation of the banking
industry in New York and surrounding states. Many of these competitors have greater resources and offer additional services
than we do. We also face significant competition from online service providers who offer financial services, including loan
and deposit products.
Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies,
credit unions, online retail mortgage lenders and other financial service companies. The most direct competition for deposits
comes from commercial banks, savings banks, credit unions, and online banks. We face additional competition for deposits
from non-depository competitors such as mutual funds, securities and brokerage firms and insurance companies. We are
significantly smaller than many of the financial institution competitors in our market area. Some of our competitors are not
subject to the same degree of regulation as that imposed on federal savings banks or federally insured institutions, and these
other institutions may be able to price loans and deposits more aggressively. Competition for deposits and the origination
of loans may limit the Company’s growth and adversely impact its profitability in the future.
We expect competitive pressure to remain intense primarily due to technological advances and the continuing trend
of consolidation in the financial services industry. Technological advances have lowered barriers to entry in our local market
area by allowing banks to expand their geographic reach by providing services over the internet and have made it possible
for non-depository institutions, including fintech companies, to offer products and services that have traditionally been
provided by banks. We believe the primary factors in competing for deposits and loans is through personalized service,
knowledge of the local market area and its economy, local decision making, technological convenience via mobile and
online banking and active participation and support of the communities we serve.
Lending Activities
General. Our principal lending activity is the origination of fixed rate and adjustable rate mortgage loans
collateralized by commercial and residential real estate primarily located within our market area. The Bank also originates
commercial business loans, home equity loans and consumer loans. We retain the majority of loans that we originate.
However, we may sell residential mortgage loans into the secondary market, with retention of servicing rights, in order to
manage interest rate and liquidity risk when deemed appropriate. Additional efforts to manage interest rate risk include the
origination of shorter-term, adjustable rate loans.
The loan portfolio composition table is set forth in Part II, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section of this Report.
Loan Maturity. The following tables present the contractual maturity of our gross loans at December 31, 2023 and
sets forth our fixed and adjustable rate loans at December 31, 2023, that are contractually due after December 31, 2024.
3
The table does not include the effect of prepayments or scheduled principal amortization. Loans having no stated repayment
schedule or maturity and overdraft loans are reported as being due in one year or less.
Real Estate
Other Loans
Residential,
One- to Four-
Family(1)
Home Equity
Commercial(2)
Commercial
Consumer
Total
(Dollars in thousands)
Amounts due in:
One year or less
After one year through five years
After five year through 15 years
Beyond 15 years
$
$
48
1,878
35,319
134,760
$
259
2,920
30,711
17,979
$
25,166
67,686
223,897
237
$
6,476
4,366
5,704
—
$
736
394
—
—
32,685
77,244
295,631
152,976
Total
$
172,005
$
51,869
$
316,986
$
16,546
$
1,130
$
558,536
Interest rate terms on amounts due
after one year:
Fixed rate
Adjustable rate
Total
$
$
168,551
3,406
$
7,700
43,910
$
81,811
210,009
$
$
7,598
2,472
$
394
—
266,054
259,797
171,957
$
51,610
$
291,820
$
10,070
$
394
$
525,851
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial construction loans.
4
The following table presents our loan originations, purchases, sales, and principal repayments for the years
indicated.
Total Loans:
For the Year Ended December 31,
2023
2022
(Dollars in thousands)
Balance outstanding at beginning of year
$
576,709
$
519,779
Originations:
Real estate loans:
Residential, one- to four-family(1)
Home equity
Commercial (2)
Other loans:
Commercial
Consumer
Total originations
Deduct:
Principal repayments:
Real estate loans
Commercial and consumer loans
Total principal repayments
Transfers to foreclosed real estate
Loan sales - SONYMA(3) & FHLMC(4)
Loans charged off
Total deductions
12,496
13,470
26,400
3,560
410
56,336
67,359
7,029
74,388
60
—
61
74,509
39,991
20,833
88,180
7,607
631
157,242
86,805
11,909
98,714
216
1,309
73
100,312
Balance outstanding at end of year
$
558,536
$
576,709
(1)
(2)
(3)
(4)
Includes one- to four-family construction loans.
Includes commercial construction loans.
State of New York Mortgage Agency.
There were no loans sold during 2023. In 2022, we sold $1.0 million of long-term fixed rate residential mortgage loans with low yields to the Federal Home
Loan Mortgage Corporation (“FHLMC”) in order to offset long-term interest rate risk.
Commercial Real Estate Loans. We remained focused on originating commercial real estate loans and have
assembled a strong team of loan officers to grow this portfolio. As such, the Bank’s primary lending activity is the
origination of commercial real estate loans to finance the purchase of real property or to refinance real property. Real
property generally consists of developed real estate, such as multi-family apartment complexes, office buildings,
warehouses, hotels, restaurants, retail properties, mixed use properties, and self-storage units and is typically held as
collateral for the loan. For the majority of our commercial real estate loan portfolio, the collateral is primarily located within
the Bank’s primary market area, Erie and Chautauqua Counties. At December 31, 2023, commercial real estate loans totaled
$300.5 million and represented 53.8% of the Bank’s total loan portfolio. Commercial real estate loans that are collateralized
by residential properties and multi-family apartment complexes made up 43.3% of the commercial real estate loan portfolio
as of December 31, 2023 and totaled $130.2 million. Commercial real estate loans that are collateralized by non-residential
real estate amounted to $170.3 million, or 56.7% of the commercial real estate loan portfolio at December 31, 2023. Of this
amount, $24.0 million, or 8.0% of the commercial real estate loan portfolio, related to the accommodation (hotel) and food
services sector. In underwriting commercial real estate loans, consideration is given to historic and expected net operating
income generated by the real estate, the age and condition of the collateral, the financial resources and income level of the
borrower and any guarantors, current and projected occupancy levels, location of the property, and the borrower’s business
experience. Our commercial real estate loans are appraised by third party independent appraisers approved by the board of
directors. Personal guarantees are typically obtained from commercial real estate borrowers.
We originate a variety of fixed and adjustable-rate commercial real estate loans generally for terms of five to 10
years and payments based on an amortization schedule of up to 25 years. Adjustable-rate loans are typically based on an
index such as the prime rate or the FHLBNY advance rates with an added spread based on the type, size and risk of the
loan. The rate is typically fixed for the first five years of the loan. Some adjustable-rate loans are subject to an interest rate
floor. We typically lend up to a maximum loan-to-value ratio of 50% to 80% depending on the type and condition of the
5
property being financed. Commercial real estate loans require a minimum debt service coverage ratio ranging from 1.15 to
1.50 depending on the type of property being financed and the strength of the personal guarantees of the owners. Fixed rate
loans are typically subject to prepayment premiums if the loan is paid off within five years of origination and prior to the
scheduled maturity.
Commercial real estate loans have larger balances and involve a greater degree of risk than one- to four-family
residential loans. Of primary concern in multi-family and nonresidential real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by nonresidential
properties often depend on the successful operation and management of the properties or underlying businesses. As a result,
repayment of such loans may be subject to a greater extent, than residential real estate loans, to adverse conditions in the
real estate market or the economy. To monitor cash flows on nonresidential properties, we require borrowers and/or loan
guarantors to provide annual financial statements on larger multi-family and commercial real estate loans. In reaching a
decision on whether to make a multi-family or nonresidential real estate loan, we consider the net cash flow of the project,
the borrower’s expertise, credit history and the value of the underlying property. In addition, we monitor the tenancy of the
properties as to occupancy, lease rates, term of lease and tenant credit worthiness. Commercial real estate loans typically
involve larger loan balances to single borrowers or groups of related borrowers, which generally require substantially greater
evaluation and oversight efforts. Our loan policies limit the amount of loans to a single borrower or group of borrowers to
reduce this risk and are designed to set such limits within those prescribed by applicable federal statutes and regulations.
We engage a third party to periodically conduct a credit review of the commercial real estate portfolio, including compliance
with the Bank’s underwriting standards and policy requirements. In addition, we engage a third party to perform property
site inspections on an annual basis as required by our Commercial Loan Policy.
Commercial Construction. We originate loans primarily to established local developers to finance the construction
of commercial and multi-family properties. We provide construction loans to local developers for the construction of one-
to four-family residential developments. We also originate rehabilitation loans, enabling a borrower to partially or totally
refurbish an existing structure, which are structured as construction loans and monitored in the same manner.
These loans typically have a construction period of up to 24 months or longer, whereby draws are taken and interest
only payments are made. As part of the draw process, inspection and lien checks are required prior to the disbursement of
the proceeds. Interest rates on disbursed funds are based on the rates and terms set at closing. The majority of our
commercial real estate construction loans are variable rate loans with rates tied to the prime rate, plus a premium. A floor
rate may also be established in conjunction with a variable rate loan. A minimum of interest only payments on disbursed
funds must be made on a monthly basis during the construction period. At the end of the construction period, the loan may
convert to a commercial real estate mortgage. At December 31, 2023, construction loans totaled $16.4 million, or 2.9% of
the total loan portfolio.
Construction loans can be affected by economic conditions and the value of the underlying property. Construction
loans may have additional risks related to advancing loan funds during construction due to the uncertain value of the property
prior to the completion of construction. The repayment of a construction loan is, to a large degree, dependent on the
successful and timely completion of the construction of the subject property. Construction delays may further impair the
borrower’s ability to repay the loan. The Bank limits its risks during the construction period as disbursements are not made
until the required work for each advance has been completed and a lien check has been performed.
One- to Four-Family Residential Mortgage Lending. At December 31, 2023, our one- to four-family residential
loans (including residential construction loans) totaled $172.0 million and represented 30.8% of the total loan portfolio.
Our residential mortgage loan originations are obtained from customers, residents of our local communities or referrals from
local real estate agents, brokers, attorneys, or builders. The majority of residential loans originated are fixed rate loans;
although we do offer adjustable rate loan products to our customers. Lake Shore Savings has historically retained the
majority of residential mortgage loans that it originates. This may increase Lake Shore Savings exposure to interest rate risk
with the recent increases in market interest rates, because the yield earned on fixed-rate assets would remain fixed, while
the rates paid by Lake Shore Savings for deposits and borrowings may increase, which could result in lower net interest
income. In an effort to manage interest rate risk, the Bank has begun in recent years to sell long term, lower yielding, fixed
rate residential mortgages at origination in the secondary market, with servicing retained.
6
One- to four-family residential mortgage loan originations are generally for terms up to 30 years; however, we do
offer and have successfully originated loans with shorter terms of 10, 15, or 20 years. One- to four-family residential real
estate loans may remain outstanding for significantly shorter periods than their contractual terms as borrowers may refinance
or prepay loans at their option without penalty. Conventional one- to four-family residential mortgage loans originated by
us customarily contain “due-on-sale” clauses that permit us to accelerate the indebtedness of the loan upon transfer of
ownership of the mortgaged property. We do not offer “interest only” mortgage loans or “negative amortization” mortgage
loans.
Our residential lending policies and procedures ensure that the majority of one- to four-family residential mortgage
loans generally conform to secondary market guidelines, although we also originate non-conforming loans. We underwrite
all conforming loans (i.e. loans with less than a $726,200 loan balance during 2023) using the criteria required by the Federal
Home Loan Mortgage Corporation (“FHLMC”). We originate one- to four-family residential mortgage loans with a loan-
to-value ratio up to 100%, and up to 101% with our United States Department of Agriculture (“USDA”) Rural Development
Guaranteed Loan Program (“GLP”) mortgage loan product. Mortgages originated with a loan-to-value ratio exceeding 80%
normally require private mortgage insurance.
During 2023, there were no one- to four-family residential mortgage loans sold to the secondary mortgage market.
We may offer loans through programs offered by the State of New York Mortgage Agency (“SONYMA”) which are
originated for sale. We retain all servicing rights for one- to four-family residential mortgage loans that we sell.
We also originate loans above the lending limit for conforming loans, which we refer to as “jumbo loans.” We
originate jumbo loans with fixed-rates and terms of up to 30 years. At December 31, 2023, jumbo loans totaled $5.7 million,
or 3.3% of the one- to four-family residential mortgage portfolio. Jumbo loans carry greater risk than conforming loans as
there are a limited number of potential buyers for this type of real estate which results in greater price volatility. As a result,
these loan types are subject to more conservative underwriting requirements.
We originate one- to four-family mortgage loans on non-owner occupied properties that the borrower holds for
investment purposes. These loans have a higher interest rate and shorter terms than loans for an owner-occupied property.
The loans typically have a fixed interest rate, terms up to 25 years and a loan to value ratio up to 75%. As of December 31,
2023 these loans represented $20.7 million or 12.0% of the one- to four-family residential mortgage portfolio.
We offer adjustable rate mortgage loans with a maximum term of 30 years. When an adjustable rate mortgage is
originated, the initial interest rate is established based on market conditions and competitor rates. The rate adjusts annually
after one, five, or seven years, depending on the loan product. After the initial fixed rate time period, the interest rate on
these loans will re-price based upon a specific U.S. Treasury index plus an additional margin, taking into consideration the
cap and floor rates established at the time of loan origination.
The retention of adjustable rate one- to four-family residential mortgage loans in our loan portfolio helps reduce
our exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased
costs to the borrower as a result of the pricing of adjustable rate residential mortgage loans. During periods of rising interest
rates, the risk of default on one- to four-family residential adjustable rate mortgage loans may increase due to the increase
of interest cost to the borrower. Furthermore, changes in the interest rates on adjustable rate mortgages may be limited by
an initial fixed-rate period or by contractual limits on periodic interest rate adjustments, and as such adjustable rate loans
may not adjust as quickly as our interest-bearing liabilities during a period of rapid increases in interest rates.
Lake Shore Savings originates construction-to-permanent loans for the purpose of construction of primary and
secondary residences. The Bank issues a commitment and has one closing which encompasses both the construction phase
and permanent financing. The construction phase is a maximum of twelve months and requires the borrower to make interest
only payments at the rate stated in the loan agreement. The loan to value on construction-to-permanent loans cannot exceed
80.0% of the estimated completed value at the end of the project.
One- to four-family real estate loans can be affected by economic conditions and the value of the underlying
collateral. The majority of our one- to four-family residential loans are secured by property located in Western New York
and are affected by economic conditions in this market area. Western New York’s housing market has consistently
demonstrated stability in home prices resulting in stable collateral value and lower risk of loss.
7
Construction lending generally involves a greater degree of risk as the repayment of the loan is dependent on the
successful and timely completion of the project. Lake Shore Savings completes inspections during the construction phase
prior to any disbursements, which limits the Bank’s risk. Construction delays may impair the borrower’s ability to repay
the loan.
Home Equity Loans and Lines of Credit. We currently provide all-in-one home equity lines of credit and have
provided home equity loans in the past to our customers. Home equity lines of credit are generally made for owner-occupied
homes, and are secured by first or second mortgages on residences. At December 31, 2023, home equity loans and lines of
credit totaled $51.9 million and represented 9.3% of the total loan portfolio. The all-in-one home equity line of credit must
have a minimum line amount of $5,000 up to a maximum of 90% of the total loan-to-value ratio for qualified borrowers.
The all-in-one home equity line of credit product has interest rates tied to the prime rate and generally has a 15 year draw
period and a 15 year payback period. Since 2010, our adjustable rate home equity loans include limits on decreases in the
interest rate of the loan. The decrease in the interest rate may not be below the “floor” rate established at the time of
origination. A customer has the option to convert either a portion, or the entire line of credit balance, to a term loan at a
fixed rate of interest. As the customer pays down the balance on the term loan, the funds available on the line of credit
increase by a like amount. All-in-one home equity lines of credit have 30 year maximum terms.
Home equity loans can be affected by economic conditions and the value of the underlying property. 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. At December 31, 2023, home equity loans and lines of credit where
the Company does not hold the first mortgage represented 40.1% of the outstanding principal within our home equity loan
portfolio. During periods of rising interest rates, the risk of default on home equity loans may increase due to the increase
of interest cost to the borrower.
Commercial Loans. In addition to commercial real estate loans, we also engage in commercial business lending,
(also known as C&I lending) primarily to small businesses. A commercial business loan may be a business installment loan,
line of credit, or other commercial loan. At December 31, 2023, commercial business loans totaled $16.5 million, or 3.0%
of the total loan portfolio. Most of our commercial business loans have fixed interest rates, and are for terms generally not
in excess of five years. In underwriting commercial business loans, consideration is typically given to the financial condition
and the debt service coverage capabilities of the borrower/operating entity, projected cash flows and collateral value.
Whenever possible, we collateralize these loans with a first lien on general business assets and a specific lien on the
equipment being purchased and require personal guarantees from principals of the borrower. We offer commercial loan
services designed to give business owners borrowing opportunities for modernization, inventory, equipment, construction,
real estate, purchases or improvements, working capital, vehicle purchases, and the refinancing of existing corporate debt.
Commercial business loans are generally considered to involve a higher degree of risk than residential mortgage
loans because the collateral underlying the loans may be in the form of furniture, fixtures, and equipment and/or inventory
subject to market obsolescence and accounts receivable which must be monitored. Commercial business loans may also
involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the borrower’s operation. Such risks can be
significantly affected by economic conditions. In addition, commercial business lending generally requires substantially
greater oversight efforts compared to residential real estate lending. Accordingly, the repayment of a commercial loan
depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary
and may be an insufficient source of repayment. We engage a third party to conduct an annual credit review of the
commercial business loan portfolio, including compliance with the Bank’s underwriting standards and policy requirements.
Consumer Loans. To a lesser extent, we offer a variety of consumer loans. At December 31, 2023, consumer loans
totaled $1.1 million, or 0.2% of the total loan portfolio. Generally, the volume of consumer lending has declined as
borrowers have opted for home equity lines of credit, which have lower interest rates. The largest component of our
consumer loan portfolio are personal consumer loans and overdraft lines of credit. Our consumer loan portfolio also consists
of vehicle loans, loans secured by certificates of deposit, secured and unsecured property improvement loans, and other
secured loans.
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,
8
and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The application
of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which
can be recovered on consumer loans in the event of a default.
Loan Participations. From time to time, we may originate a commercial real estate loan or commercial business
loan which may exceed our internal lending or concentration limits and sell a portion of the loan to another community
bank. The participating bank is typically located in New York State and its lending team is known by our commercial
lenders. This allows our Bank to meet the needs of its customers and comply with its internal lending limits. In some
instances, we may purchase participation interests in loans where we are not the lead lender. In both of these circumstances,
we follow our customary loan underwriting and approval policies. We have strong relationships with other community
banks in our primary market area that may desire to purchase participations, and we may increase our sales of participations
in the future, if deemed appropriate. At December 31, 2023, our sold participations in commercial real estate and commercial
business loans totaled $6.0 million and $242,000, respectively, all of which were collateralized by properties or business
assets within our primary market area in Western New York. We may also purchase commercial real estate loan or
commercial business loan participations in the future if deemed appropriate and at December 31, 2023, our purchased
participations in commercial real estate and commercial business loans totaled $6.4 million and $194,000, respectively. All
of the Bank’s loan participations are collateralized by properties or business assets within our primary market area.
Loan Approval Procedures and Authority. Our lending policies are approved annually by our Board of Directors.
Branch managers have the authority to originate home equity or consumer loans up to amounts approved by the Board of
Directors. Home equity loans and consumer loans secured by real estate in excess of $25,000 and all one- to four-family
residential mortgage loans up to $726,200 require approval by the Internal Residential Loan Committee; loans between
$726,200 and $1.0 million, require approval of the Internal Residential Loan Committee and designated bank officers or
loan committee member. Any of the above-mentioned loans with non-standard terms such as high loan-to-value ratios will
require additional approval levels up to and including approval by the Board of Directors. All non-commercial loans that
are in excess of $1.0 million, require approval from the Loan Committee of the Board of Directors. Director loans require
approval from the Board of Directors.
Commercial Loan Officers have the authority to originate commercial real estate and commercial business loans up
to amounts approved by the Board of Directors. Commercial loans with total one obligor credit in excess of $100,000 and
up to $1.5 million require the approval of two members of the Internal Commercial Loan Committee, one of which must be
a designated member of executive management. Commercial loans with total one obligor credit in excess of $1.5 million
and up to $5.0 million require majority approval by the Board Loan Committee. Commercial loans with total obligor credit
in excess of $5.0 million require full Board approval. Loans with exceptions require a higher approval level.
Current Lending Procedures. Upon receipt of a completed loan application from a prospective borrower, we order
a credit report and verify certain other information. If necessary, we obtain additional financial or credit related information.
We require an appraisal for all residential and commercial real estate loans and home equity loans, including loans made to
refinance existing mortgage loans. Appraisals are performed by licensed third-party appraisal firms. An appraisal
management firm, approved by the Board of Directors has been engaged to handle all requests for appraisals on residential
real estate loans. We require title insurance on all one- to four-family residential and commercial real estate loans and certain
other loans. We also require property and casualty insurance on all real estate loans, and if applicable, we require borrowers
to obtain flood insurance prior to closing. Based on loan-to-value ratios and lending guidelines, escrow accounts may be
required for such items as real estate taxes, property and casualty insurance, flood insurance, and private mortgage insurance
premiums.
Asset Quality
One of our key operating objectives has been, and continues to be, maintaining a high level of asset quality. Our
high proportion of commercial real estate and one- to four-family residential mortgage loans primarily collateralized by
property in Western New York, which historically has had stable property values, the maintenance of sound credit standards
for new loan originations, our loan review procedures, including third party loan reviews, and strong executive management
focus on credit quality have been factors in monitoring and managing our levels of credit risk. These factors have contributed
to our strong financial condition.
9
Collection Procedures. We have adopted a loan collection policy to maintain adequate control on the status of
delinquent loans and to ensure compliance with the Fair Debt Collection Practices Act, the Dodd-Frank Act, the Consumer
Protection Act and the New York State Real Property Actions and Proceedings Law. When a borrower fails to make required
payments on a residential, home equity, commercial, or consumer loan, we take a number of steps to induce the borrower
to cure the delinquency and restore the loan to a current status.
Prior to proceeding with any foreclosure action in the case of a secured loan, we will review the collateral to
determine whether its possession would be cost-effective for us. In cases where the collateral fails to fully secure the loan,
in addition to repossessing the collateral, we may also sue on the note underlying the loan.
Non-performing Loans and Non-performing Assets. Loans are periodically reviewed for performance.
Management individually evaluates loans when it is probable that at least a portion of the loan will not be collected in
accordance with the original loan terms due to a deterioration in the financial condition of the borrower or in the value of
the underlying collateral. When a loan is determined to be individually evaluated, the measurement of the loan is based on
the present value of the expected future cash flows, or the fair value of the collateral, if the loan is collateral-dependent. If
the measurement value is less than the loan balance, the loss is recorded against the allowance for credit losses. Loans are
placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal, or
when a loan becomes 90 days past due, unless an evaluation by management indicates that the loan is in the process of
collection and is either guaranteed or well secured. When management designates loans on which we stop accruing interest
income as non-accrual loans, we reverse outstanding interest income that was previously credited. We return a non-accrual
loan to accrual status when factors indicating doubtful collection no longer exist and the borrower has performed for a
period of at least six months.
Real estate acquired as a result of foreclosure is classified as foreclosed real estate until such time as it is sold. We
record foreclosed real estate at its fair value less estimated selling costs at the date of acquisition. If a foreclosure action is
commenced and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property could be
sold at the foreclosure sale (to an outside bidder). If not, and we retain the property, then we will sell the real property
securing the loan as soon thereafter as practical.
Loans modified due to borrowers experiencing financial difficulties occur when we grant borrowers loan
modifications 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 substitution or addition of borrower(s). The Company identifies loans for potential
modifications related to borrowers experiencing financial difficulty 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 loan
modified due to a borrower experiencing financial difficulties 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. These loans
are individually evaluated loans, which may result in specific reserves within the allowance for credit losses and subsequent
charge-offs, if appropriate.
Refer to Part II, Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations”
and Part IV, Financial Statements, Note 2 and Note 5 elsewhere in this report for additional details on nonperforming and
individually evaluated loans.
Classification of Loans. Federal regulations require us to regularly review and classify our loans. In addition, our
regulators have the authority to identify problem loans and, if appropriate, require them to be classified. Management closely
monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the
Company’s loan portfolio. The credit quality grade helps management make a consistent assessment of each loan
relationship’s credit risk. Consistent with regulatory guidelines, the Company classifies loans and other assets considered
of lesser quality. Such ratings coincide with the “Substandard”, Doubtful”, and “Loss” classifications used by federal
regulators in their examination of financial institutions. A “Substandard” classification indicates that a loan has one or more
10
defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not
corrected. A “Doubtful” classification has all the weaknesses of a “Substandard” classification with the added characteristic
that the weaknesses make collection or liquidation in full highly questionable and improbable. Loans classified as “Loss”
are considered uncollectible and continuance as an asset of the Company is no longer warranted.
Regulations also provide for a “special mention” category (i.e. criticized loans), described as loans which do not
currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving our close attention. When we classify loans as either substandard or doubtful, we set aside a loss
reserve for such loans as we deem prudent. When we classify problem loans as loss, we typically charge-off the outstanding
loan balance against the allowance for credit losses reserve. Our determination as to the classification of our loans and the
amount of our loss allowances are subject to review by our regulators, which can require that we establish additional loss
allowances. For further discussion on how management determines when a loan should be classified, refer to Note 5 in the
consolidated financial statements located elsewhere in this report.
Allowance for Credit Losses on Loans and Unfunded Commitments. On January 1, 2023, the Company adopted
ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured
at amortized cost and other commitments to extend credit. The allowance for credit losses on loans and unfunded
commitments is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio and
commitments to extend credit. The process to determine expected credit losses utilizes analytic tools and judgment and is
reviewed on a quarterly basis. We maintain the allowance through (credit) provisions for credit losses that we charge to
income. We charge losses on loans against the allowance for credit losses when we believe the collection of the loan is
unlikely, and all possible avenues of repayment have been analyzed, including the potential of future cash flow, the value
of the underlying collateral, and strength of any guarantors or co-borrowers.
Our evaluation of risk in maintaining the allowance for credit losses includes the review of all loans on which the
collectability of principal may not be reasonably assured. We consider the following qualitative and environmental factors
as part of this evaluation: historical loan loss experience; payment status; the estimated value of the underlying collateral;
changes in lending policies, procedures and loan review system; changes in the experience, ability, and depth of lending
management and other relevant staff; trends in loan volume and the nature of the loan portfolio; and current and future
national and local economic conditions. There may be other factors that may warrant consideration in maintaining the
allowance. Although our management believes that it has established and maintained the allowance for credit losses to
reflect losses inherent in our loan portfolio, based on its evaluation of the factors noted above, future additions may be
necessary if economic and other conditions differ substantially from the current operating environment.
In addition, various regulatory agencies periodically review our allowance for credit losses as an integral part of
their examination process. These agencies, including the Office of the Comptroller of the Currency, may require us to
increase the allowance for credit losses or the valuation allowance for foreclosed real estate based on their evaluation of the
information available to them at the time of their examination.
Refer to Note 5 in the consolidated financial statements located elsewhere in this report for more information on
our individually evaluated loans.
The following table presents our allocation of the allowance for credit losses by loan category and the percentage
of loans in each category to total loans at the end of the years indicated. The allowance for credit losses allocated to each
category is not necessarily indicative of inherent losses in any category and does not restrict the use of the allowance to
absorb losses in other categories.
11
2023
% of Allowance
to Total
Allowance
% of Loans in
Category to
Total Loans
2022
% of Allowance
to Total
Allowance
% of Loans in
Category to
Total Loans
Amount
Amount
At December 31,
(Dollars in thousands)
$
$
$
532
213
5,231
5,976
471
16
487
6,463
—
6,463
8.2%
3.3%
81.0%
92.5%
7.3%
0.2%
7.5%
100.0%
0.0%
100.0%
30.8% $
9.3%
56.8%
96.9%
3.0%
0.1%
3.1%
100.0% $
$
411
217
5,746
6,374
509
47
556
6,930
135
7,065
5.8%
3.1%
81.3%
90.2%
7.2%
0.7%
7.9%
98.1%
1.9%
100.0%
30.5%
9.2%
56.7%
96.4%
3.4%
0.2%
3.6%
100.0%
Real Estate Loans:
Residential, one- to four-family(1)
Home equity
Commercial(2)
Other loans:
Commercial
Consumer
Total allocated
Total unallocated
Balance at end of year
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial construction loans.
For further discussion on how management evaluates its allowance for credit losses, refer to Note 5 in the
consolidated financial statements located elsewhere in this report.
Investment Activities
General. The general objectives of the investment portfolio are to provide for the overall asset/liability management
of the Bank. All of our securities carry market risk, as increases in market rates of interest may cause a decrease in the fair
value of the securities. Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and
liabilities, to provide collateral for pledging requirements on borrowings, to generate a favorable return without incurring
undue interest rate or credit risk, to complement our lending activities and to provide and maintain liquidity within
established guidelines. Our investment policy outlines the pre-purchase analysis, credit, and interest rate risk assessment
guidelines and due diligence documentation required for all permissible investments. In addition, our policy requires
management to routinely monitor the investment portfolio as well as the markets for changes which may have a material,
negative impact on the credit quality of our holdings. Our Board of Directors reviews and approves our investment policy
on an annual basis. The Board of Directors has delegated primary responsibility for ensuring that the guidelines in the
investment policy are followed to the Asset-Liability Committee. The board designates members of executive management
with the authority to purchase securities within established plans and guidelines. All transactions are reviewed by the
Asset/Liability Committee.
In establishing our investment strategies, we consider our interest rate sensitivity, the types of securities to be held,
liquidity and other factors. Federal savings banks have authority to invest in various types of assets, including U.S.
Government obligations, securities of various federal agencies, obligations of states and municipalities, mortgage-backed
and asset-backed securities, collateralized-mortgage obligations, certain time deposits of insured banks and savings
institutions, certain bankers’ acceptances, repurchase agreements, loans of federal funds, and, subject to certain limits,
corporate debt and commercial paper.
The Company has classified all of its investments in debt securities as “available for sale.” The debt securities are
reported at fair value, and unrealized gains and losses on debt securities are excluded from earnings and reported, net of
deferred taxes, as a separate component of equity. Our current securities portfolio consists of collateralized mortgage
obligations, mortgage backed securities, asset-backed securities, U.S. Government Agency bonds, and municipal bonds.
Nearly all of our mortgage backed securities are directly or indirectly insured or guaranteed by FHLMC, the Government
National Mortgage Association (“GNMA”) or the Federal National Mortgage Association (“FNMA”, or “Fannie Mae”).
The municipal securities we invest in are fixed-rate investment grade bonds issued primarily by municipalities in New York
State, have maturities of 20 years or less and many have private insurance guaranteeing repayment. The majority of
municipal securities in our portfolio are unlimited general obligation bonds.
12
Fair values of available for sale securities are based on a market approach. 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
third party data service provider.
We also have investments in equity securities, specifically Federal Home Loan Bank of New York (“FHLBNY”)
stock, which must be held as a condition of membership in the Federal Home Loan Bank system. The level of investment
is largely dependent on our level of borrowings from the FHLBNY. The investment in FHLBNY stock is considered
restricted and is reported at cost on the consolidated statements of financial condition. The related changes in fair market
value of equity securities are reported in other non-interest income on the consolidated statements of income.
Classification of Investments. Federal regulations require us to regularly review and classify our investments based
on credit risk in determining credit quality of investment portfolios as well as for calculating risk based capital. A decline
in the market value of a security due to interest rate fluctuations is not a basis for adverse classification. Instead, the
classification is based on the likelihood of the timely and full collection of principal and interest.
In assessing the credit quality of securities in our investment portfolio, we conduct an internal risk analysis, which
includes a review of third party research and analytics. If our research indicates that an issuer of a security does not have
adequate capacity to meet its financial obligations for the life of the asset, the Company will review the security and consider
it for classification.
Our determination as to the classification of our investments is subject to review by our regulators. We regularly
review our investment portfolio to determine whether any investments require classification in accordance with applicable
regulations. Our review of our investment portfolio at December 31, 2023 resulted in two private-label asset-backed
securities being classified, as the issuer may not have an adequate capacity to meet its financial commitments over the
projected life of the investment or the risk of default by the obligor was possible, resulting in an expectation that the Bank
would not receive the full and timely repayment of principal and interest as expected. These two securities had an amortized
cost of $0 and an aggregate fair value of $31,000 at December 31, 2023.
The Company assessed whether it intended to or would be more likely than not required to sell its available-for-
sale securities in an unrealized loss position before the recovery of its amortized cost basis and concluded that no securities
met this criteria. Furthermore, we considered whether the decline in fair value related to credit factors and concluded that
no allowance for credit losses on available-for-sale securities was required as of December 31, 2023. Additionally, we
concluded that no other than temporary impairment charges needed to be recorded during the year ended December 31,
2022. During the years ended December 31, 2023 and 2022, we recaptured $7,000 and $15,000 respectively, of prior year
other-than-temporary impairment charges. The recaptured amounts are reflected in the “recovery on previously impaired
investment securities” line item in the consolidated statements of income.
Bank Owned Life Insurance. The Bank owns several Bank Owned Life Insurance (“BOLI”) policies totaling
$29.4 million and $23.2 million at December 31, 2023 and 2022, respectively. The purpose of these policies is to offset the
costs of supplemental employee retirement benefit (“SERP”) plans contractually obligated to members of management and
non-employee directors. Refer to Note 11 in the notes to the consolidated financial statements beginning on page F-1 of this
report for more information on the SERP plans. The lives of certain key Bank employees and non-employee directors are
insured, and Lake Shore Savings Bank is the sole beneficiary and will receive any benefits upon the employee or non-
employee’s death. The policies were purchased from various life insurance companies. The design of the plan allows the
cash value of the policy to be designated as an asset of the Bank. The asset’s value will increase by the crediting rate, which
is a rate set by each insurance company and is subject to change on a quarterly, semi-annual or annual basis. The growth
of the value of the asset will be recorded in non-interest income on the consolidated statements of income. Because this is
a life insurance product, current federal tax laws exempt the income from federal income taxes.
Bank owned life insurance is not secured by any government agency nor are the policies’ asset values or death
benefits secured specifically by any collateral. The Bank has worked closely with its advisor to select insurance companies
and the bond ratings and financial condition of the underlying insurance companies are monitored on a quarterly basis. The
failure of one of these insurance companies could result in a significant loss to the Bank. Other risks include the possibility
that the favorable tax treatment of the income could change, that the crediting rate will not increase in a manner comparable
to market interest rates, or that this type of plan will no longer be permitted by the Bank’s regulators. This asset is considered
13
illiquid because, although the Bank may terminate the policies and receive the original premium plus all earnings at any
time, such an action would require the payment of federal income taxes on all earnings since inception.
Sources of Funds
General. Deposits are our major source of funds for lending and other investment purposes. We may also borrow
funds, primarily from the FHLBNY, to supplement the amount of funds available for lending and daily operations. In
addition, we derive funds from loan and mortgage-backed securities principal repayments and prepayments and from
interest and proceeds from the maturity and call of investment securities, along with cash flows from operations. Loan
repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates, pricing strategies and economic conditions.
Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. We currently offer
regular savings deposits (consisting of Christmas Club and statement savings accounts), money market savings and checking
accounts, interest-bearing and non-interest bearing checking accounts (i.e., demand deposits), health savings accounts,
retirement accounts, time deposits and Interest on Lawyer Accounts (“IOLA”). In addition to accounts for individuals, we
also offer commercial savings, checking and money market accounts designed for the small to medium-sized businesses
operating in our market area.
Deposit flows are influenced significantly by general and local economic conditions, changes in prevailing interest
rates, pricing of deposits, and competition. Our deposits are obtained from communities surrounding our branch offices
and we rely primarily on paying competitive rates, service, and long-standing relationships with customers to attract and
retain these deposits. We may also rely on brokers to obtain deposits for liquidity purposes. We are a participant in the
IntraFi Network Deposits program. This program offers our depositors enhanced FDIC insurance coverage. On May 24,
2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “EGRRCPA”) was signed into
law and as a result reciprocal deposits obtained via the IntraFi Network Deposits program are generally not considered
brokered deposits. At December 31, 2023 and 2022, we had $12.9 million and $8.1 million of depositor funds placed in
the IntraFi Network Deposits program. At December 31, 2023, we had $16.0 million of brokered time deposits while there
were $1.7 million of brokered time deposits at December 31, 2022.
When we determine our deposit rates, we consider local competition, U.S. Treasury securities offerings, our
liquidity needs, and the rates charged on other sources of funds. We generally review our deposit mix and pricing on a
weekly basis. Our deposit pricing strategy has generally been to offer competitive rates to attract funds and to focus on the
acquisition of lower cost core deposits as opportunities arise.
The following table presents our time deposit accounts categorized by interest rates which mature during each of
the years set forth below and the amounts of such time deposits by interest rate at December 31, 2023 and 2022.
Interest Rate Range
0.49% and below
0.50% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
Total
Period to maturity at December 31, 2023
At December 31,
Less than
One
Year
More than
One Year to
Two Years
More than
Two Years
to
Three Years
More than
Three
Years
(Dollars in thousands)
2023
2022
$
17,557
12
2,617
6,677
7,355
91,640
24,644
$ 150,502
$
$
2,684
1,091
4,067
13,286
1,443
295
36,017
58,883
$
$
444
3,426
—
4
—
—
—
3,874
$
$
100
2,168
7
—
3,477
1,803
—
7,555
$
20,785
6,697
6,691
19,967
12,275
93,738
60,661
$ 220,814
$
$
45,643
18,330
21,332
52,109
13,637
1,907
—
152,958
14
At December 31, 2023 and 2022, time deposits with remaining terms to maturity of less than one year amounted to
$150.5 million and $78.5 million, respectively.
At December 31, 2023 and 2022, we had $75.7 million, or 12.8% of total deposits, and $82.5 million, or 16.6% of
total deposits, respectively, in uninsured deposits in excess of the FDIC insurance limit of $250,000. At December 31,
2023, we had $38.4 million in time deposits with balances of $250,000 or more maturing as follows:
Maturity Period
Three months or less
Over three months through six months
Over six months to twelve months
Over twelve months
Total
Amount
(In thousands)
5,014
10,716
7,793
14,910
38,433
$
$
Borrowings. The Company maintains borrowing arrangements in the form of lines of credit through two depository
institutions. The Company may also obtain term borrowings from the FHLBNY. Our borrowings typically consist of a mix
of short-term and long-term FHLBNY advances. At December 31, 2023 we had $35.3 million of long-term debt from the
FHLBNY. In comparison, we had $12.6 million of short-term borrowings and $25.0 million of long-term debt from the
FHLBNY at December 31, 2022.
Additional information regarding our deposits and borrowings are included in Notes 7 and 8 in the notes to our
consolidated financial statements beginning on page F-1 of this report. Also, refer to “Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional
information on sources of funds.
Subsidiary Activities
Lake Shore Savings Bank is the only subsidiary of Lake Shore Bancorp. Lake Shore Savings Bank has no
subsidiaries.
Employees and Human Capital Resources
Our core values of “Putting People First and Helping our Customers, Energizing our Employees, Respecting our
Stockholders and Serving our Communities” begins with our Bank employees and their well-being. As a community bank,
our employees are integral to the establishment of personal relationships with each of our customers, and as such are critical
to the success of our Company.
As of December 31, 2023, Lake Shore Savings Bank employed 115 full-time employees and 2 part-time employees.
Lake Shore Savings employees are not represented by a collective bargaining unit. Management believes that it has good
relations with its employees.
Management encourages and supports the growth and development of all its employees by providing internal and
external educational opportunities. Employees have the opportunity to participate in instructor led classroom training, third
party webinars, seminars, conferences, and local leadership training groups, in an effort to increase their knowledge.
Whenever possible, the Company seeks to fill its open positions through internal promotions and transfers from within the
organization.
As part of our efforts to attract and retain employees, as well as support their health and well-being, we provide, in
addition to competitive salaries, a comprehensive benefit package that provides health, dental, life, disability and other
ancillary insurance benefits, as well as a generous paid time off policy. In addition, through our 401K, profit sharing and
ESOP programs the Company facilitates the future financial well-being of its employees. Nearly all of our employees are
stockholders in the Company through their participation in our Employee Stock Ownership Plan. Employee participation
helps align employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost
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to our associates. These benefits, when combined with incentive compensation and bonus programs, serve as rewards for
performance and as retention vehicles.
General
Supervision and Regulation
Lake Shore Savings Bank, a federally chartered savings bank, is subject to regulation, examination, and supervision
by the OCC, while Lake Shore Bancorp, Inc. and Lake Shore, MHC, which are federally chartered savings and loan holding
companies, are subject to regulation, examination, and supervision by the Federal Reserve Board. Under this system of
federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with
respect to their capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market interest rates.
Lake Shore Savings also is regulated, to a lesser extent, by the FDIC with respect to insurance of deposit accounts and the
Federal Reserve Board, with respect to the payment of dividends and other matters. The regulation and supervision by these
government agencies establishes a comprehensive framework of activities in which an institution may engage and is
intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Lake Shore Savings’ relationship
with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters
concerning the ownership of deposit accounts and the form and content of Lake Shore Savings’ mortgage documents.
Certain of the regulatory requirements that are applicable to Lake Shore Savings, Lake Shore Bancorp and Lake
Shore, MHC are described below. This description of statutes, regulations and other documents is not intended to be a
complete explanation of such statutes, regulations and other documents and their effect on Lake Shore Savings, Lake Shore
Bancorp and Lake Shore, MHC and is qualified in its entirety by reference to the actual statutes, regulations and other
documents.
Consent Order
Effective as of February 9, 2023, the Bank and the OCC entered into a Consent Order (the “Order”). The Order
replaces the prior Agreement between the Bank and the OCC dated July 13, 2022 (the “Written Agreement”), which has
been terminated in connection with the entry into the Order. The Order provides, among other things, that the Bank will
take the following actions within specified time frames as set forth in the Order:
create a compliance committee to monitor and oversee the Bank’s compliance with the Order and submit monthly
reports to the Board of Directors of the Bank and the OCC;
develop, adopt, implement, and thereafter adhere to a program for corporate governance and Board oversight of the
Bank’s operation and structure;
establish, and review at least annually, the objectives by which senior executive officers’, as well as the Chief
Technology Officer’s, the Information Security Officer’s, and the Bank Secrecy Act (“BSA”) Officer’s,
effectiveness will be measured and prepare an annual written performance appraisal for each Bank senior executive
officer evaluating the performance of such objectives;
ensure that the Bank has competent management in place, review the capabilities, experience, qualifications and
performance of the Bank’s management, including, but not limited to, the Chief Executive Officer, Chief Operating
Officer, Chief Technology Officer, Information Security Officer and BSA Officer, and the Board will determine
whether management changes should be made;
if an officer will continue in his or her position, but the Board determines the officer’s depth of skills needs
improvement, it will develop and implement a written program to improve the officer’s supervision and
management of the Bank;
submit to the OCC for review and prior written determination of no supervisory objection an acceptable written
strategic plan for the Bank covering at least a three-year period;
submit to the OCC for review an acceptable, comprehensive, written internal audit program that adequately assesses
controls and operations to allow the Board and management to understand the sufficiency of the Bank’s internal
controls program;
16
develop, adopt and implement a written program to effectively assess and manage the Bank’s information
technology (“IT”) activities, commensurate with the level of risk and complexity of the Bank’s IT activities, subject
to review and prior written determination of no supervisory objection by the OCC;
develop, adopt and implement a written information security program that includes administrative, technical and
physical safeguards to ensure the security and confidentiality of customer information, subject to review and prior
written determination of no supervisory objection by the OCC;
adopt and implement the written automated clearing house risk management program previously given no
supervisory objection by the OCC in connection with the Written Agreement;
analyze the current BSA/AML risk profile and strategic direction of the Bank to determine the skills, experience,
and expertise required of the Bank’s BSA Officer and develop a comprehensive job description detailing all the
requirements and responsibilities of the BSA Officer role with such appointment of a BSA Officer subject to OCC
non-objection;
ensure that the Bank’s BSA Department maintains sufficient personnel with requisite expertise, training, skills, and
authority to ensure the safe and sound operation of the Bank;
develop, adopt, implement and ensure that the BSA Officer and any supporting staff receive training, and thereafter
ensure the Bank’s adherence to a written system of internal controls reasonably designed to provide for ongoing
compliance with BSA regulatory requirements, including appropriate suspicious activity monitoring and reporting;
ensure that Bank management develops, implements, and thereafter maintains adherence to an enhanced written
risk-based program of internal controls and processes to ensure compliance with OCC regulations to file suspicious
activity reports (“SARs”);
submit to the OCC for prior written determination of no supervisory objection, the name and qualifications of a
proposed independent, third-party consultant to conduct a look-back review of certain medium and high risk activity
over a six-month period and provide a written report on the Bank’s SARs monitoring, including a proposed scope
and timeline for completion of the engagement;
revise, develop, adopt, implement, and thereafter ensure the Bank’s adherence to expanded account opening policies
and procedures for all accounts that pose greater than normal risk for compliance with the BSA;
develop, adopt, implement, and thereafter ensure the Bank’s adherence to procedures for periodically reviewing,
testing, and updating the Bank’s BSA/AML model risk assessments; and
develop, adopt, implement, and thereafter ensure the Bank’s adherence to requirements for the periodic independent
validation of the Bank’s BSA/AML systems to ensure the system is detecting potentially suspicious activity.
The foregoing description of the Order is qualified in its entirety by reference to the full Order which was included
in a Form 8-K filed on February 15, 2023 with the Securities and Exchange Commission.
Troubled Condition Status
The Bank has been designated as being in “Troubled Condition” under the rules and regulations of the OCC. As a
result of this designation, the Bank must notify the OCC at least 30 days prior to the addition or replacement of a board
member, or the employment or change in responsibilities of anyone who is, who will become, or performs the duties of a
senior executive officer. Furthermore, the Bank must file an application with, and receive the consent of, the OCC with the
concurrence of the FDIC, prior to the Bank entering into any agreement to pay and prior to making certain severance
payments to our directors, officers and employees.
Individual Minimum Capital Requirement
Pursuant to an Individual Minimum Capital Requirement, the Bank has been directed by the OCC to maintain a
Tier 1 Leverage capital ratio of 10% and a Total Risk-Based capital ratio of 13%. In order to be considered “well-capitalized”
by the OCC, a savings bank must maintain a Tier 1 Leverage capital ratio of 5% and a Total Risk-Based capital ratio of
10%. At December 31, 2023, the Bank’s Tier 1 Leverage capital ratio was 12.68% and its Total Risk-Based capital ratio
was 17.77% and accordingly the Bank was in compliance with its Individual Minimum Capital Requirement and was
considered well-capitalized.
Agreement with the Federal Reserve Bank of Philadelphia
17
On June 28, 2023 Lake Shore, MHC and Lake Shore Bancorp, Inc. the parent savings and loan holding companies
of Lake Shore Savings Bank, entered into a written agreement (the “Agreement”) with the Federal Reserve Bank of
Philadelphia (the “Reserve Bank”), the companies’ regulator. The Agreement provides, among other things, that the
companies take appropriate steps to fully utilize the companies’ financial and managerial resources to serve as a source of
strength to the Bank, including, but not limited to, taking steps to ensure that the Bank complies with the Consent Order and
not, directly or indirectly, declare or pay dividends, increase or guarantee any debt without prior approval. We expect that
our non-interest expenses will continue at their increased levels as a result of the Agreement and the Order, which may
adversely affect our financial performance.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’
Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, Lake Shore Savings may originate
mortgage loans secured by residential and commercial real estate, commercial business loans and consumer loans, and it
may invest in certain types of debt securities and certain other assets. Certain types of lending, such as commercial real
estate, commercial business and consumer loans, are subject to an aggregate limit calculated as a specified percentage of
Lake Shore Savings’ capital or assets. Specifically, Lake Shore Savings may invest in non-residential real estate loans
which may not in the aggregate exceed 400% of capital, commercial business loans up to 20% of assets in the aggregate
and consumer loans up to 35% of assets in the aggregate. Lake Shore Savings also may establish subsidiaries that may
engage in activities not otherwise permissible for Lake Shore Savings, including real estate investment and securities and
insurance brokerage.
Examinations and Assessments. Lake Shore Savings Bank is primarily supervised by the OCC, and as such is
required to file reports with and is subject to periodic examination by the OCC. Lake Shore Savings Bank is also required
to pay assessments to the OCC to fund the agency’s operations.
Capital Requirements. Federal regulations require a federal savings bank to meet certain minimum capital
standards. The minimum capital standards consist of a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-
weighted assets, a uniform leverage ratio of 4%, a Tier 1 capital to risk-weighted assets ratio of 6% of risk-weighted assets
and a total capital ratio of at least 8% of risk-weighted assets. In order to be considered well-capitalized, the Bank must
have a CET1 ratio of 6.5%, a Tier 1 ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%. The Bank
is also required to meet an Individual Minimum Capital Requirement as described above. The regulatory standards require
unrealized gains and losses on certain “available for sale” securities holdings to be included for purposes of calculating
regulatory capital unless a one-time opt-out is exercised. Lake Shore Savings Bank has exercised this one-time opt-out and
therefore excluded unrealized gains and losses on certain “available-for-sale” securities holdings for purposes of calculating
regulatory capital when applying the general rule. Additional restraints are also imposed on the inclusion in regulatory
capital of mortgage-servicing assets, deferred tax assets and minority interests.
Capital definitions include:
Common equity Tier 1 capital is generally defined as common stockholders’ equity, including retained earnings but
excluding accumulated other comprehensive income.
Tier 1 capital is generally defined as Common Equity Tier 1 capital and Additional Tier 1 capital.
Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and
minority interests in equity accounts of consolidated subsidiaries.
Total capital includes Tier 1 capital and Tier 2 capital.
Tier 2 capital is comprised of capital instruments and related surplus meeting specific requirements, and may
include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock. Also included in Tier 2 capital is the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have not exercised an
opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net
unrealized gains on available-for-sale equity securities with readily determinable fair market values. Lake Shore
Savings has exercised this one time opt-out election and does not include AOCI in its regulatory capital when
applying the general rule.
18
Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain
additional regulatory capital because of the recourse back to the savings bank. In assessing an institution’s capital adequacy,
the federal regulators take into consideration not only these numeric factors but also qualitative factors as well and has the
authority to establish higher capital requirements for individual associations where necessary.
In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight factor assigned by federal regulations based on the risks believed inherent in the type of asset.
The capital requirements assign a higher risk weight to asset categories believed to present a great risk. For example, a risk
weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently
underwritten first lien one to four family residential mortgages, a risk weight of 100% is assigned to commercial and
consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% and 600% is
assigned to permissible equity interests, depending on certain specified factors.
The regulations limit a banking organization’s capital distributions and certain discretionary bonus payments if the
banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to
risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
Notwithstanding the foregoing, pursuant to the EGRRCPA, the OCC finalized a rule effective January 2020 that
established a minimum community bank leverage ratio (tier 1 capital to average consolidated assets) of 9% for institutions
under $10 billion in assets. An institution may elect to utilize the community bank leverage ratio in lieu of the general
applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio
and certain other qualifying criteria will automatically be deemed to be well-capitalized.
Effective January 1, 2020, the Bank elected to opt in and utilize the community bank leverage ratio framework on
its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter
grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace period or maintain a
leverage ratio of 9% requires the institution to comply with the generally applicable capital requirements.
At December 31, 2023, Lake Shore Savings’ capital exceeded the minimum requirement of the community bank
leverage ratio with a ratio of 12.68% and was considered to be well-capitalized.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and
authorized to take supervisory actions against undercapitalized federal savings banks. For this purpose, a savings bank is
placed in one of the following categories based on the savings bank’s capital:
well-capitalized (at least 5% leverage capital, 6.5% common equity Tier 1 risk-based capital, 8% Tier 1 risk-
based capital and 10% total risk-based capital or if applicable, a community bank leverage ratio of 9.0%);
adequately capitalized (at least 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1
risk-based capital and 8% total risk-based capital);
undercapitalized (less than 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1 risk-
based capital or 8% total risk-based capital);
significantly undercapitalized (less than 3% leverage capital, 3% common equity Tier 1 risk-based capital, 4%
Tier 1 risk-based capital or 6% total risk-based capital); and
critically undercapitalized (less than 2% tangible capital).
Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically
undercapitalized” within specific time frames. “Undercapitalized” institutions are subject to certain restrictions, such as on
capital distributions and growth. The regulations also provide that a capital restoration plan must be filed with the OCC
within 45 days of the date a savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.” Any holding company for the savings bank required to submit a capital restoration plan must
guarantee the lesser of: an amount equal to 5% of the savings bank’s assets at the time it was notified or deemed to be
undercapitalized by the OCC, or the amount necessary to restore the savings bank to adequately capitalized status. This
guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for
each of four consecutive calendar quarters. The OCC has the authority to require payment and collect payment under the
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guarantee. The failure of a holding company to provide the required guarantee will result in certain operating restrictions
on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and
management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary
supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
At December 31, 2023, Lake Shore Savings met the criteria for being considered “well-capitalized.”
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include
cash dividends, stock repurchases and other transactions charged to the capital account.
Among other requirements, every federal savings bank in the mutual holding company structure must file an
application with the OCC prior to paying a dividend or making a capital distribution.
Every federal savings bank that is a subsidiary of a holding company must file a notice with the Federal Reserve
Board, at least 30 days before the board of directors declares a dividend or approves a capital distribution.
The OCC and the Federal Reserve Board may disapprove an application or notice if:
the savings bank would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any
capital distribution if, after making such distribution, the institution would be undercapitalized.
Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single
borrower in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real
estate. As of December 31, 2023, Lake Shore Savings Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, Lake Shore Savings is subject to a qualified thrift lender,
or “QTL,” requirement by meeting one of two tests: The Home Owners’ Loan Act (“HOLA”) QTL test or the Internal
Revenue Service (“IRS”) Domestic Building and Loan Association (“DBLA”) test. The federal savings bank may use either
test to qualify and may switch from one test to the other.
Under the HOLA QTL test, Lake Shore Savings must maintain at least 65% of its “portfolio assets” in “qualified
thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total
assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible
assets, and the value of property used in the conduct of the savings bank’s business.
“Qualified thrift investments” includes various types of loans made for residential and housing purposes,
investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal,
family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also
include 100% of an institution’s credit card loans, education loans and small business loans.
Under the IRS DBLA test, the Bank must meet the business operations test and the 60% of assets test. The business
operations test requires that the federal savings bank’s business consists primarily of acquiring the savings of the public
(75% of its deposits and other obligations must be held by the general public) and investing in loans (more than 75% of its
gross income consists of interest on loans and government obligations and various other specified types of operating income
that federal savings bank’s ordinarily earn). For the 60% of assets test, the Bank must maintain at least 60% of its total in
“qualified investments” as of the close of the taxable year or, at the option of the federal savings bank, may be computed
on the basis of the average assets outstanding during the taxable year.
20
A savings bank that fails the QTL test must either convert to a commercial bank charter or operate under specified
restrictions. The Dodd-Frank Act made noncompliance with the QTL test potentially subject to agency enforcement action
for violation of law. At December 31, 2023, Lake Shore Savings Bank opted to utilize the HOLA QTL test and satisfied
the requirements of this test for the entire 12-month period.
Liquidity. A federal savings institution is required to maintain a sufficient amount of liquid assets to ensure its safe
and sound operation. We seek to maintain a ratio of liquid assets not subject to pledge as a percentage of total liabilities of
12% or greater.
Refer to Part II, Item 7 “Management Discussion and Analysis – Liquidity and Capital Resources” elsewhere in
this report for additional details on liquidity.
Community Reinvestment Act and Fair Lending Laws. All savings banks have a responsibility under the
Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including
low-and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the OCC is required
to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or
in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. Lake
Shore Savings Bank received an “outstanding” Community Reinvestment Act rating in its most recent federal examination.
On October 24, 2023, the OCC and the other federal banking agencies issued a final rule to strengthen and
modernize the CRA regulations. Under the final rule, banks with assets of at least $600 million as of December 31 in both
of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years will be
an “intermediate bank.” The agencies will evaluate intermediate banks under the Retail Lending Test and either the current
community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the
Bank’s option, the Community Development Financing Test. The applicability date for the majority of the provisions in the
CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its “affiliates”
is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act. The term “affiliate” for these
purposes generally means any company that controls, is controlled by, or is under common control with an insured
depository institution such as Lake Shore Savings Bank. Lake Shore Bancorp, Inc. and Lake Shore, MHC are affiliates of
Lake Shore Savings Bank. In general, transactions with affiliates must be on terms that are as favorable to the savings bank
as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate
percentage of the savings bank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to
receive loans from the savings bank. In addition, OCC regulations prohibit a savings bank from lending to any of its
affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the
securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound
banking practices and may not involve low-quality assets. The OCC requires savings banks to maintain detailed records of
all transactions with affiliates.
Lake Shore Savings’ authority to extend credit to its directors, executive officers and 10% stockholders, as well as
to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal
Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions
of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that
are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve
more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the
amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount
of Lake Shore Savings Bank’s capital. In addition, Lake Shore Savings Bank’s board of directors must approve extensions
of credit in excess of certain limits. Extensions of credit to executive officers are subject to additional restrictions based on
the category of loan.
21
At December 31, 2023, Lake Shore Savings is in compliance with Regulation O.
Cybersecurity. In addition to the provisions in the Gramm-Leach-Bliley Act relating to data security, the Company
and its subsidiaries are subject to many federal and state laws, regulations and regulatory interpretations which impose
standards and requirements related to cybersecurity. For example, federal regulatory statements regarding cybersecurity
indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to
ensure that risk management processes also address the risk posed by compromised customer credentials, including security
measures to reliably authenticate customers accessing internet-based services of the financial institution. Additionally, the
statements indicate that a financial institution’s management is expected to maintain sufficient business continuity planning
processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack
involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery
of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical
service providers fall victim to this type of cyber-attack. Financial institutions that fail to observe this regulatory guidance
on cybersecurity may be subject to various regulatory sanctions, including financial penalties.
In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations to notify
their primary federal regulator as soon as possible and no later than 36 hours of determining that a “computer-security
incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred. A
notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to
materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer
base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector.
The final rule also requires bank service providers to notify any affected bank to or on behalf of which the service provider
provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or
degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for four or more
hours. The rule was effective April 1, 2022, with compliance required by May 1, 2022.
Anti-Money Laundering and OFAC. Under federal law, financial institutions must maintain anti-money laundering
programs that include established internal policies, procedures, and controls. Financial institutions are also prohibited from
entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence
and customer identification. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account
relationships to guard against money laundering and to report any suspicious transactions. Law enforcement authorities
have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely
examine institutions for compliance with these obligations. The U.S. Department of the Treasury's Office of Foreign Assets
Control, or "OFAC," is responsible for helping to ensure that U.S. entities do not engage in transactions with certain
prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons,
organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated
Nationals and Blocked Persons. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC
list, the Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate
authorities. The U.S. Treasury Department's Financial Crises Enforcement Network ("FinCEN") rules include customer due
diligence requirements for banks, including a requirement to identify and verify the identity of beneficial owners of
customers that are legal entities, subject to certain exclusions and exemptions.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted in January 2021. The
AMLA is intended to comprehensively reform and modernize U.S. bank secrecy and anti-money laundering laws. Among
other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the
U.S. Department of the Treasury to promulgate priorities for anti-money laundering and countering the financing of
terrorism policy; requires the development of standards for testing technology and internal processes for BSA compliance;
expands enforcement and investigation-related authority, including increasing available sanctions for certain BSA
violations; and expands BSA whistleblower incentives and protections. In June 2021, FinCEN issued the priorities for anti-
money laundering and countering the financing of terrorism policy required under AMLA. The national priorities include:
(i) corruption, (ii) cybercrime, (iii) terrorist financing, (iv) fraud, (v) transnational crime, (vi) drug trafficking, (vii) human
trafficking and (viii) proliferation financing.
Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the
authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys,
22
appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist
order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil
penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate
deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings
institution. If the OCC does not take action, the FDIC has authority to take action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain
standards for all insured depository institutions. These standards relate to, among other things, internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation,
and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards
required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines
address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest
rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that
an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a compliance plan.
Insurance of Deposit Accounts. Lake Shore Savings is a member of the Deposit Insurance Fund, which is
administered by the FDIC. Deposit accounts in the Bank are insured by the FDIC. The Dodd-Frank Act permanently
increased the maximum amount of deposit insurance for banks and savings institutions to $250,000 per depositor.
The FDIC imposes an assessment for deposit insurance on all depository institutions. The FDIC’s assessment
system is based on each institution’s total assets less tangible capital and, for institutions of Lake Shore Savings’ asset size,
ranges from 3.5 basis points to 32 basis points. Assessment rates are risk based and are based on a formula which uses
financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three
years. The FDIC may also issue special assessments. In 2023, the FDIC issued a special assessment for banks with total
consolidated assets of $5 billion or more in order to recover losses sustained by the Deposit Insurance Fund as a result of
the March 2023 failures of Silicon Valley Bank and Signature Bank.
The FDIC has authority to increase insurance assessments. As a result of the Consent Order described above, the
Bank expects its deposit insurance assessments will remain at an increased level in the near future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may
lead to termination of our deposit insurance.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
Federal Home Loan Bank System. Lake Shore Savings is a member of the Federal Home Loan Bank System,
which consists of eleven regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central
credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Lake Shore
Savings is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2023,
Lake Shore Savings was in compliance with this requirement.
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Other Regulations
Interest and other charges collected or contracted for by Lake Shore Savings are subject to state usury laws and
federal laws concerning interest rates. Lake Shore Savings’ operations are also subject to federal laws applicable to credit
transactions, such as the:
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Real Estate Settlement Procedures Act, requiring that borrowers for one- to four-family residential real estate
loans receive various disclosures, including good faith estimates of settlement costs, lender servicing and
escrow account practices;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors
in extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies;
Truth in Savings Act; and
Rules and regulations of the various federal agencies charged with the responsibility of implementing such
federal laws.
The operations of Lake Shore Savings also are subject to the:
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to
and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated
teller machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as
digital check images and copies made from that image, the same legal standing as the original paper check;
The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money
laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting
of money laundering. Such required compliance programs are intended to supplement existing compliance
requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign
Assets Control Regulations; and
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by
financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all
financial institutions offering financial products or services to retail customers to provide such customers with
the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing
of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. Lake Shore, MHC and Lake Shore Bancorp are savings and loan holding companies within the meaning
of the Home Owners’ Loan Act. As such, Lake Shore, MHC and Lake Shore Bancorp are registered with the Federal
Reserve Board and are subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements.
In addition, the Federal Reserve Board has enforcement authority over Lake Shore, MHC and Lake Shore Bancorp, and
their non-bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, Lake Shore,
MHC and Lake Shore Bancorp are generally not subject to state business organization laws.
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Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and Federal Reserve Board
regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as Lake Shore
Bancorp may engage in the following activities:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
investing in the stock of a savings institution;
acquiring a mutual savings bank through the merger of such savings institution into a savings institution
subsidiary of such holding company or an interim savings bank subsidiary of such holding company;
merging with or acquiring another holding company, one of whose subsidiaries is a savings institution;
investing in a corporation, the capital stock of which is available for purchase by a savings institution under
federal law or under the law of any state where the subsidiary savings institution or savings institutions
share their home offices;
furnishing or performing management services for a savings institution subsidiary of such company;
holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company;
holding or managing properties used or occupied by a savings institution subsidiary of such company;
acting as trustee under deeds of trust;
any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Federal
Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies;
or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987;
any activity permissible for financial holding companies (if such status is elected by the Company) under
Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and
purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by the Federal Reserve
Board.
If a mutual holding company acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in
(i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming
investments.
The Home Owners’ Loan Act prohibits a savings and loan holding company, including Lake Shore Bancorp and
Lake Shore, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another
savings institution or holding company thereof, without prior written approval of the Federal Reserve Board. It also
prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in
activities other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve
Board must consider the financial and managerial resources, future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive
factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and
loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution
in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary
in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. The Dodd-Frank Act, required the Federal Reserve Board to establish minimum consolidated capital
requirements for all depository institution holding companies that are as stringent as those required for insured depository
institutions. However, savings and loan holding companies of under $3.0 billion in consolidated assets are exempt from
consolidated regulatory capital requirements, unless the Federal Reserve Board determines otherwise. As a result, the
MHC and Lake Shore Bancorp will be exempt from the regulatory capital requirements until consolidated assets exceed
$3.0 billion.
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Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding
companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy that
requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital,
liquidity and other support in times of financial stress. Federal Reserve Board policies also provide that holding companies
should pay dividends only out of current earnings and only if the prospective rate of earnings retention by the holding
company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The ability
of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory
policies may affect the ability of a savings and loan holding company to pay dividends or otherwise make capital
distributions.
Waivers of Dividends by Lake Shore, MHC. Federal regulations require federally-chartered mutual holding
companies to give the Federal Reserve Board notice before waiving the receipt of dividends, and provides that in the case
of “grandfathered” mutual holding companies, like Lake Shore, MHC, the Federal Reserve Board “may not object” to a
dividend waiver if the board of directors of the mutual holding company waiving dividends determines that the waiver: (i)
would not be detrimental to the safe and sound operation of the subsidiary savings bank; and (ii) is consistent with the
board’s fiduciary duties to members of the mutual holding company. To qualify as a grandfathered mutual holding
company, a mutual holding company must have been formed, issued stock and waived dividends prior to December 1, 2009.
Lake Shore, MHC qualifies as a grandfathered mutual holding company. Federal regulations further provide that the Federal
Reserve Board may not consider waived dividends in determining an appropriate exchange ratio upon the conversion of a
grandfathered mutual holding company to stock form. The Federal Reserve Board has issued an interim final rule that also
requires, as a condition to waiving dividends, that each mutual holding company obtain the approval of a majority of the
eligible votes of its members within 12 months prior to the declaration of the dividend being waived. On February 15, 2023,
the Company announced the suspension of the payment of quarterly dividends. Subject to the prior written approval of the
Federal Reserve Board, the Company intends to resume the payment of quarterly cash dividends. However, there is no
guarantee as to if and when the Federal Reserve Board will grant the Company its approval to begin the resumption of
quarterly cash dividend payments. Lake Shore, MHC is soliciting its members (depositors of Lake Shore Savings Bank) to
vote on a proposal to authorize Lake Shore, MHC to waive its right to receive dividends aggregating up to $0.72 per share
that may be declared by the Company in the 12 months subsequent to the approval of the proposal by members. The special
meeting of members to consider the proposal will be held on April 2, 2024. There can be no assurance that the members
will approve the dividend waiver or that the Federal Reserve Board will not object to the waiver even if it is approved by
members at the special meeting. It is expected that Lake Shore, MHC will continue to waive future dividends, if the
Company declares dividends to its stockholders in the future, except to the extent dividends are needed to fund Lake Shore,
MHC’s continuing operations, subject to the ability of Lake Shore, MHC to obtain regulatory approval of its requests to
waive dividends and its ability to obtain future member approval of dividend waivers. For more information, see Item 1A,
“Risk Factors – Our ability to pay dividends is subject to the ability of Lake Shore Savings to make capital distributions to
Lake Shore Bancorp and the waiver of dividends by Lake Shore, MHC.”
Conversion of Lake Shore, MHC to Stock Form. Federal Reserve Board regulations permit Lake Shore, MHC to
convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There
can be no assurance when, if ever, a Conversion Transaction will occur, and the board of directors has no current intention
or plan to undertake a Conversion Transaction. In a Conversion Transaction, a new stock holding company would be
formed as the successor to Lake Shore Bancorp (the “New Holding Company”), Lake Shore, MHC’s corporate existence
would end, and certain depositors of Lake Shore Savings Bank would receive the right to subscribe for shares of the New
Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than Lake Shore,
MHC (“Minority Stockholders”) would be automatically converted into a number of shares of common stock of the New
Holding Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same
percentage of common stock in the New Holding Company as they owned in Lake Shore Bancorp immediately prior to the
Conversion Transaction. The total number of shares of common stock held by Minority Stockholders after a Conversion
Transaction also would be increased by any purchases by Minority Stockholders in the stock offering conducted as part of
the Conversion Transaction. Under a provision of the Dodd-Frank Act applicable to Lake Shore, MHC, Minority
Stockholders would not be diluted because of any dividends waived by Lake Shore, MHC (and waived dividends would
not be considered in determining an appropriate exchange ratio), in the event Lake Shore, MHC converts to stock form.
Any Conversion Transaction would be subject to approvals by Minority Stockholders and members of Lake Shore,
MHC.
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Liquidation Rights. Each depositor of Lake Shore Savings has both a deposit account in Lake Shore Savings and a
pro rata ownership interest in the net worth of Lake Shore, MHC based upon the deposit balance in his or her account. This
ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account.
This interest may only be realized in the unlikely event of a complete liquidation of Lake Shore Savings. Any depositor
who opens a deposit account obtains a pro rata ownership interest in Lake Shore, MHC without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his or her account (including reductions to pay for
shares of common stock in the stock offering) receives a portion or all, respectively, of the balance in the deposit account
but nothing for his or her ownership interest in the net worth of Lake Shore, MHC, which is lost to the extent that the balance
in the account is reduced or closed.
In the unlikely event of a complete liquidation of Lake Shore Savings, all claims of creditors of Lake Shore Savings,
including those of depositors of Lake Shore Savings (to the extent of their deposit balances), would be paid first. Thereafter,
if there were any assets of Lake Shore Savings remaining, these assets would be distributed to Lake Shore Bancorp as Lake
Shore Savings’ sole stockholder. Then, if there were any assets of Lake Shore Bancorp remaining, depositors of Lake Shore
Savings would receive those remaining assets, pro rata, based upon the deposit balances in their deposit account in Lake
Shore Savings immediately prior to liquidation.
Federal Securities Laws
Lake Shore Bancorp common stock is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. Lake Shore Bancorp is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of the common stock in the initial stock offering does
not cover the resale of the shares. Shares of the common stock purchased by persons who are not affiliates of Lake Shore
Bancorp may be resold without registration. Shares purchased by an affiliate (generally officers, directors and principal
stockholders) of Lake Shore Bancorp will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933.
If Lake Shore Bancorp meets the current public information requirements of Rule 144 under the Securities Act of 1933,
each affiliate of Lake Shore Bancorp who complies with the other conditions of Rule 144, including those that require the
affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three month period, the greater of 1% of the outstanding shares of Lake Shore
Bancorp, or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may
be made in the future by Lake Shore Bancorp to permit affiliates to have their shares registered for sale under the Securities
Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley
Act, the Chief Executive Officer and Chief Financial Officer of Lake Shore Bancorp, Inc. are required to certify that its
quarterly and annual reports filed with the Securities and Exchange Commission do not contain any untrue statement of a
material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several
requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of internal control over financial reporting; they have made certain disclosures to its auditors
and the audit/risk committee of the Board of Directors about internal control over financial reporting; and they have included
information in the quarterly and annual reports about their evaluation and whether there have been changes in internal
control over financial reporting or in other factors that could materially affect internal control over financial reporting. Lake
Shore Bancorp, Inc. has existing policies, procedures and systems designed to comply with these regulations, and is further
enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.
Item 1A. Risk Factors.
In analyzing whether to make or to continue an investment in the Company, investors should consider, among other
factors, the following risk factors. The risks listed here may not be the only risks we face. Additional risks that are not
27
presently known, or that we presently deem immaterial, could also have a material effect on our financial condition, results
of operations, business and prospects:
Risks Related To Regulatory Compliance
The Bank is a party to a Consent Order (the “Order”) with the OCC relating to information technology, security,
automated clearing house program, audit, management, and BSA/AML deficiencies. In addition, the Company and Lake
Shore, MHC have entered into an Agreement with the Reserve Bank. Failure to comply with the Order or the Agreement
may result in further regulatory enforcement actions. We expect that our non-interest expense will remain elevated as a
result of remediation actions we will take in order to comply with the requirements of the Order and the Agreement
which may adversely affect our financial performance. Effective as of February 9, 2023, the Bank and the OCC entered
into the Order. The Order replaces the prior Agreement between the Bank and the OCC dated July 13, 2022 (“Written
Agreement”), which has been terminated in connection with the entry into the Order. The Order provides, among other
things, that the Bank will take the following actions within specified time frames as set forth in the Order:
create a compliance committee to monitor and oversee the Bank’s compliance with the Order and submit
monthly reports to the Board of Directors of the Bank and the OCC;
develop, adopt, implement, and thereafter adhere to a program for corporate governance and Board oversight
of the Bank’s operation and structure;
establish, and review at least annually, the objectives by which senior executive officers’, as well as the Chief
Technology Officer’s, the Information Security Officer’s, and the Bank Secrecy Act (“BSA”) Officer’s,
effectiveness will be measured and prepare an annual written performance appraisal for each Bank senior
executive officer evaluating the performance of such objectives;
ensure that the Bank has competent management in place, review the capabilities, experience, qualifications
and performance of the Bank’s management, including, but not limited to, the Chief Executive Officer, Chief
Operating Officer, Chief Technology Officer, Information Security Officer and BSA Officer, and the Board
will determine whether management changes should be made;
if an officer will continue in his or her position, but the Board determines the officer’s depth of skills needs
improvement, it will develop and implement a written program to improve the officer’s supervision and
management of the Bank;
submit to the OCC for review and prior written determination of no supervisory objection an acceptable written
strategic plan for the Bank covering at least a three-year period;
submit to the OCC for review an acceptable, comprehensive, written internal audit program that adequately
assesses controls and operations to allow the Board and management to understand the sufficiency of the Bank’s
internal controls program;
develop, adopt and implement a written program to effectively assess and manage the Bank’s information
technology (“IT”) activities, commensurate with the level of risk and complexity of the Bank’s IT activities,
subject to review and prior written determination of no supervisory objection by the OCC;
develop, adopt and implement a written information security program that includes administrative, technical
and physical safeguards to ensure the security and confidentiality of customer information, subject to review
and prior written determination of no supervisory objection by the OCC;
adopt and implement the written automated clearing house risk management program previously given no
supervisory objection by the OCC in connection with the Written Agreement;
analyze the current BSA/AML risk profile and strategic direction of the Bank to determine the skills,
experience, and expertise required of the Bank’s BSA Officer and develop a comprehensive job description
detailing all the requirements and responsibilities of the BSA Officer role with such appointment of a BSA
Officer subject to OCC non-objection;
ensure that the Bank’s BSA Department maintains sufficient personnel with requisite expertise, training, skills,
and authority to ensure the safe and sound operation of the Bank;
develop, adopt, implement and ensure that the BSA Officer and any supporting staff receive training, and
thereafter ensure the Bank’s adherence to a written system of internal controls reasonably designed to provide
for ongoing compliance with BSA regulatory requirements, including appropriate suspicious activity
monitoring and reporting;
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ensure that Bank management develops, implements, and thereafter maintains adherence to an enhanced written
risk-based program of internal controls and processes to ensure compliance with OCC regulations to file
suspicious activity reports (“SARs”);
submit to the OCC for prior written determination of no supervisory objection, the name and qualifications of
a proposed independent, third-party consultant to conduct a look-back review of certain medium and high risk
activity over a six-month period and provide a written report on the Bank’s SARs monitoring, including a
proposed scope and timeline for completion of the engagement;
revise, develop, adopt, implement, and thereafter ensure the Bank’s adherence to expanded account opening
policies and procedures for all accounts that pose greater than normal risk for compliance with the BSA;
develop, adopt, implement, and thereafter ensure the Bank’s adherence to procedures for periodically
reviewing, testing, and updating the Bank’s BSA/AML model risk assessments; and
develop, adopt, implement, and thereafter ensure the Bank’s adherence to requirements for the periodic
independent validation of the Bank’s BSA/AML systems to ensure the system is detecting potentially suspicious
activity.
On June 28, 2023, Lake Shore, MHC and Lake Shore Bancorp entered into a written agreement (the “Agreement”)
with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”), the companies’ regulator. The Agreement provides,
among other things, that the companies take appropriate steps to fully utilize the companies’ financial and managerial
resources to serve as a source of strength to the Bank, including, but not limited to, taking steps to ensure that the Bank
complies with the Consent Order and not, directly or indirectly, declare or pay dividends, increase or guarantee any debt
without prior approval.
Management and the Bank’s Board of Directors are committed to promptly addressing the action items included in
the Order and the Agreement. However, we may not be successful in complying fully with the provisions of the Order or
the Agreement. The OCC and the Reserve Bank will determine whether or not the provisions of the Order and the Agreement
have been met. In the event we are in material non-compliance with the terms of the Order or the Agreement, the OCC and
the Reserve Bank have the authority to subject us to additional enforcement actions, such as civil money penalties and
removal of directors and officers from their positions with the Bank, the Company or Lake Shore, MHC. Moreover, the
work required to comply with the Order may place a significant burden on management and internal resources of the Bank.
Any significant diversion of management attention away from ongoing business and any reputational harm encountered
during the process could affect the financial results of the Company. We expect that our non-interest expense will remain
elevated as a result of remediation actions we will take in order to comply with the requirements of the Order and the
Agreement which may adversely affect our financial performance.
The Bank has been designated as being in “Troubled Condition” by the OCC. The Bank is subject to
restrictions on its operations as a result of this designation. The Bank has been designated as being in “Troubled
Condition” under the rules and regulations of the OCC, which places restrictions on the Bank with respect to board
members and senior executive officers, including adding or replacing board members or hiring senior executive officers,
as well as on the Bank’s ability to enter into agreements that provide for, and to pay, certain severance payments to our
directors, officers and employees. These restrictions may limit the Bank’s ability to expand its board and management
team. For more information, see “Supervision and Regulation—Troubled Condition.”
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act and related regulations may subject us to
fines or sanctions. The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to
prevent financial institutions from being used for money laundering and terrorist activities. Once such activities are
detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial
Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and
verifying the identity of customers that open new financial accounts. Failure to comply with these regulations could result
in fines or sanctions. The Order cited the Bank’s failure to adequately develop, design and maintain our Bank Secrecy Act
programs which could lead to additional sanctions and other negative actions, restrictions on conducting acquisitions or
establishing new branches and other regulatory actions which would have serious reputational consequences for us, and
which would have a material adverse effect on our business, financial condition or results of operations.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may
adversely affect our operations and/or increase our costs of operations. Lake Shore Savings, Lake Shore Bancorp and
29
Lake Shore, MHC are subject to extensive regulation, supervision and examination by the OCC and the Federal Reserve
Board. Such regulation and supervision governs the activities in which an institution and its holding companies may engage
and are intended primarily for the protection of federal deposit insurance funds and the depositors and borrowers of Lake
Shore Savings, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and
determination of the level of our allowance for credit losses. These regulations, along with existing tax, accounting,
securities, insurance and monetary laws, rules, standards, policies, and interpretations control the methods by which
financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting
and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards
can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial
condition and results of operations, and our interpretation of those changes.
Our ability to pay dividends is subject to the ability of Lake Shore Savings to make capital distributions to Lake
Shore Bancorp and the waiver of dividends by Lake Shore, MHC. The value of Lake Shore Bancorp’s common stock is
significantly affected by our ability to pay dividends to our public stockholders. Our long-term ability to pay dividends to
our stockholders is based primarily upon the ability of the Bank to make capital distributions to Lake Shore Bancorp, and
also the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends. On
February 15, 2023, the Company announced the suspension of the payment of quarterly dividends. Subject to the prior
written approval of the Federal Reserve Board, the Company intends to resume the payment of quarterly cash dividends.
However, there is no guarantee as to if and when the Federal Reserve Board will grant the Company its approval to begin
the resumption of quarterly cash dividend payments.
In circumstances when the Bank is not operating under a consent order, it may distribute capital to Lake Shore
Bancorp in an amount not exceeding net income for the current calendar period and the prior two calendar years under OCC
safe harbor regulations. Our ability to pay dividends and the amount of such dividends is also affected by the ability of
Lake Shore, MHC, our mutual holding company and majority stockholder of Lake Shore Bancorp, to waive the receipt of
dividends declared by Lake Shore Bancorp. Lake Shore, MHC waived its right to receive most of its dividends on its shares
of Lake Shore Bancorp since its inception in 2006. The ability to waive dividends meant that Lake Shore Bancorp had more
cash resources to pay dividends to its public stockholders than if Lake Shore, MHC accepted such dividends. Lake Shore,
MHC is now required to obtain a waiver from the Federal Reserve Board allowing it to waive its right to dividends.
Under Section 239.8(d) of the Federal Reserve Board’s Regulation MM governing dividend waivers, a mutual
holding company may waive its right to dividends on shares of its subsidiary if the mutual holding company gives written
notice of the waiver to the Federal Reserve Board and the Federal Reserve Board does not object. For a company such as
Lake Shore, MHC, that was formed, issued stock and waived dividends prior to December 1, 2009, the Federal Reserve
Board may not object to a dividend waiver if such waiver would not be detrimental to the safety and soundness of the
savings bank subsidiary and the board of directors of the mutual holding company expressly determines that such dividend
waiver is consistent with the board’s fiduciary duties to the members of the mutual holding company. Regulation MM also
requires as a condition to waiving dividends, that a mutual holding company obtain the approval of a majority of the eligible
votes of its members within 12 months prior to the declaration of the dividend being waived.
Lake Shore, MHC is soliciting its members (depositors of Lake Shore Savings Bank) to vote on a proposal to
authorize Lake Shore, MHC to waive its right to receive dividends aggregating up to $0.72 per share that may be declared
by the Company in the 12 months subsequent to the approval of the proposal by members. The special meeting of members
to consider the proposal will be held on April 2, 2024. There can be no assurance that the members will approve the dividend
waiver or that the Federal Reserve Board will not object to the waiver even if it is approved by members at the special
meeting. It is expected that Lake Shore, MHC will continue to waive future dividends, if the Company declares dividends
to its stockholders in the future, except to the extent dividends are needed to fund Lake Shore, MHC’s continuing operations,
subject to the ability of Lake Shore, MHC to obtain regulatory approval of its requests to waive dividends and its ability to
obtain future member approval of dividend waivers.
While Lake Shore, MHC is grandfathered for purposes of the dividend waiver provisions of Regulation MM and
has complied with all additional requirements imposed, we cannot predict whether the Federal Reserve Board will grant a
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dividend waiver request and, if granted, there can be no assurance as to the conditions, if any, the Federal Reserve Board
will place on future dividend waiver requests by grandfathered mutual holding companies such as Lake Shore, MHC. If
Lake Shore, MHC is unable to waive the receipt of dividends, our ability to pay dividends to our stockholders may be
substantially impaired and the amounts of any such dividends may be significantly reduced.
We may be required to raise additional capital in the future, but that capital may not be available when it is
needed, or it may only be available on unacceptable terms, which could adversely affect our financial condition and
results of operations. We are required by federal regulatory authorities to maintain adequate levels of capital to support our
operations. The Bank is also subject to an Individual Minimum Capital Requirement as described above. We may at some
point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our
capital resources. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that
time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional
capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand
our operations and pursue our growth strategy could be materially impaired and our financial condition and liquidity could
be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our bank
regulators, we may be subject to adverse regulatory action.
Risks Related to Economic Conditions
Our local economy may affect our future growth possibilities. Our success significantly depends upon the growth
in population, income levels, deposits and housing starts in our current market area, which is primarily located in Western
New York, in particular within Erie and Chautauqua counties. Unlike many larger institutions, we are not able to spread
the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations.
If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are
unfavorable, our business may be negatively affected. This could lead to a deterioration in the credit quality of our loan
portfolio and reduce our level of customer deposits, which in turn would hurt our business. Moreover, the value of real
estate or other collateral that may secure our loans could be adversely affected.
High inflation levels could adversely impact our business and results of operations. The national economy
continues to experience elevated levels of inflation. As of December 31, 2023, the year over year consumer price index
(“CPI”) increase was 3.4% primarily driven by increases in transportation, shelter, and food prices. As a result, the Federal
Reserve raised interest rates by 100 basis points in 2023 to combat rising inflation. High inflation, if sustained, could have
an adverse effect on our business. The increase in interest rates in response to elevated levels of inflation has decreased the
value of our securities portfolio since 2021, resulting in an increase in unrealized losses recorded in accumulated other
comprehensive loss on the stockholders’ equity section of our balance sheet. In addition, inflation-driven increases in our
levels of non-interest expense could negatively impact our results of operations. High inflation and increasing interest rates
could also cause increased volatility in the business environment, which could adversely affect loan demand and borrowers’
ability to repay loans.
Changes in the Federal Reserve Board’s monetary or fiscal policies could adversely affect our results of
operations and financial condition. Our earnings will be affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal Reserve Board has, and is likely to continue
to have, an important impact on the operating results of banks through its power to implement national monetary policy,
among other things, in order to curb inflation or combat a recession. The Federal Reserve Board’s actions affect the levels
of bank loans, investments and deposits through its control over the issuance of United States government securities, its
regulation of the discount rate applicable to member banks and its influence on other monetary and fiscal policies. We
cannot predict the nature or impact of future changes in monetary and fiscal policies.
Risks Related to Technology
Our information systems experienced an interruption or breach in security which could disrupt business, cause
increased operating costs, damage our reputation, and result in litigation and other liabilities. In November 2021, the
Bank experienced a data security incident that prevented employees from accessing internal systems and data for a limited
period of time. Upon discovering the incident, the Bank immediately launched an investigation and engaged a digital
forensics firm to help determine the scope of the incident and identify potentially impacted data. The Bank also promptly
31
notified law enforcement and the Bank’s primary regulator, the OCC, about the incident. Through its investigation, the Bank
identified unauthorized access to certain data in its internal systems. However, the Bank believes that its core banking and
electronic interfaces were not affected by this event, including deposit and loan systems, online/mobile banking system or
ATM systems. While there is no evidence that customer personal information was misused, the Bank notified affected
customers of the incident. All impacted individuals were offered identity theft protection services. The Bank has
implemented additional safeguards to help ensure the security of its network to reduce the risk of a similar event occurring
in the future.
Although we maintain insurance coverage, including cybersecurity insurance, the amount available under coverage
may not cover all losses. Costs and expenses incurred by the Bank in connection with the November 2021 incident includes
both direct and indirect costs and not all of the costs were covered by our insurance coverage. Further, both as a result of
the November 2021 incident and industry trends generally, the Company will incur higher costs for the renewal of the
Company’s current insurance coverage, as well as future cybersecurity insurance coverage.
As a result of the incident, we did incur one-time and ongoing expenses for the implementation and operation of a
cloud computing system and enhancements to system security, including additional hardware, software and maintenance
expenses. In addition, we incurred one-time consulting expenses, as well as increased personnel expenses as a result of
hiring a Chief Technology Officer and an Information Security Officer during the fourth quarter of 2022 and the first quarter
of 2023, respectively. We may be subject to future incidents that could have a material adverse effect on our business,
results of operations or financial condition or may result in operational impairments and financial losses, as well as
significant harm to our reputation.
We rely heavily on communications and information systems to conduct our business. The computer systems and
network infrastructure we use could be vulnerable to hardware and cybersecurity issues. Our operations are dependent on
our ability to protect our computer equipment from fire, power loss, telecommunications failure or other similar catastrophic
event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or
external sources, including our third party vendors, unknown third parties or through cyber-attacks. The risk of a breach
can exist whether information systems and services are in our internal data centers or in third party data centers, including
cloud-based computing services. Breaches have occurred, and may occur again, in our systems and in the systems of our
third party vendors. The occurrence of any failures, interruptions or security breaches of information systems used to process
customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect
on our financial condition, results of operations and cash flows.
The risk of cyber-threats continue to evolve and are substantially escalating and we may be required to expend
significant additional resources to continue to modify or enhance our protection measures to mitigate information security
vulnerabilities or incidents. Cybersecurity and the continued enhancement of our controls and processes to protect our
systems, data and networks from attacks, unauthorized access or significant damage remains a priority. We maintain a
system of internal controls, disaster recovery plans and contingency plans, which are periodically reviewed, updated and
tested. In connection with the Order, the Bank has enhanced its Information Technology program. The Company also
reviews and evaluates the disaster recovery plans of its third party vendors that provide critical computing systems to the
Company.
We continually encounter technological change. The financial services industry is continually undergoing rapid
technological change with frequent introductions of new technology driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future
success depends, in part, upon our ability to address the needs of our customers by using technology to provide products
and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Our largest
competitors have substantially greater resources to invest in technological improvements. Furthermore, new payment
services developed and offered by non-financial institution competitors pose an increasing threat to the traditional payment
services offered by financial institutions. We may not be able to effectively implement new technology-driven products and
services or be successful in marketing these products and services to our customers and we may not be able to effectively
deploy new technologies to improve our operational efficiency. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse effect on us.
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Risks Related to Credit
We are subject to lending concentration risks. As of December 31, 2023, commercial real estate (including
commercial construction) and commercial business loans comprised in the aggregate 59.7% of our total loan portfolio.
These types of loans may expose a lender to greater credit risk than loans secured by residential real estate because the
collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial real estate and
commercial business loans may also involve relatively large loan balances to individual borrowers or groups of borrowers.
These loans also have greater credit risk than residential real estate for the following reasons:
Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts sufficient to
cover operating expenses and debt service.
Commercial Business Loans. Repayment is generally dependent upon the successful operation of the
borrower’s business.
A deterioration in economic conditions in our market areas could affect the performance of our loan portfolio.
Higher prices for businesses and consumers and high unemployment could negatively affect our loan portfolio, if business
owners or consumers are not able to make loan payments. If there was a downturn in the real estate market or our national
or local economy, due to inflation, changes in interest rates or monetary policy, increased unemployment or other reasons,
then this could adversely affect the value of the properties securing the loans or revenues from our borrowers’ businesses
thereby increasing the risk of non-performing loans. Because commercial loans generally have a higher loan balance in
comparison to residential real estate loans, the deterioration of one or a few of these loans could cause a significant increase
in nonaccrual loans, which could have a material adverse effect on our financial condition and results of operations.
Deteriorating credit quality could adversely affect our earnings. Our loan customers may not repay their loans
according to their terms and the collateral securing the payment of these loans may be insufficient to pay any remaining
loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our
operating results. A downturn in the real estate market or the local economy could exacerbate this risk. We review our
allowance for credit losses for loans and unfunded commitments on a quarterly basis to ensure that it sufficiently reflects
management's estimate of expected losses as of the valuation date.
Our investment portfolio may experience credit deterioration, which could have a material adverse effect on our
operating results. Numerous factors, including the credit quality of the counterparty, adverse changes in business climate,
adverse actions by regulators, lack of liquidity for re-sales of certain investment securities, or unanticipated changes in the
competitive environment could have a negative effect on our investment portfolio or other assets in future periods. The
existence of credit deterioration within the investment portfolio could cause us to add to our allowance for credit losses. We
review our allowance for credit losses on our investment portfolio on a quarterly basis to ensure that it sufficiently reflects
management’s estimate of expected losses inherent within the investment portfolio.
Material additions to our allowance for credit losses on loans, unfunded commitments, or the investment portfolio
also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance for credit
losses. We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of
many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among
other factors, in determining the amount of the allowance for credit losses on loans. We rely on underlying credit ratings of
our investment portfolio, as well as other economic characteristics, to determine if a credit loss exists within our investment
portfolio and whether an allowance for credit losses on investments is required. If our assumptions prove to be incorrect,
our allowance for credit losses may not be sufficient to cover losses inherent in our loan, unfunded commitment, and
investment portfolios, resulting in additions to our allowance for credit losses. The Bank’s increased focus on commercial
loan originations has been one of the more significant factors we have taken into account in evaluating our allowance for
credit losses and provision for credit losses. If we were to further increase the amount of commercial loans in our portfolio,
we may decide to make increased provisions for credit losses. In addition, bank regulators periodically review our allowance
for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs, which
may have a material adverse effect on our financial condition and results of operations.
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Risks Related To Our Business
Low demand for real estate loans may lower our profitability. Making loans secured by real estate, including one-
to four-family and commercial real estate, is our primary business and primary source of revenue. If customer demand for
real estate loans decreases, our profits may decrease because our alternative investments, primarily securities, generally earn
less income than real estate loans. Customer demand for loans secured by real estate could be reduced due to weaker
economic conditions, an increase in unemployment, a decrease in real estate values or an increase in interest rates. As
interest rates rise, loan demand may slow down, and deposit expenses may increase, which could lower our net interest
income and profitability.
We depend on our executive officers and key personnel to implement our business strategy and could be harmed
by the loss of their services. We believe that our growth and future success will depend in large part upon the skills of our
management team. The competition for qualified personnel in the financial services industry is intense, and the loss of our
key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business.
The Bank is currently operating under an Order with the OCC and we cannot assure you that we will be able to retain our
existing key personnel or attract additional qualified personnel. Although we have a retention agreement with our Executive
Vice President Commercial Division, that contains a non-compete provision, the loss of the services of one or more of our
executive officers and key personnel could impair our ability to continue to develop our business strategy.
Our risk management framework may not be effective in mitigating risk and reducing the potential for
significant losses. Our risk management framework is designed to minimize risk and loss to the Company and our
customers. We seek to identify, measure, monitor, report and control our exposure to risk, including credit, interest rate,
liquidity, price, operations, compliance, strategic, and reputation risks. We additionally segregate and assess information
technology and human resource risks due to their complexity and over-arching risk profiles. While we deploy a diverse
set of risk monitoring and mitigation techniques, including internal management and third-party engagement in risk
processes; risk identification and mitigation processes are inherently limited because they cannot anticipate the existence or
future development of currently unanticipated or unknown risks. As part of our remediation activities relating to the Order,
management is working to improve certain areas of risk management. Recent economic conditions and heightened
legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level
of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
The results of our operations may be adversely affected by environmental conditions. During the course of making
loans secured by real estate, we have acquired and may acquire in the future, property securing loans that are in default.
There is a risk that we could be required to investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition in a foreclosure action, and that we may be held liable to a governmental entity or third
parties for property damage, personal injury and investigation and clean-up costs incurred by such parties in connection
with such contamination. In addition, the owner or former owners of contaminated sites may be subject to common law
claims by third parties based on damages and costs resulting from environmental contamination emanating from such
property. An environmental assessment of real estate securing commercial loans is completed prior to loan closing. This
initial assessment may indicate a higher level of testing is needed. The borrower is then required to have further testing and
complete any remedial action recommended. To date, we have not been subject to any environmental claims. There can
be no assurance, however, that this will remain the case in the future.
Our ability to grow may be limited. We intend to seek to expand our banking franchise, organically via deposit
and loan growth, while addressing the operational, compliance and governance deficiencies cited in the Order that was
disclosed previously herein. We cannot assure you that we will be able to generate organic growth. Competition in our
market areas for loans and deposits may limit our opportunities for growth, as well as the impact of economic conditions,
including an increase in inflation rates and costs to borrow funds.
Competition in our primary market area may reduce our ability to attract and retain deposits and originate loans.
We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans.
Our most direct competition for savings deposits has come from commercial banks, credit unions, savings banks and online
banks. Competition has increased in our market areas as a result of new entrants to the Erie County market area. We face
additional competition for depositors from non-depository competitors such as the mutual fund industry, securities and
brokerage firms, and insurance companies. Our competition for loans comes principally from commercial banks, savings
34
banks, mortgage banking companies, credit unions, online retail mortgage lenders and other financial service companies.
Competition for loan originations and deposits may limit our future growth and earnings prospects. Some of the institutions
with which we compete have substantially greater resources than we have and may offer services that we do not provide.
We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability
to compete successfully in our market areas.
Risks Related to Interest Rates and Liquidity
Changes in interest rates could adversely affect our results of operations and financial condition. Our results of
operations and financial condition are significantly affected by changes in interest rates. We derive our income mainly from
the difference or “spread” between the interest earned on loans, securities and other interest-earning assets and interest paid
on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When
market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate.
This can cause decreases in our spread and can adversely affect our income.
From an interest rate risk perspective, we have generally been liability sensitive, which indicates that our liabilities
generally re-price faster than assets. Our earnings may be adversely impacted by an increase in interest rates which occurred
in 2022 and 2023, because the majority of our interest-earning assets are long-term, fixed rate mortgage-related assets that
will not re-price as long-term interest rates increase. As rates rise, we expect loan applications to decrease, prepayment
speeds to slow down and the interest rate on our loan portfolio to remain static. Conversely, a majority of our interest-
bearing liabilities have much shorter contractual maturities and are expected to re-price, resulting in increased interest
expense. A significant portion of our deposits have no contractual maturities and are likely to re-price quickly as short-term
interest rates increase. Therefore, in an increasing rate environment, our cost of funds is expected to increase more rapidly
than the yields earned on our loan and securities portfolios. The impact on earnings is more adverse when the slope of the
yield curve flattens or inverts, i.e. when short-term interest rates increase more than corresponding changes in long-term
rates or when long-term rates decrease more than corresponding changes in short-term rates.
Changes in market interest rates could also reduce the value of our interest-earning assets including, but not limited
to, our securities portfolio. In particular, the unrealized gains and losses on securities available for sale are reported, net of
tax, in accumulated other comprehensive income which is a component of stockholders’ equity. As such, declines in the
fair value of such securities resulting from increases in market interest rates may adversely affect stockholders’ equity.
In a decreasing interest rate environment, our earnings may increase or decrease. If long-term interest-earning assets
do not re-price and interest rates on short-term deposits begin to decrease, earnings may rise. However, low interest rates
on loan products may result in an increase in prepayments, as borrowers refinance their loans. If we cannot re-invest the
funds received from prepayments at a comparable spread, net interest income could be reduced. Also, in a falling interest
rate environment, certain categories of deposits may reach a point where market forces prevent further reduction in interest
paid on those products. The net effect of these circumstances is reduced net interest income and possibly net interest rate
spread.
We are subject to certain risks with respect to liquidity. “Liquidity” refers to our ability to generate sufficient cash
flows to support our operations and to fulfill our obligations, including commitments to originate loans, to repay our
wholesale borrowings and other liabilities and to satisfy the withdrawal of deposits by our customers. Our primary source
of liquidity is our core deposit base, which is raised through our retail branch network. Core deposits - consisting of savings
and money market accounts, time deposits less than $250,000 and demand deposits - comprised approximately 62.6% of
total deposits at December 31, 2023. Additional available unused sources of liquidity include borrowings from the Federal
Reserve of New York discount window, FHLB borrowings, brokered deposits and lines of credit with correspondent banks.
Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $56.8 million at December
31, 2023. As a result of the Order previously disclosed herein, the Company’s ability to access available sources of funds
from the FHLB has been curtailed to short-term advances (i.e., 30 days or less) and the residential loans pledged as collateral
for these borrowings will be subject to reductions in value. The availability of lines of credit with other correspondent banks
may also be reduced or eliminated. Lastly the unsecured line of credit for our Master Account at the Federal Reserve has
been withdrawn at this time.
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An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from
other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our
customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock
market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments,
we could lose a relatively low-cost source of funds, which would require us to seek wholesale funding alternatives in order
to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.
Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect
us specifically or the banking industry in general. Factors that could detrimentally impact our access to liquidity sources
include regulatory restrictions, disruptions in the financial markets or negative views and expectations about the prospects
for the banking industry.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan,
including originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings
or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business,
financial condition and results of operations.
Adverse developments affecting the financial services industry, such as bank failures or concerns involving
liquidity, may have a material effect on the Company’s operations. Events relating to the failures of certain banking entities
in March 2023, i.e. Silicon Valley Bank and Signature Bank, have caused general uncertainty and concern regarding the
liquidity adequacy of the banking sector as a whole. Uncertainty may be compounded by the reach and depth of media
attention, including social media, and its ability to disseminate concerns or rumors about any events of these kinds or other
similar risks, and have in the past and may in the future lead to market-wide liquidity problems. These failures underscore
the importance of maintaining diversified sources of funding as key measures to ensure the safety and soundness of a
financial institution. As a result, market conditions and other external factors may impact the competitive landscape for
deposits in the banking industry in an unpredictable manner. The rising interest rate environment has increased competition
for liquidity and the premium at which liquidity is available to meet funding needs.
Risks Related to Investment in the Company’s Stock
We expect that our return on equity will be low compared to other financial institutions as a result of our high
level of capital. Return on average equity, which equals net income divided by average equity, is a ratio used by many
investors to compare the performance of a particular company with other companies. Our return on equity may be low while
we continue to leverage capital levels via organic growth of loans and deposits. As we implement our strategic plan to
increase net interest income and non-interest income via organic growth, we expect our return on equity ratio to improve.
Failure to achieve a competitive return on average equity might make an investment in our common stock unattractive to
some investors and might cause our common stock to trade at lower prices than comparable financial institutions with higher
returns on average equity.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to
accurately report our financial results or prevent fraud, and, as a result, stockholders and depositors could lose
confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our
ability to attract additional deposits. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the
rules and regulations of the Securities and Exchange Commission (the “SEC”), requires us to evaluate our internal control
over financial reporting and provide an annual management report on our internal control over financial reporting, including,
among other matters, management’s assessment of the effectiveness of internal control over financial reporting. The
Company has established a process to document and evaluate its internal controls over financial reporting in order to satisfy
the Sarbanes-Oxley Act and related regulations, which require management consideration of the Company’s internal
controls over financial reporting on an annual basis. In this regard, management has dedicated internal resources and
adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take
steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as
documented and (iv) maintain a continuous internal reporting and improvement process for internal control over financial
reporting. The Company’s management and Audit/Risk Committee have made the Company’s compliance with Section
404 a high priority. The Company cannot be certain that these measures will ensure that the Company implements and
maintains adequate controls over its financial processes and reporting in the future. Any failure to implement appropriate
36
new or improved controls in response to changes in financial processes or reporting, or difficulties encountered in their
implementation could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations.
If the Company fails to correct any significant deficiencies in the design or operating effectiveness of internal controls over
financial reporting or fails to prevent fraud, current and potential stockholders and depositors could lose confidence in the
Company’s financial reporting, which could harm its business and the trading price of its stock.
Public stockholders do not exercise voting control over us. A majority of our voting stock is owned by Lake Shore,
MHC. Lake Shore, MHC is controlled by its Board of Directors, which consist of those persons who are members of the
Board of Directors of Lake Shore Bancorp and Lake Shore Savings. Lake Shore, MHC will determine the outcome of the
election of the Board of Directors of Lake Shore Bancorp, and, as a general matter, controls the outcome of most matters
presented to the stockholders of Lake Shore Bancorp for resolution by vote. Consequently, Lake Shore, MHC, acting
through its Board of Directors, is able to control the business and operations of Lake Shore Bancorp and may be able to
prevent any challenge to the ownership or control of Lake Shore Bancorp by stockholders other than Lake Shore, MHC.
There is no assurance that Lake Shore, MHC will not take actions that the public stockholders believe are against their
interests.
Our stock price may be volatile due to limited trading volume. Our common stock is traded on the NASDAQ
Global Market. However, the average daily trading volume in Lake Shore Bancorp’s common stock has been relatively
small, averaging less than 3,000 shares per day during 2023. As a result, trades involving a relatively small number of shares
may have a significant effect on the market price of the common stock, and it may be difficult for investors to acquire or
dispose of large blocks of stock without significantly affecting the market price.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
The Company recognizes the security of our operations is critical to protecting our customers and maintaining the
reputation of the Company. Management is committed to managing Information Security Risk, which includes
cybersecurity, that may impact the Company. The Enterprise Risk Committee (ERC) of the Board of Directors provides
oversight of the Company’s written Information Security Management and Information Technology Governance Programs
(the "Programs"). Through the Programs, the Company has established polices, processes, controls, and systems designed
to identify, assess, measure, manage, monitor, and report risks related to cybersecurity and help prevent or limit the effect
of possible cybersecurity threats and attacks. As cybersecurity threats continue to evolve, the Company expects to continue
to monitor and enhance the current controls and systems in place to detect and prevent cybersecurity attacks and to remediate
discovered vulnerabilities.
The Company’s Information Security Officer (ISO) is responsible for the design and execution of the Information
Security Management Program and the information and cyber security aspects of the Information Technology Governance
Program. The ISO provides the ERC with regular reports on the status and effectiveness of the Programs and risk
management activities, as well as cyber and information security issues that may affect the Company. In addition, the ISO
regularly reports the status to Executive Management.
The Company utilizes the following guidelines and frameworks to develop and maintain the Information Security
Management Program: Federal Financial Institutions Examination Council (FFIEC) Information IT Examination
Handbooks, FFIEC Cybersecurity Assessment Tool (CAT), Center for Internet Security Critical Security Controls, National
Institute of Standards and Technology Special Publication 800 Series, National Institute of Standards and Technology
Cybersecurity Framework (CSF), 12 CFR Appendix B to Part 30 - Interagency Guidelines Establishing Standards for Safety
and Soundness Gramm-Leach-Bliley Act (GLBA) 501(b).
The Information Security Management Program features layered controls of network and endpoint intrusion
detection and prevention, enterprise malware protection, threat-monitoring, and a Security Operations Center that provides
37
full time support and additional operational measures to monitor and respond to data breaches and cyberattacks. The
Company leverages regular assessments to identify current and potential threats and vulnerabilities within the Company’s
environment. Technical vulnerabilities are identified through regular automated vulnerability scanning tools and periodic
vulnerability and penetration testing performed by independent third parties. Non-technical vulnerabilities are identified
through the Information Technology and Information Security Assurance Program by conducting regular process and
procedural reviews as well as risk assessments. The Company uses the FFIEC CAT to help identify cybersecurity risks and
determine our cybersecurity preparedness. The Company’s information security and cybersecurity risk appetite statements
define the levels of risk the Company is willing to accept and guide the risk management decisions of the Company. The
risk appetite statements are approved by the Board of Directors annually.
The Company has an Incident Response Plan to help reduce the risks related to security incidents by providing
guidelines on responding to incidents; focusing on a roadmap for coordinating personnel, policies, and procedures to ensure
incidents are detected, analyzed, and handled appropriately.
The Company also recognizes the risks associated with the use of third party providers and maintains a Third Party
Risk Management Program that is responsible for the oversight of outsourced services. This enables the Company to identify
risks related to third parties through an inherent risk assessment and a due diligence review process designed to ensure third
parties are in compliance with the Company’s risk and information security expectations.
The Company’s Security Awareness Program provides annual, mandatory training for personnel on information
security to prepare personnel with the knowledge of how to properly use and protect Company resources from internal and
external threats. The Program also conducts regular phishing assessments and targets new hires and other groups with
specific training related to their job activities or risk levels. The Program also communicates information security policies,
standards, and practices to personnel and requires annual review and acknowledgement of the policies.
The ISO has served various roles in audit, information risk, information technology, and information security in
multiple industries for over 12 years. The ISO holds an undergraduate degree in Management Information Systems and has
attained the ISACA Certification in Certified Information Systems Auditor (CISA). The ISO reports to the Chief Financial
Officer (CFO) as well as the Chairperson of the ERC.
For the year ended December 31, 2023, the Company has not identified any specific risk from a cybersecurity threat
that has materially affected, or is reasonable likely to affect, the Company’s business strategy, results of operation, or
financial condition, other than those described in Item 1A. Risk Factors - Risks Related to Technology.
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Item 2. Properties.
We conduct our business through our corporate headquarters, administrative offices, and eleven branch offices. At
December 31, 2023, the net book value of our buildings and premises was $6.9 million and the net book value of the
computer equipment and other furniture and fixtures, and equipment at our offices totaled $1.0 million. For more
information, see Note 6 and Note 9 in the notes to our audited consolidated financial statements beginning on page F -1 of
this report.
Location
Corporate Headquarters
31 East Fourth Street
Dunkirk, NY 14048
Branch Offices:
Chautauqua County branches
128 East Fourth Street
Dunkirk, NY 14048
30 East Main Street
Fredonia, NY 14063
1 Green Avenue, WE
Jamestown, NY 14701
115 East Fourth Street
Jamestown, NY 14701
106 East Main Street
Westfield, NY 14787
Erie County branches
5751 Transit Road
East Amherst, NY 14051
3111 Union Road
Orchard Park, NY 14127
59 Main Street
Hamburg, NY 14075
3438 Delaware Avenue
Kenmore, NY 14217
570 Dick Road
Depew, NY 14043
4950 Main Street
Snyder, NY 14226
Administrative Offices:
125 East Fourth Street
Dunkirk, NY 14048
123 East Fourth Street
Dunkirk, NY 14048
415 Washington Avenue
Dunkirk, NY 14048
Leased or
Owned
Owned
Owned/Leased(1)
Owned
Owned/Leased(2)
Owned
Owned
Owned
Owned
Leased(3)
Owned
Leased(4)
Owned
Owned
Owned
Owned
Original
Date Acquired
2003
1926
1996
1996
1997
1998
2003
2003
2005
2008
2009
2012
1995
2001
2010
(1) The building is owned. Additional parking lot is leased on a month-to-month basis.
(2) The building is owned. The land is leased. The lease expires in 2025.
(3) The lease expires in 2028.
(4) The lease expires in 2024, but has an option for a five-year renewal at expiration.
Item 3. Legal Proceedings.
At December 31, 2023, we are not involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are immaterial
to our financial condition and results of operations.
Item 4. Mine Safety Disclosures.
39
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Lake Shore Bancorp, Inc. common stock trades on the Nasdaq Global Market under the symbol “LSBK”.
On February 15, 2023, the Company announced the suspension of the payment of quarterly dividends to its
stockholders for the preservation of capital to support the Bank while the Bank began operating under a consent order with
the OCC and the Company began operating pursuant to a written agreement with the Federal Reserve Bank of Philadelphia
(the "Reserve Bank"). Subject to the prior written approval of the Reserve Bank, the Company intends to resume the payment
of quarterly cash dividends sometime in 2024. However, there is no guarantee as to if and when the Reserve Bank will grant
the Company its approval to begin the resumption of quarterly cash dividend payments. The Board of Directors evaluates
the payment of dividends and makes a dividend payment decision based on its review of certain factors such as our earnings,
financial condition, capital requirements, regulatory limitations on the payment of dividends, and other relevant factors. No
assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether
such dividends will continue. Refer to Part I, Item 1. “Business – Supervision and Regulation - Federal Banking Regulations
- Capital Distributions”, “Business – Supervision and Regulation - Holding Company Regulation - Source of Strength and
Waivers of Dividends by Lake Shore, MHC” and Part I, Item 1a. “Risk Factors – Risks Related to Regulatory Compliance”
above for information on the current and possible future restriction of dividend payments and MHC dividend waivers.
As of February 14, 2024, there were 673 stockholders of record (excluding the number of persons or entities holding
stock in street name through various brokerage firms) of Lake Shore Bancorp, Inc. common stock.
The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each
month of the quarter ended December 31, 2023. The Company has suspended its stock repurchase program.
Period
October 1 through October 31, 2023
November 1 through November 30, 2023
December 1 through December 31, 2023
Total
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)
— $
—
—
— $
—
—
—
—
—
—
—
—
30,626
30,626
30,626
30,626
(1)
On August 13, 2021, the Board of Directors of Lake Shore Bancorp, Inc. (the “Company”) adopted a new stock repurchase program. The stock repurchase program
authorizes the Company to repurchase up to an aggregate of 106,327 shares, or approximately 5% of its outstanding shares, excluding the shares held by Lake
Shore, MHC. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading
plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase plan does not have an expiration date and
superseded all prior stock repurchase programs.
Item 6. Reserved.
40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our consolidated financial condition and results of operations. You should read
the information in this section in conjunction with our audited consolidated financial statements and accompanying notes
to the audited consolidated financial statements beginning on page F-1 of this Form 10-K, and the other statistical data
provided in this Form 10-K.
Overview
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, debit card fees, earnings
on bank owned life insurance, gains and losses on interest rate swaps and the sales of securities and loans, our provision for
credit 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. In 2024, we expect that non-
interest expenses will continue at their increased levels similar to 2023 as the Bank works to remediate the issues cited in
the Order and the Agreement as further discussed below.
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, as well as regulatory actions, may materially impact the Company.
Management Strategy
Remediating the issues raised in the Consent Order and the Agreement. Effective as of February 9, 2023, the
Bank consented to the issuance of a Consent Order (the “Order”) by the OCC. The Order replaced the prior Agreement
between the Bank and the OCC dated July 13, 2022 which was terminated in connection with the entry into the Order. The
Order requires the Bank to correct deficiencies relating to information technology, security, automated clearing house
program, audit, management and BSA/AML. Management and the Bank’s Board of Directors are committed to promptly
addressing the action items included in the Order. On June 28, 2023, Lake Shore, MHC and Lake Shore Bancorp entered
into a written agreement (the “Agreement”) with the Reserve Bank. The Agreement provides, among other things, that the
companies take appropriate steps to fully utilize the companies’ financial and managerial resources to serve as a source of
strength to the Bank, including, but not limited to, taking steps to ensure that the Bank complies with the Order and not,
directly or indirectly, declare or pay dividends, increase or guarantee any debt without prior approval. We expect that our
non-interest expenses will continue at their increased levels as a result of remediation actions we will take in order to comply
with the requirements of the Order and the Agreement which may adversely affect our financial performance.
Our Reputation. Our primary management strategy has been to maintain our position as an authentic community
bank, locally headquartered in Western New York, with more than 132 years of service to our community. Our management
team strives to accomplish this goal by continuing to emphasize our exceptional individualized customer service and
financial strength, continued community involvement, strong capital levels, multi-channel banking services and penetration
in our market areas via organic growth of loans and deposits.
Branding and Marketing. We currently operate eleven full-service branch offices throughout Western New York,
where our branch teams initiate and develop both consumer and commercial customer relationships in and around the
surrounding market areas. We offer concierge banking services, together with our online and mobile customer conveniences,
41
creating a truly individualized approach for customers to manage their finances whenever, wherever and however they wish.
As a true local bank, we pride ourselves on offering competitive products delivered with the individualized service our
customers have come to expect. Our experienced team of commercial bankers can meet the needs of nearly any type of
business through a variety of checking and credit products, and banking services. The retail banking team located in our
branch offices focuses on meeting the deposit and lending needs of consumer customers throughout various life stages as
well as small business customers. Our team members live and work right here in our Western New York communities and
can fully understand the specific challenges and opportunities our customers face daily. As the banking industry continues
to rapidly evolve in terms of technological conveniences, we remain proactive in our efforts to provide e-banking services
that our customers expect. From local decision-making, responding quickly and efficiently to customer needs, and utilizing
technology to level the playing field with our competitors, we are committed to developing long-term relationships with our
customers. Staying true to our local roots and mission of “Putting People First” continues to uniquely position us as a bank
of choice in Western New York.
Technology and Data Security. An important strategic objective is to continue to evaluate and enhance the
technology supporting our customer service. We are committed to making investments in technology and we believe that it
represents an efficient way to deploy a portion of our capital. To this end, the Company has enhanced the security,
monitoring and updating of our computer systems via the deployment of a cloud-based computing system, and supporting
hardware and software. During 2023, we continued to leverage the use of a new core banking system that we implemented
during the third quarter of 2021, which improved our ability to efficiently serve our customers and provides our customers
with updated e-banking services for their convenience.
Our People. A large part of our success is related to customer service and customer satisfaction. Having employees
who understand and value our clientele and their business is a key component to our success. We believe that our present
staff is one of our competitive strengths, and thus the retention of such persons and our ability to continue to attract quality
personnel is a high priority.
Lending. Our strategy is to maintain our loan portfolio while improving our asset quality.
Due to the interest rate risk inherent in holding long-term, fixed rate one- to four-family real estate loans in our
portfolio, we have been strategically focused on increasing the originations of commercial real estate loans to finance the
purchase of real property, which generally consists of developed real estate. We have also focused on commercial business
lending to small businesses, including business installment loans, lines of credit and other commercial loans. These types
of commercial loans are generally made at higher interest rates and for shorter terms than one- to four-family real estate
loans, which reduces the Bank’s interest rate risk. At December 31, 2023 and 2022, our commercial real estate loan portfolio
(including loans to finance the construction of commercial real estate) represented the largest holdings in our loan portfolio
at 56.8% and 56.7%, respectively, of total loans.
At December 31, 2023 and 2022, residential one- to four-family mortgage loans (including loans to finance the
construction of one- to four-family homes) represented the second largest holding in our loan portfolio at 30.8% and 30.5%,
respectively. We may sell low-yielding long-term conforming fixed rate one- to four-family residential loans that we
originate on the secondary market, as part of our interest rate and liquidity risk strategy and asset/liability management, if
it is deemed appropriate. During the year ended December 31, 2022, we sold $1.3 million of low-rate one- to four- family
residential loans in the secondary market. We did not sell any low-rate one- to four- family residential loans in the secondary
market during the year ended December 31, 2023. We typically retain servicing rights when we sell one- to four-family
residential mortgage loans.
Commercial business loans, home equity loans and consumer loans provide diversification to our loan portfolio
while meeting the needs of our customers. As of December 31, 2023 and 2022, our commercial business loan portfolio
represented 3.0% and 3.4%, respectively, of total loans, while the home equity loan portfolio represented 9.3% and 9.2%,
respectively, of total loans.
Asset Quality. We remain committed to maintaining prudent underwriting standards and aggressively monitoring
our loan portfolio to maintain asset quality. We introduce loan products only when we are confident that our staff has the
necessary expertise to originate and administer such loans, and that sound underwriting and collection procedures are in
42
place. Our goal is to continue to improve our asset quality through prudent underwriting standards and the diligence of our
loan collection personnel.
Critical Accounting Estimates
Disclosure of the Company’s significant accounting estimates 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, 2023. Some of these
estimates require significant judgment, estimates and assumptions to be made by management, most particularly in
connection with determining the allowance for credit losses, securities valuation, and income taxes. The Company
adopted ASU 2016-13 - Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, as amended, ("CECL") for all financial assets measured at amortized cost using the modified retrospective
method on January 1, 2023 and replaced the allowance for loan losses “incurred loss” model discussed in the Form 10-K
for the year ended December 31, 2022 with the allowance for credit losses model. Refer to Notes 2 and 5 in the audited
consolidated financial statements for additional information and accounting policies related to the CECL model.
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.
43
Average Balances, Interest and Average Yields. The following table sets 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 years 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 years presented.
Average balances are derived from daily balances over the years indicated. The average balances for loans are net of
allowance for credit losses, but include non-accrual loans. The loan yields include net amortization of certain deferred fees
and costs that are considered adjustments to yields. The net amortization of deferred loan fees and costs were $552,000 and
$490,000 for the years ended December 31, 2023 and 2022, respectively. Interest income on securities does not include a
tax equivalent adjustment for bank qualified municipal bonds.
For the Year Ended
December 31, 2023
Interest
Income/
Expense
Average
Balance
For the Year Ended
December 31, 2022
Interest
Income/
Expense
Yield/
Rate
Yield/
Rate
(Dollars in thousands)
Average
Balance
Interest-earning assets:
Interest-earning deposits & federal funds
sold
Securities(1)
Loans, including fees
Total interest-earning assets
Other assets
Total assets
Interest-bearing liabilities
Demand & NOW accounts
Money market accounts
Savings accounts
Time deposits
Borrowed funds & other interest-bearing
liabilities
Total interest-bearing liabilities
Other non-interest bearing liabilities
Stockholders' equity
Total liabilities & stockholders' equity
Net interest income
Interest rate spread
Net interest margin
1,805
1,941
30,009
33,755
75
1,914
47
6,033
1,328
9,397
$
$
$
$
$
$
36,948
67,840
567,319
672,107
46,057
718,164
76,495
132,816
70,600
206,218
38,701
524,830
109,907
83,427
718,164
$
24,358
179
2,068
24,507
26,754
78
486
41
1,210
600
2,415
$
$
19,654
81,352
544,914
645,920
50,831
696,751
87,069
169,331
77,248
138,729
25,200
497,577
116,408
82,766
696,751
$
24,339
4.89% $
2.86%
5.29%
5.02%
$
0.10% $
1.44%
0.07%
2.93%
3.43%
1.79%
$
3.23%
3.62%
0.91%
2.54%
4.50%
4.14%
0.09%
0.29%
0.05%
0.87%
2.38%
0.49%
3.65%
3.77%
(1)
The tax equivalent adjustment for bank qualified municipal securities results in rates of 3.27% and 2.95% for the years ended December 31, 2023 and 2022,
respectively.
44
Rate Volume Analysis. The following table analyzes the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities. The table shows 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 year to the volume change
between the two years. The effect of changes in rate is measured by applying the change in rate between the two years to
the average volume during the first year. 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.
Interest-earning assets:
Interest-earning deposits & federal funds sold
Securities
Loans, including fees
Total interest-earning assets
Interest-bearing liabilities:
Demand & NOW accounts
Money market accounts
Savings accounts
Time deposits
Total deposits
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities
Total interest-bearing liabilities
Total change in net interest income
Year Ended December 31, 2023
Compared to
Year Ended December 31, 2022
Volume
(Dollars in thousands)
Rate
Net Change
$
$
1,353
241
4,461
6,055
7
1,554
10
3,997
5,568
356
5,924
131
$
$
$
273
(368)
1,041
946
(10)
(126)
(4)
826
686
372
1,058
(112) $
1,626
(127)
5,502
7,001
(3)
1,428
6
4,823
6,254
728
6,982
19
As shown in the above tables, the increase in net interest income for the year ended December 31, 2023 as compared
to the prior year was primarily due to an increase in the average yield earned on interest-earning assets and an increase in
the average balance of interest-earning assets. Net interest rate spread decreased by 42 basis points to 3.23% for the year
ended December 31, 2023 as compared to 3.65% for the year ended December 31, 2022. Net interest margin decreased by
15 basis points to 3.62% for the year ended December 31, 2023 as compared to 3.77% for the prior year. The decrease in
net interest rate spread and net interest margin were primarily due to a 206 basis points increase in the average rate paid on
time deposits.
Comparison of Financial Condition at December 31, 2023 and December 31, 2022
Total assets at December 31, 2023 were $725.1 million, an increase of $25.2 million, or 3.6%, from $699.9 million
at December 31, 2022. The increase in total assets was primarily due to a $44.1 million increase in cash and cash equivalents
and a $6.1 million increase in bank-owned life insurance, partially offset by a $17.7 million decrease in loans receivable,
net, and a $12.6 million decrease in securities available for sale.
Cash and cash equivalents increased by $44.1 million, or 457.8%, from $9.6 million at December 31, 2022 to $53.7
million at December 31, 2023. The increase was primarily due to a $20.8 million cash inflow due to an increase in total
deposits, a $17.7 million decrease in loans receivable and a sale of $9.8 million of securities available-for-sale, partially
offset by a $2.3 million net cash outflow due to a decrease in short-term borrowings and long-term debt and a purchase of
additional bank-owned life insurance of $12.6 million.
Securities decreased by $12.6 million, or 17.3%, from $73.0 million at December 31, 2022 to $60.4 million at
December 31, 2023. The decrease was primarily the result of the sale of $9.8 million of securities during the year ended
December 31, 2023 to reposition our balance sheet.
45
Net loans receivable decreased during the year ended December 31, 2023, as shown in the table below:
Real Estate Loans:
Residential, one- to four-family(1)
Home equity
Commercial(2)
Total real estate loans
Other Loans:
Commercial
Consumer
Total gross loans
Allowance for credit losses
Net deferred loan costs
Loans receivable, net
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial construction loans.
At December 31,
2023
At December 31,
2022
Change
$
%
(Dollars in thousands)
$
$
172,005
51,869
316,986
540,860
16,546
1,130
558,536
(6,463)
3,755
555,828
$
$
175,904
53,057
326,955
555,916
19,576
1,217
576,709
(7,065)
3,893
573,537
$
$
(3,899)
(1,188)
(9,969)
(15,056)
(3,030)
(87)
(18,173)
602
(138)
(17,709)
(2.2) %
(2.2) %
(3.0) %
(2.7) %
(15.5) %
(7.1) %
(3.2) %
(8.5) %
(3.5) %
(3.1) %
The loans receivable, net balance decreased $17.7 million, or 3.1%, from $573.5 million at December 31, 2022 to
$555.8 million at December 31, 2023. The decrease was primarily due to decreases in commercial, one- to four-family
loans, and home equity loans, as part of our strategy to increase our liquidity. During the year ended December 31, 2023,
we remained strategically focused on originating shorter duration, adjustable-rate loans to diversify our asset mix and to
manage interest rate risk.
Asset Quality. The following table presents information regarding activity in our allowance for credit losses and
our asset quality ratios at or for the dates indicated, including non-performing loan and non-performing asset ratios.
Beginning balance, prior to adoption of ASC 326
Impact of adopting ASC 326
(Credit) provision for credit losses
Charge-offs:
Real estate loans:
Residential, one- to four-family
Commercial
Other loans:
Consumer
Total charge-offs
Recoveries:
Real estate loans:
Residential, one- to four-family
Home equity
Commercial
Other loans:
Commercial
Consumer
Total recoveries
Net recoveries
Balance at end of period
Average loans outstanding
Allowance for credit losses as a percent of total net loans
Allowance for credit losses as a percent of non-performing loans
46
$
$
$
At or for the Year Ended December 31,
2023
2022
(Dollars in thousands)
$
7,065
282
(897)
(3)
—
(58)
(61)
2
—
35
29
8
74
13
6,463
567,319
1.16 %
193.09 %
$
$
6,118
—
725
—
(4)
(69)
(73)
17
1
269
—
8
295
222
7,065
544,914
1.23 %
240.96 %
Ratio of net recoveries (charge-offs) to average loans outstanding by loan type,
annualized:
Real estate loans:
Residential, one- to four-family
Home equity
Commercial
Construction – Commercial
Other loans:
Commercial
Consumer
Ratio of net recoveries to average loans outstanding
Loans past due 90 days or more but still accruing:
Real estate loans:
Residential, one- to four-family
Home equity
Commercial
Other loans:
Commercial
Consumer
Total
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential, one- to four-family(1)
Home equity
Commercial(2)
Other loans:
Commercial
Consumer
Total non-accrual loans
Total non-performing loans
Foreclosed real estate
Total non-performing assets
Ratios:
Non-performing loans as a percent of total net loans:
Non-performing assets as a percent of total assets:
(1) Includes one- to four-family construction loans.
(2) Includes commercial construction loans.
At or for the Year Ended December 31,
2023
2022
— %
— %
0.01 %
— %
0.15 %
(4.41) %
— %
0.01 %
— %
0.09 %
— %
— %
(4.77) %
0.04 %
At December 31,
2023
At December 31,
2022
(Dollars in thousands)
$
$
$
$
— $
—
—
—
—
— $
1,904
196
1,242
—
5
3,347
3,347
34
3,381
$
$
1
—
—
—
—
1
2,295
602
—
—
34
2,931
2,932
95
3,027
0.60 %
0.47 %
0.51 %
0.43 %
Total non-performing assets increased by $354,000, or 11.7%, to $3.4 million at December 31, 2023 as compared
to $3.0 million at December 31, 2022, primarily due to an increase in non-accrual loans, including one commercial
relationship comprised of two loans which were moved to non-accrual status during 2023. Non-performing loans were $3.3
million at December 31, 2023 compared to $2.9 million at December 31, 2022.
Other assets increased $5.7 million, or 80.6%, to $12.8 million at December 31, 2023 from $7.1 million at December
31, 2022. The increase was primarily due to a $6.6 million increase in other assets related to the surrender of certain bank-
owned life insurance policies in the fourth quarter of 2023 in which cash consideration is expected to be received in the first
quarter of 2024.
47
The table below shows changes in deposit balances by type of deposit account between December 31, 2023 and
December 31, 2022:
Core Deposits
Demand deposits and NOW accounts:
Non-interest bearing
Interest bearing
Money market
Savings
Total core deposits
Non-core Deposits
Time deposits
Total deposits
At December 31,
2023
At December 31,
2022
Change
$
%
(Dollars in thousands)
$
$
95,186 $
72,966
137,374
64,584
370,110
105,678 $
85,033
149,250
77,200
417,161
(10,492)
(12,067)
(11,876)
(12,616)
(47,051)
220,814
590,924 $
152,958
570,119 $
67,856
20,805
(9.9) %
(14.2) %
(8.0) %
(16.3) %
(11.3) %
44.4 %
3.6 %
The increase in total deposits was primarily due to a 44.4% increase in time deposits, partially offset by a decrease
in core deposits. The increase in time deposits was primarily due to a $51.9 million increase in customer time deposits and
a $16.0 million increase in brokered time deposits. The increase in customer time deposits was primarily due to an increase
in customer demand for these types of deposit products due to the rising and competitive interest rate environment. The
increase in brokered time deposits was a result of management's strategy to lock in liquidity during a rising interest rate
environment, and increased competition for deposits in our market area. The Company’s strategic focus is centered on
organic growth of deposits among its retail and commercial customers to reduce the reliance on wholesale funding and to
strengthen customer relationships. At December 31, 2023 and December 31, 2022 the Company's percentage of uninsured
deposits to total deposits was 12.8% and 16.6%, respectively.
Short-term borrowings from the FHLBNY decreased to $0 at December 31, 2023 from $12.6 million at December
31, 2022, as the Company paid-off short-term borrowings to decrease interest expense.
Long-term debt consisting of advances from the FHLBNY, increased by $10.3 million, or 41.3%, from $25.0
million at December 31, 2022 to $35.3 million at December 31, 2023. The additional borrowings were used as part of a
balance sheet management strategy to fix a portion of funding costs in an effort to mitigate interest rate risk and to lock in
liquidity.
Total stockholders’ equity increased $5.1 million, or 6.3%, to $86.3 million at December 31, 2023 from $81.2
million at December 31, 2022. The increase in stockholders’ equity was primarily attributed to a $4.1 million increase in
retained earnings. The increase was also due to $947,000 unrealized mark-to-market gain on the available-for-sale securities
portfolio recognized in accumulated other comprehensive loss as a result of decreased market interest rates on the investment
securities portfolio during the year ended December 31, 2023.
Comparison of Results of Operations for the Year Ended December 31, 2023 and 2022
General. Net income was $4.8 million for the year ended December 31, 2023, or $0.82 per diluted share, a decrease
of $0.9 million, or 15.5%, compared to net income of $5.7 million, or $0.97 per diluted share, for the year ended December
31, 2022. The decrease in net income for the year ended December 31, 2023, reflected a $2.4 million increase in non-
interest expense, a $69,000 decrease in non-interest income, and a $237,000 increase in income tax expense, which was
partially offset by a $1.8 million decrease in (credit) provision for credit losses, and a $19,000 increase in net interest income.
Net Interest Income. Net interest income increased by $19,000, or 0.1%, to $24.4 million for the year ended
December 31, 2023 compared to $24.3 million for the year ended December 31, 2022. Interest income increased by 26.2%,
while interest expense increased by 289.1% for the year ended December 31, 2023 when compared to the year ended
December 31, 2022. Interest rate spread and net interest margin were 3.23% and 3.62%, respectively, for the year ended
December 31, 2023 compared to 3.65% and 3.77%, respectively, for the year ended December 31, 2022.
48
Interest Income. Interest income increased by $7.0 million, or 26.2%, to $33.8 million for the year ended December
31, 2023 when compared to the year ended December 31, 2022 primarily due to an increase in loan interest income. Loan
interest income increased $5.5 million, or 22.5 %, to $30.0 million for the year ended December 31, 2023 when compared
to the year ended December 31, 2022. The increase was primarily due to a 79 basis points increase in the average yield on
loans to 5.29% for the year ended December 31, 2023 as compared to 4.50% for the year ended December 31, 2022 as a
result of rising interest rates. The increase in loan interest income was also aided by an increase in the average balance of
the loan portfolio of $22.4 million, or 4.1%, from $544.9 million for the year ended December 31, 2022 to $567.3 million
for the year ended December 31, 2023. The increase in the average balance of loans was primarily due to growth in the
average balance of commercial real estate, one- to four- family real estate loans, and home equity loans.
Investment interest income decreased $127,000, or 6.1%, to $1.9 million for the year ended December 31, 2023
compared to the year ended December 31, 2022, due to a decrease in the average balance of securities of $13.5 million, or
16.6%, partially offset by a 32 basis points increase in the average yield of the investment portfolio. The average yield was
2.54% for the year ended December 31, 2022 as compared to 2.86% for the year ended December 31, 2023. The decrease
in the average balance and the increase in the average yield of our securities was the result of the sale of securities during
2023 to reposition our balance sheet.
Other interest income increased by $1.6 million, to $1.8 million for the year ended December 31, 2023, as compared
to $179,000 for the year ended December 31, 2022. The increase in other interest income was significantly impacted by a
398 basis points increase in the average yield to 4.89% for the year ended December 31, 2023 as compared to 0.91% for the
year ended December 31, 2022. The increase in the average yield was primarily driven by an increase in market rates. The
average balance of other interest earning assets increased from $19.7 million for the year ended December 31, 2022 to $36.9
million for the year ended December 31, 2023 due to the increase in cash from deposit growth, loan repayments, and the
sale of securities during 2023.
Interest Expense. Interest expense increased $7.0 million, or 289.1%, to $9.4 million for the year ended December
31, 2023 compared to $2.4 million for the year ended December 31, 2022 primarily due to an increase in interest paid on
deposits. Interest paid on deposits increased by $6.3 million, or 344.6%, to $8.1 million for the year ended December 31,
2023 when compared to the year ended December 31, 2022. The increase in interest paid on deposits was primarily the
result of a $67.5 million increase in the average balance of time deposits, as well as a 206 basis points increase in the average
rate paid on time deposit accounts. Interest paid on time deposits increased by $4.8 million, or 398.6% during the year
ended December 31, 2023 as compared to the prior year. The increase in the average rate paid on deposit accounts was
primarily due to the increase in market interest rates and increased competition since December 31, 2022. Average deposit
balances were $486.1 million, a 2.9% increase during the year ended December 31, 2023, resulting from an increase in time
deposits and brokered deposits since December 31, 2022.
During the year ended December 31, 2023, interest expense on borrowed funds and other interest-bearing liabilities
increased by $728,000, or 121.3%, compared to the year ended December 31, 2022, primarily due to a $13.5 million increase
in average borrowed funds and other interest-bearing liabilities outstanding. In addition, the cost of borrowed funds and
other interest-bearing liabilities increased 105 basis points to 3.43% for the year ended December 31, 2023 as compared to
the prior year. Interest expense on borrowed funds and other interest-bearing liabilities increased as we increased liquidity
on the balance sheet.
(Credit) Provision for Credit Losses. We adopted the Current Expected Credit Losses (“CECL”) methodology to
record expected credit losses on our loan portfolio and unfunded commitments effective January 1, 2023. The adoption of
CECL under current accounting guidance resulted in a pre-tax increase to the allowance for credit losses on loans of
$282,000 and an increase to the allowance for credit losses on unfunded commitments of $633,000, with an offset to retained
earnings. A $1.0 million (credit) provision for credit losses on loans and unfunded commitments was recorded during the
year ended December 31, 2023 compared to a $725,000 provision for the year ended December 31, 2022. The (credit)
provision for credit losses during the year ended December 31, 2023 was primarily due to a decrease in commercial real
estate, residential one- to four-family, and home equity loans during 2023, as well as a decrease in unfunded commitments
that are not unconditionally cancellable during the year. The Company’s 2022 provision for loan losses was primarily due
to general reserves set aside for loan growth and an increase in criticized and classified commercial real estate loans.
During the year ended December 31, 2023, we utilized the CECL methodology to record expected credit losses on
our loan portfolio and unfunded commitments, which is estimated using relevant available information, from internal and
49
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We use the vintage
model to estimate expected credit losses for all loan segments. We recorded a credit to the provision for credit losses of
$570,000 related to commercial real estate loans, which consisted of a $436,000 credit attributable to a decrease in the
segment's loan balance and a $134,000 credit attributable to qualitative and forecasting factors, including trends in the nature
and volume of the loan portfolio, loan concentrations, national and local economic conditions, as well as forecasted data
related to unemployment rates and changes in forecasted gross domestic product (GDP). We also recorded a credit to the
provision for credit losses for unfunded commitments of $207,000 related to a decrease in loan commitments during 2023.
During the year ended December 31, 2022, the Company recorded a net provision of $744,000 for commercial real
estate and construction – commercial loans. This consisted of an $816,000 general provision primarily to reflect the
classification of two commercial real estate loans totaling $8.6 million to substandard during the year ended December 31,
2022. It also included a $197,000 general provision due to an increase in commercial real estate and construction –
commercial loans during the year ended December 31, 2022, driven by organic loan growth in these loan categories. These
provisions were partially offset by a $269,000 recovery on previously impaired commercial real estate loans during the year
ended December 31, 2022. A $22,000 net credit provision was recorded for commercial business loans primarily due to a
decrease in criticized and classified loans for this loan type and a decrease in commercial loan balances during the year
ended December 31, 2022. A $92,000 net provision was recorded for one-to four-family, home equity and consumer loans
that primarily reflected adjustments to certain qualitative factors, net-charge offs and an increase in classified loans for these
loan types during the year ended December 31, 2022. An $89,000 credit provision was recorded for the unallocated category
of 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 loan portfolio.
Refer to Note 5 of the Notes to the Consolidated Financial Statements for additional details on the provision for
credit losses.
Non-Interest Income. Non-interest income was $2.6 million for the year ended December 31, 2023, a decrease of
$69,000, or 2.6%, as compared to the year ended December 31, 2022. The decrease was primarily due to a $391,000 net
decrease in unrealized gains on interest rate swap products as a result of market interest rate movements, a $59,000 loss on
the sale of securities in the current year to reposition the Bank’s balance sheet, and a $59,000 decrease in service charges
and fees. These decreases were partially offset by a $420,000 increase in earnings on bank-owned life insurance in
connection with the restructuring of bank-owned life insurance during the fourth quarter of 2023, and a $18,000 decrease
in loss on sale of loans when compared to the year ended December 31, 2022.
Non-Interest Expense. Non-interest expense was $21.8 million for the year ended December 31, 2023, an increase
of $2.4 million, or 12.2%, as compared to $19.4 million for the year ended December 31, 2022 primarily due to an increase
in the aggregate of professional services expense and salary and employee benefits expense of $1.8 million, or 14.9%, as a
result of performing remediation activities related to regulatory matters. Additionally, FDIC insurance expense increased
by $841,000, or 309.2%, during the year ended December 31, 2023 due to an increase in premium assessments related to
regulatory matters. Data processing costs increased by $323,000, or 22.7%, during the year ended December 31, 2023
primarily due to an increase in costs related to core system maintenance and enhancements to existing IT security protocols.
Income Taxes Expense. Income tax expense was $1.4 million for the year ended December 31, 2023, an increase
of $237,000, or 20.4%, as compared to $1.2 million for the year ended December 31, 2022. The increase in income tax
expense was primarily due to the restructuring of bank-owned life insurance, which resulted in additional income tax
expense of $378,000. This increase was partially offset by a decrease in income before income taxes during the year ended
December 31, 2023. The effective tax rate for the years ended December 31, 2023 and 2022 was 22.4% and 16.9%,
respectively. The increase in the effective tax rate in 2023 was due to the aforementioned restructuring of the bank-owned
life insurance.
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, scheduled amortization
and prepayments of loans and securities, maturities and sales of investments and loans, excess cash, 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 December 31, 2023,
50
the maximum amount that we could borrow from the FHLBNY was $36.8 million which was collateralized by certain fixed-
rate residential, one- to four-family loans in delivery. We can increase our maximum borrowing capacity by providing
additional collateral in delivery. At December 31, 2023, we had outstanding advances under this agreement of $35.3 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. At December
31, 2023 there were no securities pledged to the Federal Reserve Bank. At December 31, 2022 securities pledged to the
FRB discount window was equal to a book value of $14.4 million and fair value of $12.2 million. There were no balances
outstanding with the Federal Reserve Bank as of December 31, 2023 and 2022. We have also established lines of credits
with correspondent banks for $27.0 million, of which $25.0 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 December 31,
2023.
As a result of the Order previously disclosed herein, the Company’s ability to access available sources of funds
from the FHLB has been curtailed to short-term advances (i.e., 30 days or less) and the residential loans pledged as collateral
for these borrowings are subject to reductions in value. The availability of lines of credit with one other correspondent bank
was terminated, while the availability of lines of credit with other correspondent banks may also be reduced or eliminated.
The Bank is not eligible to access the Bank Term Funding Program created by the Federal Reserve Board on March 12,
2023. The Bank is ineligible to participate in the program due to the Consent Order. The program ended on March 11, 2024.
Lastly, the unsecured line of credit for our Master Account at the Federal Reserve has been withdrawn at this time.
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
year ended December 31, 2023, we originated loans of approximately $56.3 million as compared to approximately $157.2
million of loans originated during the year ended December 31, 2022. Principal repayments and other deductions exceeded
loan originations in 2023 by $17.9 million. There were no purchases of investment securities during the year ended
December 31, 2023. Purchases of investment securities totaled $6.1 million for the year ended December 31, 2022.
Additionally during 2023, we purchased additional bank-owned life insurance of $12.6 million, while surrendering $7.2
million, to increase the yield on these assets. These activities were funded primarily through deposit growth, principal
payments received on loans and securities, securities sales, 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 $590.9 million at
December 31, 2023, as compared to $570.1 million at December 31, 2022. Approximately $150.5 million of time deposit
accounts are scheduled to mature within one year as of December 31, 2023. 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 maintain sufficient liquidity and manage our cost of funds, we may consider wholesale
funding options in the future.
We do not anticipate any material capital expenditures in 2024. We do not have any balloon or other payments due
on any long-term obligations, other than the borrowing agreements noted above.
51
Off-Balance Sheet Arrangements
Our off-balance sheet items include loan commitments as described in Note 16 in the notes to our consolidated
financial statements. At December 31, 2023, we had loan commitments to borrowers of approximately $21.0 million and
overdraft lines of credit, unused home equity lines of credit, unused commercial lines of credit, and commercial and standby
letters of credit of approximately $76.9 million. We recorded an allowance for credit losses associated with these
commitments of $487,000 as of December 31, 2023. We do not have any other 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.
Accounting Polices, Standards and Pronouncements
Refer to Note 2 in the notes to our consolidated financial statements for a discussion of significant accounting
policies, the impact of the adoption of new accounting standards and recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosure not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
See pages F – 1 through F – 51 following the signature page of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that the information required to be
disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and
communicated to the issuer’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s
management, with the participation of its Principal Executive Officer and Principal 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
Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s
disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
for the Company. Our internal control over financial reporting is a process designed under the supervision of our Principal
Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted
accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
52
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Our management has made a comprehensive review, evaluation, and assessment of our internal control over
financial reporting as of December 31, 2023. In making its assessment of internal control over financial reporting,
management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that, as of
December 31, 2023, our internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting pursuant to rules of the SEC that exempts the Company from such
attestation and requires only management’s report.
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 December 31, 2023
to which this report relates that have materially affected, or are reasonably likely to materially affect, internal control over
financial reporting.
Item 9B. Other Information.
During the fourth quarter of 2023, none of our directors or officers adopted or terminated any contract, instruction
or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions
of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2024
Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our
December 31, 2023 fiscal year end.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2024
Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our
December 31, 2023 fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2024
Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our
December 31, 2023 fiscal year end.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2024
Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our
December 31, 2023 fiscal year end.
53
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2024
Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our
December 31, 2023 fiscal year end.
54
Item 15. Exhibits and Financial Statement Schedules.
PART IV
15(a)(1) Financial Statements. The following are included in Item 8 of Part II of this Annual Report on Form 10-
K.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2023 and 2022
Consolidated Statements of Income for the years ended December 31, 2023 and 2022
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2023 and 2022
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
15(a)(2) Financial Statement Schedules. Schedules are omitted because they are not required or the information
is provided elsewhere in the Consolidated Financial Statements or Notes thereto included in Item 8 of Part II of this Annual
Report on Form 10-K.
15(a)(3) Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated
herein by reference.
Charter of Lake Shore Bancorp, Inc.1
Amended and Restated Bylaws of Lake Shore Bancorp, Inc.2
Form of Stock Certificate of Lake Shore Bancorp, Inc.3
Form of Stock Option Certificate4
Description of Common Stock5
Amended and Restated Severance Pay Plan of Lake Shore Savings Bank6
2015 Executives Supplemental Benefit Plan I7
Amended and Restated 2015 Executives Supplemental Benefit Plan II8
2015 Directors Supplemental Benefit Plan I9
Amended and Restated 2015 Directors Supplemental Benefit Plan II10
Lake Shore Bancorp, Inc. 2006 Stock Option Plan11
Amended and Restated 2017 Supplemental Executive Retirement Plan for Daniel P. Reininga12
2015 Executives Supplemental Benefit Plan II amended and restated joinder agreement for Rachel A. Foley13
2015 Executives Supplemental Benefit Plan II joinder agreement for Jeffery M. Werdein14
Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan15
Retention Agreement between Lake Shore Savings Bank and Jeffrey Werdein16
Consent Order17
Written Agreement by and between Lake Shore, MHC, Lake Shore Bancorp, Inc. and the Federal Reserve Bank of
Philadelphia, dated June 28, 202318
Subsidiaries of Lake Shore Bancorp, Inc.*
Consent of Baker Tilly US, LLP*
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*
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*
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*
Policy Relating to Recovery of Erroneously Awarded Compensation*
XBRL Instance Document*
XBRL Taxonomy Extension Schema Document*
XBRL Taxonomy Calculation Linkbase Document*
XBRL Taxonomy Extension Definition Linkbase Document*
XBRL Taxonomy Label Linkbase Document*
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
21.1
23.1
31.1
31.2
32.1
32.2
97
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
* Filed herewith.
55
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on November 4, 2005 (Registration No. 333-129439).
Incorporated herein by reference to Exhibit 3.2 to Form 8-K, filed with the Securities and Exchange Commission on November 1,
2023.
Incorporated herein by reference to the Exhibits to Amendment No. 2 to the Registration Statement on Form S-1/A, filed with the
Securities and Exchange Commission on February 8, 2006 (Registration No. 333-129439).
Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8, filed with the Securities and Exchange
Commission on April 3, 2007 (Registration No. 333-141829).
Incorporated herein by reference to Exhibit 4.4 to Form 10-K, filed with the Securities and Exchange Commission on March 27,
2020.
Incorporated herein by reference to the Exhibits to Form 8-K, filed with the Securities and Exchange Commission on November
16, 2007.
Incorporated herein by reference to Exhibit 10.5 to Form 10-K, filed with the Securities and Exchange Commission on March 25,
2016.
Incorporated herein by reference to Exhibit 10.6 to Form 10-K, filed with the Securities and Exchange Commission on March 25,
2016.
Incorporated herein by reference to Exhibit 10.7 to Form 10-K, filed with the Securities and Exchange Commission on March 25,
2016.
Incorporated herein by reference to Exhibit 10.8 to Form 10-K, filed with the Securities and Exchange Commission on March 25,
2016
Incorporated herein by reference to the Proxy Statement for our October 24, 2006 special meeting of shareholders filed with the
Securities and Exchange Commission on September 7, 2006.
Incorporated herein by reference to Exhibit 10.2 to Form 8-K, filed with the Securities and Exchange Commission on January 27,
2017.
Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on May 23,
2016.
Incorporated herein by reference to Exhibit 10.2 to Form 8-K, filed with the Securities and Exchange Commission on May 23,
2016.
Incorporated herein by reference to Appendix A to the Proxy Statement for our May 23, 2012 annual meeting of stockholders filed
with the Securities and Exchange Commission on April 11, 2012.
Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on April 4, 2018.
Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on February 15,
2023.
Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on June 30,
2023.
Item 16. Form 10-K Summary.
None.
56
Pursuant to the requirements of Section 13 or 15(d) 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, on March 22, 2024.
SIGNATURES
Lake Shore Bancorp, Inc.
By:/s/ Kim C. Liddell
Kim C. Liddell
President and Chief Executive Officer
Date: March 22, 2024
Pursuant to the requirements of the Securities Act of 1933, as amended, and any rules and regulations promulgated
there under, this Annual Report on Form 10-K, has been signed by the following persons in the capacities and on the dates
indicated.
Name
Title
Date
/s/ Kim C. Liddell
Kim C. Liddell
President and Chief Executive
Officer (Principal Executive Officer)
March 22, 2024
/s/ Kevin M. Sanvidge
Chairman of the Board
March 22, 2024
Kevin M. Sanvidge
/s/ Sharon E. Brautigam
Vice Chairperson of the Board
March 22, 2024
Sharon E. Brautigam
/s/ Michelle M. DeBergalis
Director
March 22, 2024
Michelle M. DeBergalis
/s/ John P. McGrath
Director
March 22, 2024
John P. McGrath
/s/ Jack L. Mehltretter
Director
March 22, 2024
Jack L. Mehltretter
/s/ Ronald J. Passafaro
Director
March 22, 2024
Ronald J. Passafaro
/s/ Ann M. Segarra
Ann M. Segarra
/s/ Taylor M. Gilden
Taylor M. Gilden
Director
March 22, 2024
Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
March 22, 2024
57
Table of Contents
Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 23)
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F - 2
F - 4
F - 5
F - 6
F - 7
F - 8
F - 9
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Lake Shore Bancorp, Inc. and Subsidiary:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Lake Shore Bancorp, Inc. and
Subsidiary (Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive
income (loss), stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the
consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of
America.
Change in Accounting Principle
As described in Note 2 to the Company’s consolidated financial statements, the Company has changed its method of
accounting for the recognition and measurement of the allowance for credit losses effective January 1, 2023 due to the
adoption of ASC 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts
or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Qualitative Factors and Economic Forecast Factor
Critical Audit Matter Description
F - 2
As discussed in Notes 2 and 5 to the consolidated financial statements, the allowance for credit losses on loans and off
balance sheet credit exposure is accounted for under ASC 326, Financial Instruments – Credit Losses. ASC 326 requires
the measurement of expected credit losses over the estimated life of the existing loan portfolio.
The Company’s allowance for credit losses on loans is measured on a collective (pool) basis when similar risk characteristics
exist using the vintage model for all loan segments, adjusted for qualitative factors and an economic forecast factor
components. Loans that do not share risk characteristics are evaluated on an individual basis. The vintage model measures
the expected loss calculation for future periods based on historical performance by the origination period of loans with
similar life cycles and risk characteristics. For each loan segment, the Company utilizes historical loss data through the
current period to calculate the actual loss percentage for each loan type by vintage year of loan origination. The qualitative
factors used by the Company include factors such as trends in nature and volume of loan portfolio, loan concentrations,
changes in the experience, ability and depth of the Company’s lending management, and national and local economic
conditions. The economic forecast factor considers unemployment data and changes in gross domestic production to
determine the impact on the Company’s loan portfolio. The adjustments for qualitative factors and the economic forecast
factor require a significant amount of judgment by management and involve a high degree of estimation uncertainty.
The Company’s allowance for credit losses on off balance sheet credit exposure is derived through the use of the vintage
model described above and a utilization rate concept, adjusted for the same qualitative factors and economic forecast factor
as applied to loans.
We identified the qualitative factor and economic forecast factor components of the allowance for credit losses as a critical
audit matter as auditing the underlying qualitative factors and economic forecast factor required significant auditor judgment
as amounts determined by management rely on analysis that is highly subjective and includes significant estimation
uncertainty.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included, among others:
Obtaining an understanding of the relevant controls related to the allowance for credit losses, including controls
related to management’s determination and review of the qualitative factors and the economic forecast factor,
and the completeness and accuracy of the data used in determining the qualitative factors and the economic
forecast factor.
Testing of the completeness and accuracy of the data used by management in determining qualitative factor and
the economic forecast factor adjustments by agreeing to internal and external source data.
Testing of the mathematical accuracy of the allowance calculation, including the calculation of the qualitative
factor and economic forecast factor components.
Evaluating the reasonableness of management’s conclusions regarding the appropriateness of the qualitative
factor and economic forecast factor adjustments when compared to the underlying internal and external source
data.
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2005.
Pittsburgh, Pennsylvania
March 22, 2024
F - 3
Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
Assets
Cash and due from banks
Interest earning deposits
Cash and Cash Equivalents
Securities
Federal Home Loan Bank stock, at cost
Loans receivable, net of allowance for credit losses of $6,463 in 2023 and $7,065
in 2022
Premises and equipment, net
Accrued interest receivable
Bank-owned life insurance
Other assets
Total Assets
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Interest bearing
Non-interest bearing
Total Deposits
Short-term borrowings
Long-term debt
Advances from borrowers for taxes and insurance
Other liabilities
Total Liabilities
Stockholders' Equity
Common stock, $0.01 par value per share, 25,000,000 shares authorized;
6,836,514 shares issued and 5,686,288 shares outstanding at December 31, 2023
and 6,836,514 shares issued and 5,705,225 shares outstanding at December 31,
2022
Additional paid-in capital
Treasury stock, at cost (1,150,226 shares at December 31, 2023 and 1,131,289
shares at December 31, 2022)
Unearned shares held by ESOP
Unearned shares held by compensation plans
Retained earnings
Accumulated other comprehensive loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
$
$
$
$
December 31,
2023
December 31,
2022
(Dollars in thousands, except share data)
4,648
49,082
53,730
60,442
2,293
555,828
7,870
2,835
29,355
12,765
725,118
495,738
95,186
590,924
—
35,250
3,307
9,364
638,845
68
31,456
(13,760)
(1,023)
(39)
78,956
(9,385)
86,273
725,118
$
$
$
$
4,503
5,130
9,633
73,047
2,330
573,537
8,286
2,796
23,218
7,067
699,914
464,441
105,678
570,119
12,596
24,950
3,308
7,757
618,730
68
31,459
(13,571)
(1,108)
(191)
74,859
(10,332)
81,184
699,914
F - 4
Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
Interest Income
Loans, including fees
Investment securities, taxable
Investment securities, tax-exempt
Other
Total Interest Income
Interest Expense
Deposits
Short-term borrowings
Long-term debt
Other
Total Interest Expense
Net Interest Income
(Credit) Provision for Credit Losses
Net Interest Income After (Credit) Provision for Credit
Losses
Non-Interest Income
Service charges and fees
Debit card fees
Increase in cash surrender value of bank-owned life insurance
Unrealized gain (loss) on equity securities
Unrealized (loss) gain on interest rate swap
Recovery on previously impaired investment securities
Loss on sale of securities available for sale
Net loss on sale of loans
Other
Total Non-Interest Income
Non-Interest Expense
Salaries and employee benefits
Occupancy and equipment
Professional services
Data Processing
Advertising
Postage and Supplies
FDIC Insurance
Other
Total Non-Interest Expense
Income before Income Taxes
Income Tax Expense
Net Income
Basic and diluted earnings per common share
Dividends declared per share
See notes to consolidated financial statements.
F - 5
Years Ended December 31,
2023
2022
(Dollars in thousands, except per share data)
$
$
$
$
$
30,009
898
1,043
1,805
33,755
8,069
87
1,191
50
9,397
24,358
(1,043)
25,401
1,045
846
761
11
(58)
7
(59)
—
82
2,635
11,254
2,911
2,489
1,745
578
261
1,113
1,466
21,817
6,219
1,399
4,820
0.82
$
$
— $
24,507
823
1,245
179
26,754
1,815
49
494
57
2,415
24,339
725
23,614
1,104
846
341
(11)
332
15
—
(18)
95
2,704
9,854
3,054
2,108
1,422
714
266
272
1,758
19,448
6,870
1,162
5,708
0.97
0.68
Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
Net Income
Other Comprehensive Income (Loss), net of tax (expense) benefit:
Unrealized holding gains (losses) on securities available for sale, net of tax (expense)
benefit
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income, net
of tax expense
Net loss on sale of securities included in net income, net of tax benefit
Total Other Comprehensive Income (Loss)
Total Comprehensive Income (Loss)
See notes to consolidated financial statements.
Years Ended December 31,
2023
2022
(Dollars in thousands)
4,820
$
5,708
905
(11,298)
(5)
47
947
5,767
$
(12)
—
(11,310)
(5,602)
$
$
F - 6
Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2023 and 2022
Common
Stock
Additional
Paid-In
Capital
Unearned
Shares
Held by
ESOP
Unearned Shares
Held by
Compensation
Plans
Treasury
Stock
Retained
Earnings
(Dollars in thousands, except share and per share data)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance - January 1, 2022
Net income
Other comprehensive loss, net of tax benefit of
$3,007
ESOP shares earned (7,935 shares)
Compensation plan shares granted (29,132
shares)
Compensation plan shares forfeited (10,616
shares)
Compensation plan shares earned (14,911
shares)
Purchase of treasury stock, at cost (5,701
shares)
Cash dividends declared ($0.68 per share)
Balance - December 31, 2022
Balance - January 1, 2023
Cumulative change in accounting principle
(Note 2)
Net income
Other comprehensive income, net of tax
expense of $251
ESOP shares earned (7,935 shares)
Compensation plan shares granted (8,282
shares)
Compensation plan shares forfeited (22,296
shares)
Compensation plan shares earned, net of
forfeitures (2,102 shares)
Common stock repurchased on vesting for
payroll taxes (4,923 shares)
Balance - December 31, 2023
$
$
$
$
68
—
—
—
—
—
—
—
—
68
$
31,350
—
$
(13,660)
—
$
(1,194)
—
$
$
(157)
—
70,591
5,708
$
$
978
—
87,976
5,708
—
24
—
—
85
—
—
274
(100)
—
—
86
—
—
—
—
—
31,459
$
(85)
—
(13,571)
$
—
—
(1,108)
$
$
—
—
(274)
100
140
—
—
(191)
—
—
—
—
—
(11,310)
—
(11,310)
110
—
—
—
—
—
225
—
(1,440)
74,859
$
$
—
—
(10,332)
$
(85)
(1,440)
81,184
Common
Stock
Additional
Paid-In
Capital
Unearned
Shares
Held by
ESOP
Unearned Shares
Held by
Compensation
Plans
Treasury
Stock
Retained
Earnings
(Dollars in thousands, except share and per share data)
Accumulated
Other
Comprehensive
Loss
Total
68
—
—
—
—
—
—
—
—
68
$
31,459
$
(13,571)
$
(1,108)
$
(191)
$
74,859
$
(10,332)
$
81,184
—
—
—
1
—
—
(4)
—
—
—
—
78
(209)
—
—
—
—
85
—
—
—
—
—
—
—
(78)
209
21
(723)
4,820
—
—
—
—
—
—
—
947
—
—
—
—
(723)
4,820
947
86
—
—
17
—
31,456
$
(58)
(13,760)
$
—
(1,023)
$
$
—
(39)
$
—
78,956
$
—
(9,385)
$
(58)
86,273
See notes to consolidated financial statements.
F - 7
Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Years Ended December 31,
2023
2022
(Dollars in thousands)
$
4,820
$
Net amortization of investment securities
Net amortization of deferred loan costs
(Credit) provision for credit losses
Recovery on previously impaired investment securities
Unrealized (gain) loss on equity securities
Unrealized loss (gain) on interest rate swap
Loss on sale of investment securities
Originations of loans held for sale
Proceeds from sales of loans held for sale
Loss on sale of loans held for sale
Depreciation and amortization
Deferred income tax expense (benefit)
Increase in cash surrender value of bank-owned life insurance
ESOP shares committed to be released
Stock based compensation expense
Increase in accrued interest receivable
Decrease in other assets
Writedowns of foreclosed real estate
Gains from sale of foreclosed real estate
Increase in other liabilities
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in debt securities:
Sales
Maturities, prepayments and calls
Purchases
Purchases of Federal Home Loan Bank Stock
Redemptions of Federal Home Loan Bank Stock
Loan principal collections and originations, net
Proceeds from the surrender of bank-owned life insurance
Purchase of bank-owned life insurance
Proceeds from sale of interest rate swaps
Proceeds from sale of foreclosed real estate
Additions to premises and equipment
Net Cash Provided by (Used in) Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
Net (decrease) increase in advances from borrowers for taxes and insurance
Net (decrease) increase in short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repayment of finance lease obligation
Purchase of treasury stock
Cash dividends paid
Net Cash Provided by (Used in) Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid
Income taxes paid
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Life insurance receivable
Foreclosed real estate acquired in settlement of loans
See notes to consolidated financial statements.
F - 8
$
$
$
$
$
60
552
(1,043)
(7)
(11)
58
59
—
—
—
807
17
(761)
86
17
(39)
534
16
(15)
1,055
6,205
9,719
3,983
—
(1,314)
1,351
17,858
635
(12,596)
214
64
(391)
19,523
20,805
(1)
(12,596)
15,250
(4,950)
(81)
(58)
—
18,369
44,097
9,633
53,730
8,634
1,321
6,585
60
$
$
$
$
$
5,708
89
490
725
(15)
11
(332)
—
(1,309)
1,291
18
856
(187)
(341)
110
225
(313)
802
15
(93)
455
8,205
—
7,508
(6,141)
(1,692)
968
(57,762)
—
—
—
321
(406)
(57,204)
(23,065)
110
12,596
5,000
(2,000)
(69)
(85)
(1,440)
(8,953)
(57,952)
67,585
9,633
2,404
975
—
216
Lake Shore Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note–1 - Organization and Nature of Operations
Organizational Structure
Lake Shore Bancorp, Inc. (the “Company,” “us,” “our,” or “we”) and the parent mutual holding company, Lake Shore,
MHC (the “MHC”) were formed on April 3, 2006 to serve as the stock holding companies for Lake Shore Savings Bank
(the “Bank”) as part of the Bank’s conversion and reorganization from a New York State chartered mutual savings and loan
association to the federal mutual holding company form of organization.
The MHC, whose activity is not included in these consolidated financial statements, held 3,636,875 shares, or 63.96% of
the Company’s outstanding common stock as of December 31, 2023. As of December 31, 2023, the MHC elected to waive
dividends of approximately $18.6 million on a cumulative basis. The dividends waived by the MHC are considered a
restriction on the retained earnings of the Company.
Charter
Lake Shore Bancorp, Inc. and the parent mutual holding company, Lake Shore, MHC are federally chartered and regulated
by the Federal Reserve Board. Lake Shore Savings Bank, subsidiary of Lake Shore Bancorp, Inc., is a federally chartered
savings bank and regulated by the Office of the Comptroller of the Currency (the “OCC”).
Nature of Business
The Company’s primary business is the ownership and operation of its subsidiary, the Bank. The Bank is engaged primarily
in the business of retail banking through eleven branch offices located in Erie and Chautauqua Counties of New York State.
Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are
commercial real estate loans and residential mortgages.
Note–2 - Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and the Bank. All material inter-company
accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain prior
periods amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on 2022
net income.
Use of Estimates
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 credit losses, securities valuation estimates, and income taxes.
Cash and Cash Equivalents
F - 9
Cash and cash equivalents include cash on hand, amounts due from banks, interest earning deposits at other financial
institutions and overnight federal funds sold which are generally sold for one to three-day periods.
Investment Securities
All debt securities are classified as available for sale and are carried at fair value with unrealized gains and losses, net of the
related deferred income tax effect, excluded from earnings and reported as a separate component of accumulated other
comprehensive income (loss) until realized. Equity securities are also measured at fair value with changes in the fair value
recognized in the non-interest income component of the consolidated statements of income. Realized gains and losses on
securities transactions are reported in earnings and computed using the specific identification method.
An allowance for credit losses is deducted from the amortized cost basis of financial assets to present the net carrying value
at the amount that is expected to be collected over the contractual term. For available-for-sale debt securities in an unrealized
loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to
sell the security before the recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to
sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt
securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted
from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less
than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related
to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows
expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of
cash flows expected to be collected is less than the amortized cost basis, any excess cost is recorded as an allowance for
credit losses. Any impairment that has not been recorded through an allowance for credit losses is recognized in other
comprehensive income. The Company elected the practical expedient of zero loss estimates for securities issued by U.S.
government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are
highly rated by major agencies and have a long history of no losses.
Accrued interest of $260,000 as of December 31, 2023 on available-for-sale debt securities is included in accrued interest
receivable on the consolidated statements of financial condition and is excluded from the estimate of credit losses.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold restricted stock of its
district Federal Home Loan Bank according to a predetermined formula. This stock is restricted in that it can only be sold
to the FHLB or to another member institution and all sales of FHLB stock must be at par. As a result of these restrictions,
FHLB stock is carried at cost on the consolidated statements of financial condition. The investment is periodically evaluated
for impairment based on the ultimate recoverability of cost.
Loans Receivable
Loans receivable that management has the intent and ability to hold until maturity or payoff are stated at their outstanding
unpaid principal balances, net of allowance for credit losses and any deferred fees and costs. Interest income is accrued on
the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield
(interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the
loan.
Management considers a loan to be in delinquency status when the contractual payment of principal or interest has become
greater than 30 days past due. The accrual of interest is generally discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest,
even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is
either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed
in the current year. Interest received on non-accrual loans generally is either applied against principal or reported as interest
income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual
F - 10
status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period
of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Allowance for Credit Losses - Loans
The allowance for credit losses is a valuation account that is deducted from or added to the loans receivable amortized cost
basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance for credit
losses when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries recorded in the
allowance for credit loss account should not exceed the aggregate of amounts previously charged-off and expected to be
charged-off.
Management estimates the allowance for credit losses balance using relevant available information, from internal and
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss
experience provides the basis for the estimation of expected credit losses. Adjustments to historical information are made
for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix,
delinquency level, or term as well as for changes in environmental conditions, such as change in unemployment rates,
property values or other relevant factors. Changes in the allowance for credit losses on loans are recorded as a provision for
(or credit to) credit losses.
The Company uses the vintage model to estimate expected credit losses for all loan segments. The vintage model measures
the expected loss calculation for future periods based on the historical performance by the origination period of loans with
similar life cycles and risk characteristics. For each loan segment, the Company utilizes historical loss data through the
current period to calculate the actual loss percentage for each loan type by vintage year of loan origination. The calculated
loss percentages are then applied to the remaining outstanding balance for each vintage year, for the estimated remaining
life of the loans in the loan segment. In addition to this calculation, the Company applies qualitative factors for current
conditions, including trends in the nature and volume of the loan portfolio, loan concentrations, changes in the experience,
ability and depth of the Company’s lending management, and national and local economic conditions. In addition, the
Company utilizes an economic forecast factor consisting of unemployment data and changes in gross domestic production
(GDP) to determine the impact to the Bank’s loan portfolio. No reversion adjustments were necessary for our calculation as
the starting point for the Company’s estimate was a cumulative loss rate covering the expected contractual term of the loan
portfolio.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that
do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the
collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the
fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Accrued interest on loans of $2.5 million at December 31, 2023 is included in accrued interest receivable on the consolidated
statements of financial condition and is excluded from the estimate of credit losses.
The Company's determination as to the amount of expected credit losses are subject to review by bank regulators, which
can require the establishment of additional expected credit losses. Although the allowance for credit losses is allocated by
loan type, the allowance for credit losses is general in nature and is available to offset losses from any loan in the Company’s
portfolio.
Allowance for Credit Losses – Off Balance Sheet Credit Exposure
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk
via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. Off-
balance sheet credit exposure includes loan commitments in which the Company has extended terms and all parties have
accepted. The Company’s commercial overdraft line of credit and consumer overdraft line of credit products are
unconditionally cancellable by the Company and therefore, the Company does not record an allowance for credit losses on
these loan types. The allowance for credit losses for off balance sheet credit exposure is derived through the use of the
vintage model and a utilization rate concept, applied to those commitments which are not unconditionally cancellable.
F - 11
Changes in the allowance for credit losses for unfunded commitments are recorded as a provision for (or credit to) credit
losses.
Premises and Equipment
Land is carried at cost. Buildings, improvements, furniture and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of assets (generally thirty-
nine years for buildings and three to fifteen years for furniture and equipment). Leasehold improvements are amortized on
the straight-line method over the lesser of the life of the improvements or the lease term. Maintenance and repairs are
charged to expense as incurred, while major improvements are capitalized and amortized to operating expense over the
identified useful life.
Leases
The Company determines if an arrangement is a lease at the contract’s inception. 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 leases are recorded under a right of use (“ROU”) model that requires a lessee to record (for all
operating leases with terms longer than 12 months) an asset representing its right to use the underlying asset and a lease
liability. The ROU asset and lease liability are included in other assets and other liabilities, respectively, on the consolidated
statements of financial condition. Finance leases are recorded in premises and equipment on the consolidated statements of
financial condition.
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.
Mortgage Servicing Rights
Certain low-yielding, fixed rate residential, one to- four- family loans are sold on the secondary market in order to manage
interest rate risk. The individual loans are normally sold to an investor immediately after loan closing. The Company
retains servicing rights on these loans.
Originated mortgage servicing rights are recorded at their fair value at the time of transfer of the related loans and are
amortized in proportion to, and over the period of, estimated net servicing income or loss. The carrying value of the
originated mortgage servicing rights are periodically evaluated for impairment. The mortgage servicing rights asset is
recorded in other assets on the consolidated statements of financial condition. The amortization of the mortgage servicing
asset is recorded against service fee income and recorded in service charges and fees on the consolidated statements of
income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Foreclosed Real Estate
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
F - 12
repossession and are charged to the allowance for loan losses. Subsequent write-downs to fair value, net of estimated selling
costs, are recorded in non-interest expense along with direct operating expenses. Gains or losses not previously recognized,
resulting from the sale of foreclosed assets are recognized in non-interest expense on the date of sale.
Foreclosed real estate was $34,000 and $95,000 at December 31, 2023 and 2022, respectively, and was included as a
component of other assets in the consolidated statements of financial condition. Proceeds from the sale of foreclosed real
estate for the years ended December 31, 2023 and 2022 were $64,000 and $321,000, respectively. This resulted in a net
gain on sale of $15,000 and $93,000 for the years ended December 31, 2023 and 2022, respectively, and was included as a
component of other non-interest expense in the consolidated statements of income.
Bank Owned Life Insurance
The Company invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit obligations. BOLI
involves the purchase of life insurance by the Company on a chosen group of employees. The Company is the owner and
beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies.
Income from the increase in the cash surrender value of the underlying policies is included in non-interest income in the
consolidated statements of income and is not subject to income taxes unless surrendered. The Company does not intend to
surrender the policies held at December 31, 2023, and accordingly, no deferred taxes have been recorded on the earnings
from these policies. The cash surrender value of such bank owned life insurance amounted to $29.4 million at December
31, 2023 and $23.2 million at December 31, 2022.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred. Total advertising expense for
the years ended December 31, 2023 and 2022 was $578,000 and $714,000, respectively.
Income Taxes
The Company files a consolidated federal income tax return. The provision for federal and state income taxes is based on
income reported on the consolidated financial statements, rather than the amounts reported on the respective income tax
returns. Deferred taxes are recorded using the liability method whereby deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment and the effect of a change in tax rates is recognized in income at that time.
The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes.
These estimates and judgments are applied in the calculation of certain tax credits and in the calculation of deferred income
tax expense or benefit associated with certain deferred tax assets and liabilities. Significant changes to these estimates may
result in an increase or decrease to the Company’s tax provision in a subsequent period. The Company recognizes interest
and/or penalties related to income tax matters in income tax expense.
The Company periodically reviews its tax positions and applies a “more likely than not” recognition threshold for all tax
uncertainties. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Employee Stock Ownership Plan (“ESOP”)
Compensation expense is recognized based on the current market price of shares committed to be released to employees.
All shares released and committed to be released are deemed outstanding for purposes of earnings per share calculations.
Dividends declared and paid on allocated shares held by the ESOP are charged to retained earnings. The value of unearned
shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of stockholders’
equity. Dividends declared on unallocated shares held by the ESOP are recorded as a reduction of the ESOP’s loan payment
to the Company.
F - 13
Stock Compensation Plans
At December 31, 2023, the Company had stock-based employee and non-employee compensation plans, which are
described more fully in Note 12 - Stock-based Compensation. The Company accounts for the plans using a fair value-based
method, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period. The fair value of stock option grants are estimated
on the date of grant using the Black-Scholes options-pricing model. Common shares are issued from the Company’s
authorized common shares when a share option is exercised. When restricted shares are granted, the shares are released
from treasury stock. Common shares awarded as restricted stock are measured based on the fair market value at the grant
date. The stock option plan, restricted stock plan and equity incentive plan expenses are recognized in salaries and employee
benefits expense on the consolidated statement of income.
Earnings per Common Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares
outstanding, less unallocated shares held by the Company’s ESOP, 2006 Recognition and Retention Plan (“RRP”) and 2012
Equity Incentive Plan (“EIP”), during the period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would
result from the assumed conversion. Potential common shares that may be issued by the Company relate solely to
outstanding stock options and restricted stock awards, and are determined using the treasury stock method.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit. Such commitments are
recorded in the consolidated statements of financial condition when they are funded.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the stockholders’ equity section of the consolidated statements of financial condition,
such items, along with net income, are components of comprehensive income (loss).
Subsequent Events
The Company evaluated events occurring subsequent to December 31, 2023 through the date the consolidated financial
statements are being issued, and other than as set forth in Note 21, did not identify any subsequent events requiring
disclosure.
Recently Adopted Accounting Standards
On January 1, 2023, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standard
Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”), as amended. ASU 2016-13 (also known as Accounting Standard Codification 326 or “ASC
326”) replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected
credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable
to financial assets measured at amortized cost, including loans receivable. It also applies to certain off-balance sheet credit
exposures, such as loan commitments and standby letters of credit. In addition, ASU 2016-13 updated the accounting for
available-for-sale debt securities to require credit losses to be presented as an allowance rather than a write-down on
available-for-sale debt securities that management does not intend to sell or believes that it is more likely than not they will
be required to sell. The Company utilized the modified retrospective method for all financial assets measured at amortized
cost, specifically loans receivable and off-balance sheet credit exposures. Upon adoption on January 1, 2023, the Company
recorded a $282,000 increase to the allowance for credit losses related to the expected credit losses inherent within the
Company's loan portfolio and a $633,000 increase to the allowance for credit losses inherent within the Company's off-
F - 14
balance sheet credit exposures, offset by a $192,000 increase to deferred tax assets relating to the additional expected loss.
As a result, retained earnings decreased by $723,000.
The Company adopted ASC 326 using the prospective transition appropriate for available-for-sale debt securities for which
other-than-temporary impairment had been recognized prior to January 1, 2023. As a result, the amortized cost basis remains
the same before and after the effective date of ASC 326. The effective interest rate on the debt securities was not changed.
Recoveries of amounts previously written-off relating to improvements in cash flows after January 1, 2023 will be recorded
in earnings as received.
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures." This ASU eliminates the separate recognition and measurement guidance for
Troubled Debt Restructurings by creditors. The amendments in this update require the Company to apply the general loan
modification guidance in Subtopic 310-20 to all loan modifications, including modifications for borrowers experiencing
financial difficulty. The Company must evaluate whether the modification represents a new loan or a continuation of an
existing loan. ASU 2022-02 may be adopted prospectively for loan modifications after adoption or on a modified
retrospective basis, which would apply to loans previously modified, resulting in a cumulative effect adjustment to retained
earnings in the period of adoption for changes in the allowance for credit losses. On January 1, 2023, the Company adopted
ASU 2022-02 utilizing the prospective method, which did not have a material impact on its consolidated financial
statements. The adoption of ASU-2022-02 also required the Company to enhance the vintage disclosures to include gross
charge-off by year of origination.
Note 3 – Investment Securities
The amortized cost and fair value of securities are as follows:
SECURITIES
Debt Securities Available for Sale
U.S. government agencies
Municipal bonds
Mortgage-backed securities:
Amortized
Cost
December 31, 2023
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair
Value
$
2,007
40,774
$
— $
—
(133) $
(7,724)
1,874
33,050
Collateralized mortgage obligations-private label
Collateralized mortgage obligations-government sponsored
entities
Government National Mortgage Association
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Asset-backed securities-private label
Asset-backed securities-government sponsored entities
Total Debt Securities Available for Sale
Equity Securities
Total Securities
10
11,844
57
11,872
5,737
—
2
72,303
22
72,325
$
$
$
$
—
1
—
1
2
31
—
35
—
35
$
$
—
(1,445)
(2)
(1,684)
(926)
—
—
(11,914) $
(4)
(11,918) $
10
10,400
55
10,189
4,813
31
2
60,424
18
60,442
F - 15
SECURITIES
Debt Securities Available for Sale
U.S. government agencies
Municipal bonds
Mortgage-backed securities:
Collateralized mortgage obligations-private label
Collateralized mortgage obligations-government sponsored
entities
Government National Mortgage Association
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Asset-backed securities-private label
Asset-backed securities-government sponsored entities
Total Debt Securities Available for Sale
Equity Securities
Total Securities
Debt Securities
Amortized
Cost
December 31, 2022
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair
Value
$
2,008
50,734
$
— $
16
(175) $
(8,336)
1,833
42,414
12
13,790
61
13,232
6,277
—
4
86,118
22
86,140
$
$
$
$
—
1
—
1
—
96
—
114
—
114
$
$
(1)
11
(1,636)
(2)
(1,987)
(1,056)
—
—
(13,193) $
(14)
(13,207) $
12,155
59
11,246
5,221
96
4
73,039
8
73,047
All of our collateralized mortgage obligations are backed by one- to four-family residential mortgages.
At December 31, 2023, no securities were pledged as collateral to the Federal Reserve Bank (“FRB”), and at December 31,
2022 thirty-eight municipal bonds with a cost of $14.4 million and fair value of $12.2 million were pledged under a collateral
agreement with the FRB of New York for liquidity borrowing. In addition, at December 31, 2023 and December 31, 2022,
sixteen and twenty-two municipal bonds with a cost of $4.9 million and $6.6 million and fair value of $3.7 million and $5.6
million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance
Corporation ("FDIC") insurance limits.
The following table sets forth the Company’s investment in securities 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:
December 31, 2023
U.S. government agencies
Municipal bonds
Mortgage-backed securities
December 31, 2022
U.S. government agencies
Municipal bonds
Mortgage-backed securities
Less than 12 months
Gross
Unrealized
Losses
Fair Value
12 months or more
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
Total
Gross
Unrealized
Losses
Fair Value
$
$
$
$
— $
6,513
57
6,570
1,833
12,227
6,981
21,041
$
$
$
— $
(1,065)
(2)
(1,067) $
1,874
26,537
25,293
53,704
$
(133) $
(6,659)
(4,055)
$ (10,847) $
1,874
33,050
25,350
60,274
$
(133)
(7,724)
(4,057)
$ (11,914)
(175) $
(1,114)
(410)
(1,699) $
— $
— $
23,259
21,561
44,820
(7,222)
(4,272)
$ (11,494) $
1,833
35,486
28,542
65,861
$
(175)
(8,336)
(4,682)
$ (13,193)
As of December 31, 2023, the Company’s investment portfolio included 23 securities in the “unrealized losses less than
twelve months” category and 150 securities in the “unrealized losses twelve months or more” category.
F - 16
As of December 31, 2023, the Company determined that for its available-for-sale debt securities in an unrealized loss
position, it did not intend to sell nor was it more likely than not that it would be required to sell the security and that the
decline in fair value was not due to credit factors, but due to changes in interest rates and other factors. Accordingly, the
Company did not record an allowance for credit losses for its available-for-sale securities as of December 31, 2023.
As of December 31, 2022, the Company had the intent and ability to hold those securities in an unrealized loss position until
maturity and management believed 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. Therefore, under accounting
principles effective at December 31, 2022, the Company did not consider these securities to have other-than-temporary
impairment.
The unrealized losses on debt securities shown in the previous tables were recorded as a component of other comprehensive
income (loss), net of tax benefit on the Company’s consolidated statements of stockholders’ equity.
During the years ended December 31, 2023 the Company sold 40 municipal bonds and 2 mortgage-backed securities
resulting in gross realized losses of $59,000, with an amortized cost of $9.8 million. During the year ended December 31,
2022, the Company did not sell any debt securities.
Scheduled contractual maturities of debt securities are as follows:
December 31, 2023:
Less than one year
After one year through five years
After five years through ten years
After ten years
Mortgage-backed securities
Asset-backed securities
Amortized
Cost
Fair
Value
(Dollars in thousands)
$
$
— $
2,118
9,170
31,493
29,520
2
72,303
$
—
1,979
8,089
24,856
25,467
33
60,424
The Company's mortgage-backed securities and asset-backed securities have stated maturities that may differ from actual
maturities due to the borrowers' ability to prepay obligations. Cash flows from such investments are dependent upon the
performance of the underlying assets and are generally influenced by interest rates. In the table above, mortgage-backed
securities and asset-backed securities are shown in the aggregate.
Equity Securities
At December 31, 2023 and 2022, equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation
(“FHLMC”) common stock. During the years ended December 31, 2023 and 2022, the Company recognized an unrealized
gain of $11,000 and an unrealized loss of $11,000, respectively, on the equity securities, which was recorded in non-interest
income in the consolidated statements of income. There were no sales of equity securities during the years ended December
31, 2023 and 2022.
F - 17
Note 4 - Loans Receivable
Loans receivable, net consists of the following:
Real Estate Loans:
Residential, one- to four-family (1)
Home Equity
Commercial (2)
Total real estate loans
Other Loans:
Commercial
Consumer
Total gross loans
Net deferred loan costs
Allowance for credit losses on loans
Loans receivable, net
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial construction loans
December 31,
2023
December 31,
2022
(Dollars in thousands)
$
$
172,005
51,869
316,986
540,860
16,546
1,130
558,536
3,755
(6,463)
555,828
$
$
175,904
53,057
326,955
555,916
19,576
1,217
576,709
3,893
(7,065)
573,537
Residential real estate loans serviced for others by the Company totaled $39.0 million and $42.1 million at December 31,
2023 and 2022, respectively.
At December 31, 2023, $55.8 million of one- to four-family residential real estate loans were pledged as collateral for
advances from the FHLB.
At December 31, 2023 and 2022, loans to related parties including officers and directors were immaterial as a percentage
of our loan portfolio.
The ability of the Company’s residential and consumer borrowers to honor their repayment commitments is generally
dependent on the level of overall economic activity within the geographical area they reside. Commercial borrowers’ ability
to repay is generally dependent upon the general health of the economy. Substantially all of the Company’s loans are in
western New York State and, accordingly, the ultimate collectability of a substantial portion of the loans is susceptible to
changes in market conditions in this primary market area.
Note 5 - Allowance for Credit Losses
Allowance for Credit Losses for Loans
The Company adopted ASU 2016-13 on January 1, 2023 at which time the Company implemented the current expected
credit loss model in estimating the allowance for credit losses valuation account. Adjustments to the allowance for credit
losses on loans is recognized in (credit) provision for credit losses on the consolidated statements of income. As part of the
CECL calculation, the loan portfolio is segmented into the following loan types by risk level:
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 verify that its one- to four-family residential mortgage loans generally conform to secondary
market guidelines.
F - 18
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.
Other Loans:
Commercial – includes business installment loans, lines of credit, and other commercial loans. Most of our
commercial loans 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 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.
Included in the Real Estate Loans for one-to four-family and commercial real estate are loans to finance the construction of
either a one- to four-family owner occupied home or commercial real estate. At the end of the construction period, the loan
automatically converts to either a one- to four-family residential mortgage or a commercial real estate 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 inspections performed by
an independent appraisal firm or other third party. Construction loans also expose us to the risk of construction delays
which may impair the borrower’s ability to repay the loan.
F - 19
The following table details the changes in the allowance for credit losses by loan segment for the year ended December 31,
2023.
Real Estate Loans
Other Loans
One- to Four-
Family(1)
Home Equity
Commercial
Real Estate (2)
Commercial
(Dollars in thousands)
Consumer
Unallocated
Total
December 31, 2023
Allowance for Credit Loss: on Loans
Balance - January 1, 2023
Impact of adopting ASC 326
Charge-offs
Recoveries
(Credit) provision
Balance – December 31, 2023
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Gross Loans Receivable(3):
Ending balance
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
$
$
$
$
$
$
$
411
201
(3)
2
(79)
532
$
$
217
114
—
—
(118)
213
$
$
5,746
55
—
35
(605)
5,231
$
$
509
72
—
29
(139)
471
$
$
— $
— $
— $
— $
532
$
213
$
5,231
$
471
$
47
(25)
(58)
8
44
16
$
$
— $
16
$
$
135
(135)
—
—
—
— $
7,065
282
(61)
74
(897)
6,463
— $
—
— $
6,463
172,005
140
171,865
$
$
$
51,869
$
316,986
— $
1,242
51,869
$
315,744
$
$
$
16,546
$
1,130
$
— $
558,536
— $
— $
— $
1,382
16,546
$
1,130
$
— $
557,154
(1)
Includes one- to four-family construction loans.
Includes commercial construction loans of $16.4 million.
(2)
(3) Gross Loans Receivable does not include allowance for credit losses of $(6,463) or deferred loan costs of $3,755.
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses using the
incurred loss methodology. The following table summarizes the activity in the allowance for loan losses and the distribution
of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of December 31,
2022:
Real Estate Loans
Other Loans
One- to Four-
Family
Home Equity
Commercial
Real Estate (2)
Commercial
(Dollars in thousands)
Consumer
Unallocated
Total
December 31, 2022
Allowance for Loan Losses
Balance - January 1, 2022
Charge-offs
Recoveries
Provision (credit)
Balance - December 31, 2022
Ending balance: individually
evaluated
for impairment
Ending balance: collectively
evaluated
for impairment
Gross Loans Receivable(1):
Ending balance
Ending balance: individually
evaluated
for impairment
Ending balance: collectively
evaluated
for impairment
$
$
$
$
$
$
$
383
—
17
11
411
$
$
211
—
1
5
217
$
$
4,737
(4)
269
744
5,746
$
$
531
—
—
(22)
509
$
$
32
(69)
8
76
47
$
$
224
—
—
(89)
135
$
$
6,118
(73)
295
725
7,065
— $
— $
— $
— $
— $
— $
—
411
175,904
$
$
217
53,057
$
$
5,746
326,955
$
$
509
19,576
$
$
47
1,217
$
$
135
$
7,065
— $
576,709
153
$
14
$
— $
— $
— $
— $
167
175,751
$
53,043
$
326,955
$
19,576
$
1,217
$
— $
576,542
(1)
(2)
Gross Loans Receivable does not include allowance for loan losses of $(7,065) or deferred loan costs of $3,893.
Includes commercial construction loans of $22.9 million.
F - 20
Unfunded Loan Commitments
The Company’s allowance for credit losses on unfunded loan commitments is recognized as a liability and included within
other liabilities on the consolidated statements of financial condition, with adjustments to the reserve recognized in (credit)
provision for credit losses on the consolidated statements of income. The Company did not record an allowance on unfunded
loan commitments prior to January 1, 2023. The Company’s activity in the allowance for credit losses on unfunded loan
commitments for the year ended December 31, 2023 was as follows:
Balance at December 31, 2022
Impact of CECL Adoption
Provision for Credit Losses
Balance at December 31, 2023
Non-accrual Loans and Delinquency Status
For the year ended December 31,
2023
(Dollars in thousands)
$
$
—
633
(146)
487
The following table presents loans on non-accrual status, loans on non-accrual status with no allowance for credit losses
recorded, and loans past due 90 days or more and still accruing by loan segment as of the periods indicated.
Real Estate Loans:
Residential, one- to four-family (1)
Home Equity
Commercial Real Estate (2)
Other Loans:
Commercial
Consumer
Total loans
Total Non-accrual
December 31,
2023
December 31,
2022
Non-accrual with no Allowance for
Credit Losses
90 Days or More Past Due and
Accruing
December 31,
2023
(Dollars in thousands)
December 31,
2022
December 31,
2023
December 31,
2022
$
$
1,904
196
1,242
—
5
3,347
$
$
2,295
602
—
—
34
2,931
$
$
1,904
196
1,242
—
5
3,347
$
$
2,295
602
—
—
34
2,931
$
$
— $
—
—
—
—
— $
1
—
—
—
—
1
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial construction loans.
There was no interest income recognized on non-accrual loans during the years ended December 31, 2023 and 2022. 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 non-accrual loans are applied to reduce the principal balance.
The following tables provide an analysis of past due loans as of the dates indicated:
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More
Past Due
Total Past
Due
(Dollars in thousands)
Current
Due
Total Loans
Receivable
December 31, 2023:
Real Estate Loans:
Residential, one- to four-family(1) $
Home equity
Commercial(2)
Other Loans:
Commercial
Consumer
Total
$
1,488
315
—
—
6
1,809
$
$
276
56
203
1,039
1
1,575
$
$
1,767
954
203
1,039
7
3,970
$
$
170,238
50,915
316,783
15,507
1,123
554,566
$
$
172,005
51,869
316,986
16,546
1,130
558,536
3
583
—
—
—
586
$
$
F - 21
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More
Past Due
Total Past
Due
(Dollars in thousands)
Current
Due
Total Loans
Receivable
December 31, 2022:
Real Estate Loans:
Residential, one- to four-family(1) $
Home equity
Commercial(2)
Other Loans:
Commercial
Consumer
Total
$
1,173
137
—
—
15
1,325
$
$
380
287
—
—
—
667
$
$
1,649
468
—
—
17
2,134
$
$
3,202
892
—
—
32
4,126
$
$
172,702
52,165
326,955
19,576
1,185
572,583
$
$
175,904
53,057
326,955
19,576
1,217
576,709
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial real estate construction loans.
Collateral-Dependent Loans
Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation
or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk
characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.
Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance
for credit losses based on the fair value of collateral. The allowance for credit losses is measured on an individual loan basis
based on the difference between the fair value of the loan’s collateral, which is adjusted for liquidation costs, and the
amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance for credit losses is required. Refer
to Note 13 - Fair Value of Financial Instruments for additional information.
The following table presents an analysis of the amortized cost of collateral-dependent loans of the Company as of December
31, 2023 by collateral type and loan segment:
Real Estate Loans:
Residential, one- to four-family
Home Equity
Commercial
Total
Residential
Properties
Business
Assets
Commercial
Property
Land
(Dollars in thousands)
Other
Total
Loans
$
$
143
—
200
343
$
$
— $
—
—
— $
— $
—
1,026
1,026
$
— $
—
—
— $
— $
—
—
— $
143
—
1,226
1,369
There was no allowance recorded on the above noted collateral-dependent loans as of December 31, 2023.
Pre-Adoption of ASC 326 – Impaired Loans
For periods prior to the adoption of ASC 326, a loan was considered impaired when, based on current information and
events, it was probable that the Company would 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 was measured
on a loan-by-loan basis for commercial real estate loans and commercial loans. Larger groups of smaller balance
homogeneous loans were collectively evaluated for impairment. Accordingly, the Company did not separately identify
F - 22
individual consumer, home equity, or one- to four-family loans for impairment disclosure, unless they were subject to a
troubled debt restructuring.
The following is a summary of information pertaining to impaired loans at or for the periods indicated:
With no related allowance recorded:
Residential, one- to four-family
Home equity
Total impaired loans with no related allowance
With no related allowance recorded:
Residential, one- to four-family
Home equity
Commercial real estate(1)
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
At December 31, 2022
(Dollars in thousands)
$
$
153
14
167
$
153
14
167
—
—
—
Average
Recorded
Investment
Interest
Income
Recognized
For the Year Ended Ended December 31, 2022
$
$
231
21
2,440
2,692
$
$
12
—
—
12
(1) Average Commercial Real Estate loans consisted of one loan which was paid off during the year ended December 31, 2022.
Credit Quality Indicators
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.
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 classified by using 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.
Asset quality indicators for all loans and the Company’s risk rating process are reviewed on a monthly basis. Risk ratings
are updated as circumstances that could affect the repayment of individual loans are brought to management’s attention
through an established monitoring process. Written action plans are maintained and reviewed on a quarterly basis for all
classified commercial loans. In addition to the Company’s internal process, an outsourced independent credit review
function is in place for commercial loans to further assess assigned risk classifications and monitor compliance with internal
lending policies and procedures.
The following table presents loans by credit quality indicator by origination year at December 31, 2023:
2023
2022
2021
2020
(Dollars in thousands)
2019
Prior
Revolving
Loans
Total
Residential, one-to four-family(1):
Pass
Substandard
$
12,203 $
—
36,103 $
262
29,486 $
39
17,975 $
92
10,075 $
270
63,928 $
1,572
— $
—
169,770
2,235
F - 23
Doubtful
Total
Current period gross chargeoffs
Home Equity:
Pass
Substandard
Doubtful
Total
Current period gross chargeoffs
Commercial Real Estate(2):
Pass
Special mention
Substandard
Doubtful
Total
Current period gross chargeoffs
Commercial Loans:
Pass
Special mention
Substandard
Doubtful
Total
Current period gross chargeoffs
Consumer Loans:
Pass
Substandard
Doubtful
Total
Current period gross chargeoffs
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
12,203 $
— $
—
36,365 $
— $
—
29,525 $
3 $
—
18,067 $
— $
—
10,345 $
— $
—
65,500 $
— $
—
— $
— $
—
172,005
3
3,660 $
—
—
3,660 $
— $
15,396 $
—
—
—
15,396 $
— $
1,243 $
—
—
—
1,243 $
— $
269 $
—
—
269 $
— $
3,120 $
—
—
3,120 $
— $
85,587 $
—
—
—
85,587 $
— $
2,591 $
—
—
—
2,591 $
— $
245 $
—
—
245 $
8 $
102 $
—
—
102 $
— $
50,797 $
—
—
—
50,797 $
— $
732 $
263
—
—
995 $
— $
79 $
2
—
81 $
3 $
47 $
—
—
47 $
— $
42,226 $
984
1,242
—
44,452 $
— $
622 $
—
—
—
622 $
— $
136 $
1
—
137 $
3 $
274 $
—
—
274 $
— $
38,694 $
682
5,386
—
44,762 $
— $
1,901 $
764
3,114
—
5,779 $
— $
2 $
—
—
2 $
4 $
511 $
—
—
511 $
— $
43,862 $
293
—
44,155 $
— $
72,256 $
—
3,736
—
75,992 $
— $
4,997 $
—
319
—
5,316 $
— $
210 $
—
—
210 $
— $
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
184 $
2
—
186 $
40 $
51,576
293
—
51,869
—
304,956
1,666
10,364
—
316,986
—
12,086
1,027
3,433
—
16,546
—
1,125
5
—
1,130
58
(1)
(2)
Includes one- to four-family construction loans.
Includes commercial construction loans.
The following table presents loans by credit quality indicator at December 31, 2022:
December 31, 2022
Real Estate Loans:
Residential, one- to four-family(1)
Home equity
Commercial(2)
Other Loans:
Commercial
Consumer
Total
Pass/Performing
Special
Mention
Substandard
Doubtful
Loss
Total
(Dollars in thousands)
$
$
173,857
52,269
314,218
14,926
1,183
556,453
$
$
— $
—
3,272
1,112
—
4,384
$
2,047
788
9,465
3,538
24
15,862
$
$
— $
—
—
—
—
— $
— $
—
—
—
10
10
$
175,904
53,057
326,955
19,576
1,217
576,709
(1)
(2)
Includes one- to four- family construction loans.
Includes commercial construction loans.
Modifications with Borrowers Experiencing Financial Difficulty:
Occasionally, the Company modifies loans to borrowers in financial distress by providing modifications to loans that it
would not normally grant. Such modifications could include principal forgiveness, term extension, a significant payment
delay, an interest rate reduction or the addition of a co-borrower or guarantor. When principal forgiveness is provided, the
amount of the forgiveness is charged-off against the allowance for credit losses.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the
allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification.
F - 24
In some cases, the Company provides multiple types of modifications on one loan. Typically, one type of concession, such
as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification
may be granted, such as principal forgiveness.
The following table presents the amortized cost basis of loans at December 31, 2023 that were experiencing financial
difficulty and were modified during the year ended December 31, 2023, by loan class and by type of modification. The
percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the
amortized cost basis of each class of financing receivables is also presented.
Principal
Forgiveness
Payment
Delay
Term
Extension
Interest Rate
Reduction
(Dollars in thousands)
Add Co-
Borrower/
Guarantor
Combination
Term
Extension and
Add Co-
Borrower
Percentage of
Total Class of
Financing
Receivable
Real Estate Loans
Commercial real estate
Other loans
Commercial
Total
$
$
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
4,859
—
4,859
$
$
—
1,046
1,046
1.53%
6.24%
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Loan Type
Term Extension and Added Co-Borrower
Financial Effect
Commercial Real Estate
Other - Commercial
Added a co-borrower with financial ability to strengthen the credit risk related to this particular loans.
No other modification was made to this loan that had a financial effect on the borrower(s).
Added a weighted-average of 5 years to the life of the loans, which reduced the monthly payment
amount for the borrowers. Added a co-borrower with financial ability to strengthen the credit risk
related to these particular loans.
There were no modified loans past due or on non-accrual as of December 31, 2023.
There were no modified loans made during the year ended December 31, 2023 that subsequently defaulted.
The Company has not committed to lending additional amounts to the borrowers included in the previous tables.
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 credit losses. Foreclosed real estate was $34,000 and $95,000 at December
31, 2023 and December 31, 2022, 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 $158,000 at December 31, 2023 and $1.8 million at December 31, 2022.
F - 25
Note 6- Premises and Equipment
Premises and equipment consist of the following:
Land
Buildings and improvements
Furniture and equipment
Premises and equipment, gross
Accumulated depreciation
Premises and equipment, net
December 31,
2023
2022
(Dollars in thousands)
1,210
13,186
7,596
21,992
(14,122)
7,870
$
$
1,209
13,130
7,306
21,645
(13,359)
8,286
$
$
Depreciation and amortization of premises and equipment amounted to $807,000, and $856,000 for the years ended
December 31, 2023 and 2022, respectively, and is included in occupancy and equipment expense in the accompanying
consolidated statements of income.
Note 7 - Deposits
Deposits consist of the following at the dates indicated:
Demand deposits:
Non-interest bearing
Interest bearing
Money market accounts
Savings accounts
Time deposits
December 31,
2023
2022
Weighted
Average
Rate
Amount
(Dollars in thousands)
Weighted
Average
Rate
— % $
0.10
2.75
0.07
3.93
105,678
85,033
149,250
77,200
152,958
— %
0.10
0.58
0.05
1.59
Amount
$
95,186
72,966
137,374
64,584
220,814
$
590,924
2.13 % $
570,119
0.60 %
Scheduled maturities of time deposits at December 31, 2023 were as follows (dollars in thousands):
2024
2025
2026
2027
2028
Thereafter
$
$
150,502
58,883
3,874
4,810
2,745
—
220,814
Time deposit accounts with balances in excess of $250,000 amounted to $38.4 million and $28.3 million at December 31,
2023 and 2022, respectively.
F - 26
Interest expense on deposits was as follows:
Interest bearing checking accounts
Money market accounts
Savings accounts
Time deposits
Years Ended December 31,
2023
2022
(Dollars in thousands)
$
$
75
1,914
47
6,033
8,069
$
$
78
486
41
1,210
1,815
At December 31, 2023 and 2022, deposits of directors, executive officers and their affiliates totaled $2.0 million and $11.3
million, respectively.
Note 8 - Borrowings
At December 31, 2023, the Company had written agreements with the Federal Home Loan Bank of New York
(“FHLBNY”), which allows it to borrow up to the maximum lending values designated by the type of collateral pledged.
As of December 31, 2023 and 2022, our maximum lending value was $36.8 million and $116.1 million, respectively, and
was collateralized by a pledge of certain, fixed-rate residential, one- to four-family loans. At December 31, 2023 we had
advances outstanding under this agreement of $35.3 million, which consisted of long-term debt at fixed rates. At December
31, 2022 we had advances outstanding under this agreement of $37.5 million, which consisted of short-term borrowings
and long-term debt at fixed rates.
At December 31, 2023, the Company had no short-term borrowings from the FHLBNY. At December 31, 2022 the
Company had short-term borrowings of $12.6 million, and had fixed rates of interest ranging from 4.57% to 4.61% and
matured within one to three weeks. The weighted average interest rate was 4.59% as of December 31, 2022.
At December 31, 2023 and 2022, the Company had long-term debt outstanding under the written agreement with the
FHLBNY of $35.3 million and $25.0 million, respectively. All of the advances outstanding at December 31, 2023 and 2022
were term borrowings with initial terms of one to five years at fixed rates of interest ranging from 1.70% to 5.20%. As of
December 31, 2023 and 2022, the weighted average interest rate was 3.41% and 2.24%, respectively.
We have a written agreement with the FRB 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. At December 31, 2023 there were
no securities pledged to the FRB. At December 31, 2022 securities pledged to the FRB discount window was equal to a
book value of $14.4 million and fair value of $12.2 million. There were no balances outstanding with the FRB as of
December 31, 2023 and 2022.
The Company has also established lines of credit with other correspondent banks, totaling $27.0 million, of which $25.0
million is unsecured and the remaining $2.0 million is secured by a pledge of the Company’s securities when a draw is
made. The lines of credit provide for overnight borrowings through the purchase of Federal Funds, at an interest rate equal
to the Federal Funds rate plus a spread. At December 31, 2023 and 2022, there were no balances outstanding on these lines
of credit.
F - 27
Long-term debt from the FHLBNY and related contractual maturities consisted of the following:
Maturity
Amount
At December 31, 2023
At December 31, 2022
Weighted Average
Interest Rate
(Dollars in thousands)
Amount
Weighted Average
Interest Rate
In one year
In two years
In three years
In four years
In five years
$
$
25,000
8,250
1,000
1,000
—
35,250
3.28 % $
3.79 %
3.49 %
3.49 %
— %
3.41 % $
4,950
15,000
3,000
1,000
1,000
24,950
2.31 %
2.01 %
2.44 %
3.49 %
3.49 %
2.24 %
Note 9 - Lease Obligations
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 December 31, 2023 and 2022, two of the Company’s branch offices were under an operating lease and the Company’s
operating lease ROU assets were $231,000 and $373,000, respectively, and its lease liabilities were $242,000 and $390,000,
respectively. The ROU assets are recorded under other assets and the lease liabilities are recorded under other liabilities on
the consolidated statements of financial condition.
Operating lease costs that were recorded in occupancy and equipment expense on the consolidated statements of income for
each of the years ended December 31, 2023 and 2022 were $150,000.
The table below summarizes information related to our lease liabilities at or for the years ended December 31, 2023 and
2022:
(in thousands, except for percent and period data)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Weighted-average remaining lease term, operating leases, in years
Weighted-average discount rate – operating leases
For the Years Ended December 31,
2023
2022
$
$
157
51
81
1.6
2.61 %
157
57
69
2.6
2.61 %
The Company has one long-term finance lease agreement for a branch location and the outstanding balance of the finance
lease (included in other liabilities) at December 31, 2023 and 2022 was $475,000 and $554,000, respectively, with a
weighted-average discount rate of 9.22%. The remaining term of this lease is 4.5 years. The asset related to this finance
lease is included in premises and equipment and consists of the cost of $1.1 million less accumulated depreciation of
$756,000 and $714,000 at December 31, 2023 and 2022, respectively.
F - 28
The table below summarizes the maturity of remaining lease liabilities as of December 31, 2023:
2024
2025
2026
2027
2028
2028 and thereafter
Total Lease Payments
Less: Amounts representing interest
Present value of lease liabilities
Note 10 - Income Taxes
Operating
Leases
Finance
Lease
(Dollars in thousands)
$
$
$
157
90
—
—
—
—
247
(5)
242
$
$
$
136
136
136
136
56
—
600
(125)
475
The Company’s deferred federal and state income tax and related valuation accounts represent the estimated impact of
temporary differences between how we recognize our assets and liabilities under GAAP and how such assets and liabilities
are recognized under federal and state tax law. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in
effect when these differences are expected to be recovered or settled.
The provision for income tax expense consists of the following:
Current:
Federal
State
Total Current
Deferred:
Federal
State
Total Deferred
Total Income Tax Expense
Years Ended December 31,
2023
2022
(Dollars in thousands)
$
$
$
1,377
5
1,382
17
—
17
1,399
$
1,343
6
1,349
(187)
—
(187)
1,162
A reconciliation of the statutory federal income tax at a rate of 21% for the years ended December 31, 2023 and 2022 to the
income tax expense included in the consolidated statements of income is as follows:
Federal income tax at statutory rate
State benefit, net of federal expense
Tax-exempt interest income
Deferred tax valuation allowance
Life insurance income
Other
Total Income Tax Expense
F - 29
Years Ended December 31,
2022
2023
21.0 %
(1.3)
(3.3)
1.3
3.5
1.3
22.5 %
21.0 %
(0.6)
(3.6)
0.6
(1.0)
0.5
16.9 %
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as
follows:
Deferred tax assets:
Unrealized losses on securities available for sale
Allowance for credit loss
Deferred compensation
Net operating loss ("NOL")
Impairment of equity investments
Accrued expenses
Right of use liability
Stock options granted
Other
Total Deferred Tax Assets
Deferred tax liabilities:
Deferred loan origination costs
Depreciation
Prepaid expenses
Right of use asset
Other
Total Deferred Tax Liabilities
Deferred tax valuation allowance
Net Deferred Tax Asset
December 31,
2023
2022
(Dollars in thousands)
$
$
3,075
1,798
1,460
153
129
84
48
16
13
6,776
(972)
(576)
(36)
(49)
(49)
(1,682)
(1,203)
$
3,891
$
3,372
1,822
1,370
62
129
121
80
21
18
6,995
(1,004)
(598)
(97)
(78)
(123)
(1,900)
(1,126)
3,969
The net deferred tax asset was recorded in other assets on the consolidated statements of financial condition at December
31, 2023 and 2022. In assessing the ability of the Company to realize the benefit of the deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, availability of operating loss carry-backs, projected future taxable income and tax planning strategies in making
this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods
which deferred tax assets are deductible, management believes it is more likely than not the Company will generate
sufficient taxable income to realize the benefits of these deductible differences at December 31, 2023, except for the
following:
Valuation allowance of $129,000 on the deferred tax asset for the 2011 other than temporary impairment charge;
and
Valuation allowance of $1,074,000 on state deferred tax assets with anticipated net operating loss expiration dates
of 2035 through 2043, as well as unrealized losses on securities available for sale.
Management believes that the Company will not generate sufficient income of the appropriate character (i.e. capital gains)
to utilize any of the deferred tax asset created by the 2011 other than temporary impairment charge. Management believes
that it is more likely than not that the Company will not realize its state deferred tax assets because of reform in New York
State corporate tax law. Beginning in 2015, the most significant change in the tax law allows the Company to deduct up to
50% of its net interest income received from qualifying loans. This change effectively eliminates the Company’s New York
State tax on income resulting in the Company being taxed on its apportioned capital. Because of this tax reform, the
Company will not generate sufficient taxable income within New York State to realize its existing state deferred tax assets.
There was a $77,000 increase in the deferred tax valuation recorded during 2023 and a $674,000 increase in the deferred
tax valuation recorded during 2022.
F - 30
Under prior federal law, tax bad debt reserves created prior to January 1, 1998 were subject to recapture into taxable income
should the Company fail to meet certain qualifying asset and definition tests. The 1996 federal legislation eliminated these
thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the
Company make certain non-dividend distributions or cease to maintain a thrift or bank charter. Management has no intention
of taking any such actions. At December 31, 2023 and 2022, the Company’s total pre-1988 tax bad debt reserve was $2.2
million. This reserve reflects the cumulative effect of federal tax deductions by the Company for which no federal income
tax provision has been made.
Current income tax guidance prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company
recognized no adjustment for unrecognized income tax benefits for the years ended December 31, 2023 and 2022. As of
December 31, 2023, there has been no material change in any uncertain tax position. The Company’s policy is to recognize
interest and penalties on unrecognized tax benefits in income tax expense in the consolidated statements of income.
The Company’s Federal and New York State tax returns, constituting the returns of the major taxing jurisdictions, are subject
to examination by the taxing authorities for all open years as prescribed by applicable statute. No waivers have been executed
that would extend the period subject to examination beyond the period prescribed by statute. The federal tax returns for the
years ended December 31, 2020, 2021, 2022, and 2023 remain subject to examination by the IRS. The state tax returns for
the years ended December 31, 2020, 2021, 2022, and 2023 for New York State remains subject to examination.
Note 11 - Employee and Director Benefit Plans
401K Plan
The Company maintains a 401(k) savings plan covering employees who have completed three months of service and
attained age 21. Participants may make contributions to the 401(k) Plan in the form of salary deferrals of up to 75% of their
total compensation subject to certain IRS limitations. The plan consists of three components: 401(k), Profit Sharing and
Safe Harbor. For the 401(k) component, the Company makes a matching contribution equal to 40% of the participant salary
deferral, up to 6% of such employee’s compensation after one year of service. For the profit sharing component, the
Company makes a discretionary contribution, up to 5.1% of an eligible employee’s salary, depending on years of service.
Lastly, the Company contributes 3.4% of an eligible employee’s salary based on years of service, which is a discretionary
contribution to the Safe Harbor component of the plan. The Company’s expense for all three components of the 401(k) plan
for the years ended December 31, 2023 and 2022 was $452,000 and $527,000, respectively.
1999 Supplemental Benefit Plans
Effective October 1, 1999, the Company initiated a non-qualified Executive Supplemental Benefit Plan and a non-qualified
Directors Supplemental Benefit Plan (the “1999 Plans”). Both plans are unfunded and provide a predefined annual benefit
to be paid to executives and directors for fifteen years upon their retirement. The Company can set aside assets to fund the
liability which will be subject to claims of the Company’s creditors upon liquidation of the Company. Annual benefits
increase at a predetermined amount until the executive or director reaches a predetermined retirement age. Predefined
benefits are 100% vested at all times and in the event of death, are guaranteed to continue at the full amount to their
designated beneficiaries. The Company had a liability under the 1999 Plans of $324,000 and $453,000 at December 31,
2023 and 2022, respectively. This liability was included in other liabilities on the consolidated statements of financial
condition and was calculated using an assumed discount rate of 6.17% in 2023 and 2022.
The Company’s expense for the 1999 Plans was $23,000 and $35,000 for the years ended December 31, 2023 and 2022,
respectively.
2001 and 2012 Supplemental Benefit Plans
F - 31
Effective October 1, 2001, the Company initiated a non-qualified Executive Supplemental Benefit Plan and a non-qualified
Director’s Supplemental Benefit Plan (collectively, the “2001 Plans”). The Company amended and restated the 2001 Plans
effective November 1, 2015.
Effective January 27, 2016, the Company amended the 2001 Supplemental Benefit Plan for Directors, resulting in a change
to the benefit formula from a fixed, pre-determined dollar benefit. The formula provides a benefit equal to a percentage of
the director’s average pay. The average pay is multiplied by number of years of service, not to exceed 20 years of service
or 40% of average final pay. The benefit is payable over a period of fifteen years beginning the month following age 72,
unless termination occurs due to disability, death or a change in control.
Effective May 18, 2016, the Company amended the 2001 Supplemental Benefit Plan for Executives resulting in a change
in the benefit formula from a fixed, pre-determined dollar benefit to a formula-based benefit. The formula provides a benefit
equal to a percentage of the executive’s average pay. The average pay is multiplied by number of years of service, not to
exceed 20 years of service or 40% of average final pay. A reduced benefit is payable if a termination of service occurs prior
to age 65. The benefit is payable over a period of fifteen years beginning the month following age 65, unless termination
occurs due to disability, death or a change in control.
The 2001 Plans are unfunded. The Company had a liability under these plans of $2.8 million and $2.6 million at December
31, 2023 and 2022, respectively. This liability was included in other liabilities on the consolidated statements of financial
condition and was calculated using an assumed discount rate of 6.17% in 2023 and 2022.
Effective June 30, 2012, the Company implemented a Supplemental Executive Benefit Plan (the “2012 Plan”) with one
executive. The 2012 Plan provides that when the executive attains age 67, the executive will be entitled to a fixed, pre-
determined annual benefit under the 2012 Plan, which will be paid in monthly installments for 15 years. The 2012 Plan was
amended on May 18, 2016 to update the fixed, pre-determined annual benefit amount. The 2012 Plan provides for a reduced
benefit in the event the executive terminates his employment for a reason other than death, disability, cause or a change in
control, before the executive attains the age 67, which will be paid in monthly installments for 15 years. In the event of
death, the vested benefit is payable to the beneficiary as a lump sum payment. The Company had a liability under this plan
of $1.6 million and $1.3 million as of December 31, 2023 and 2022, respectively. This liability was included in other
liabilities on the consolidated statements of financial condition and was calculated using an assumed discount rate of 5.12%
in 2023 and 2022.
Under the 2001 Plans and the 2012 Plan, the Company can set aside assets to fund the liability which will be subject to
claims of the Company’s creditors upon liquidation of the Company.
The Company’s expense for the 2001 and 2012 Plans was $819,000 and $567,000 for the years ended December 31, 2023
and 2022, respectively.
2018 Retention Agreement
Effective March 29, 2018, the Company entered into a retention agreement with one executive. The agreement provides
that the executive will receive a payment of $1.4 million (the "Normal Retention Payment") provided that the executive
remains continuously employed with the Bank through March 29, 2028 (the "Retention Date"). The Normal Retention
Payment will be paid in three equal installments on March 29, 2028, January 2, 2029, and January 2, 2030. If the executive's
employment is terminated without cause or for good reason (as defined in the agreement) prior to the Retention Date, the
executive will receive the vested account balance as set forth in the agreement. In the event that the executive's employment
terminates prior to the Retention Date due to death or disability, the executive or his beneficiary, as applicable, will generally
receive the vested account balance. If the executive's employment is terminated prior to the Retention Date, and within two
years of a change in control (as defined in the agreement), the executive will receive the Normal Retention Payment in a
lump sum payment. The Company has a liability under this plan of $627,000 and $492,000 as of December 31, 2023 and
2022, respectively. This liability was included in other liabilities on the consolidated statements of financial condition and
was calculated using an assumed discount rate of 5.12% in 2023 and 2022.
F - 32
The Company’s expense for the 2018 Plan was $135,000 and $122,000 for the years ended December 31, 2023 and 2022,
respectively.
The Company has purchased bank owned life insurance for the purpose of funding the liabilities related to the 1999
Supplemental Benefit Plans, the 2001 and 2012 Supplemental Benefit Plans, and the 2018 Retention Agreement. The cash
surrender value of such bank owned life insurance amounted to $29.4 million at December 31, 2023 and $23.2 million at
December 31, 2022.
Note 12 – Stock-based Compensation
As of December 31, 2023, the Company had three active 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 $103,000 and $335,000 for the years ended December 31, 2023 and
2022.
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 year ended December 31, 2023 and 2022 is presented below:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of period
Options exercisable at end of period
Fair value of options granted
2023
Weighted
Average
Exercise
Price
$
$
$
14.38
—
—
—
14.38
14.38
—
Options
58,857
—
—
—
58,857
58,857
—
Remaining
Contractual
Life
Options
2022
Weighted
Average
Exercise
Price
Remaining
Contractual
Life
$
64,548
—
—
(5,691) $
$
58,857
$
58,857
— $
14.38
—
—
14.38
14.38
14.38
—
3.8 years
3.8 years
2.8 years
2.8 years
At December 31, 2023, stock options had no intrinsic value and there were no remaining options available for grant under
the Stock Option Plan. At December 31, 2023 all compensation cost and expense related to the Stock Option Plan has been
recognized in prior periods.
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 non-employee directors of Lake Shore Bancorp or
its subsidiaries are eligible to receive awards under the EIP, except that non-employee directors may not be granted incentive
stock options.
The Board of Directors granted restricted stock awards under the EIP during 2023 as follows:
F - 33
Grant Date
Number of Restricted
Stock Awards
Vesting
Fair Value per Share of
Award on Grant Date
Awardees
January 17, 2023
January 18, 2023
January 18, 2023
2,709
4,573
1,000
100% on January 17, 2024
100% on January 18, 2024
20% per year with first vesting
date on January 18, 2024
$
$
$
12.92
12.90
Non-employee directors
Non-employee directors
12.90
Employees
A summary of the status of unvested restricted stock awards under the EIP for the years ended December 31, 2023 and 2022
is as follows:
Unvested shares outstanding at beginning of year
Granted
Vested
Forfeited
Unvested shares outstanding at end of period
At December 31,
2023
Weighted Average
Grant Price (per
Share)
At December 31,
2022
Weighted Average
Grant Price (per
Share)
43,866
8,282
(11,734)
(22,296)
18,118
$
$
15.02
12.91
15.39
14.93
13.91
29,495
29,132
(4,145)
(10,616)
43,866
$
$
15.24
14.81
15.00
15.07
15.02
As of December 31, 2023, there were 109,620 shares of restricted stock vested or distributed to eligible participants under
the EIP and 52,261 remaining shares available for grant. Compensation expense related to restricted stock awards under the
EIP amounted to $17,000 and $225,000 for the years ended December 31, 2023 and 2022, respectively. At December 31,
2023, $60,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized
over a period of 10.2 months.
A summary of the status of stock options under the EIP for the years ended December 31, 2023 and 2022 is as follows:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding at end of period
2023
Exercise
Price
14.38
—
—
—
14.38
Options
$
20,000
—
—
—
(6,899) $
13,101
Remaining
Contractual
Life
Options
20,000
—
—
—
2.8 years
20,000
Options exercisable at end of period
13,101
$
14.38
2.8 years
20,000
Remaining
Contractual
Life
2022
Exercise
Price
14.38
—
—
—
14.38
3.8 years
14.38
3.8 years
$
$
$
Fair value of options granted
—
—
—
—
At December 31, 2023, stock options outstanding had no intrinsic value and there were 6,899 remaining options available
for grant under the EIP. At December 31, 2023, all compensation cost and expense related to the stock options granted under
the EIP has been recognized in prior periods.
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 December 31, 2023, the balance of the loan to the ESOP was $1.3 million and the fair value of
unallocated shares was $1.1 million. As of December 31, 2023, there were 74,895 allocated shares and 103,153 unallocated
F - 34
shares compared to 83,467 allocated shares and 103,153 unallocated shares at December 31, 2022. The ESOP compensation
expense was $86,000 for the year ended December 31, 2023 and $110,000 for the year ended December 31, 2022 based on
7,935 shares earned in each of those years.
Note 13 - 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 December 31, 2023 and 2022 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.
GAAP 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 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 statements of financial condition contains investment securities and derivative instruments
that are recorded at fair value on a recurring basis. For financial instruments measured at fair value on a recurring basis,
the fair value measurements by level within the fair value hierarchy used at December 31, 2023 and 2022 were as follows:
F - 35
Measured at fair value on a recurring basis:
Securities:
Debt Securities
U.S. government agencies
Municipal bonds
Mortgage-backed securities:
Collateralized mortgage obligations-private label
Collateralized mortgage obligations-government
sponsored entities
Government National Mortgage Association
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Asset-backed securities:
Private label
Government sponsored entities
Total Debt Securities
Equity securities
Total Securities
Measured at fair value on a recurring basis:
Securities:
Debt Securities
U.S. government agencies
Municipal bonds
Mortgage-backed securities:
Collateralized mortgage obligations-private label
Collateralized mortgage obligations-government
sponsored entities
Government National Mortgage Association
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Asset-backed securities:
Private label
Government sponsored entities
Total Debt Securities
Equity securities
Total Securities
Interest Rate Swap(1)
Fair Value Measurements at December 31, 2023
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant Other
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Fair Value
1,874
33,050
$
— $
—
1,874
33,050
$
10
10,400
55
10,189
4,813
31
2
60,424
18
60,442
$
$
—
—
—
—
—
—
—
— $
18
18
$
10
10,400
55
10,189
4,813
31
2
60,424
—
60,424
$
$
—
—
—
—
—
—
—
—
—
—
—
—
Fair Value Measurements at December 31, 2022
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant Other
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Fair Value
1,833
42,414
$
— $
—
1,833
42,414
$
11
12,155
59
11,246
5,221
96
4
73,039
8
73,047
273
$
$
$
—
—
—
—
—
—
—
— $
8
8
$
— $
11
12,155
59
11,246
5,221
96
4
73,039
—
73,039
273
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
(1)
Included in Other Liabilities on the consolidated statements of financial condition.
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
F - 36
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:
Investment securities - 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.
In addition to disclosure of the fair value of assets on a recurring basis, GAAP requires disclosures for assets and liabilities
measured at fair value on a non-recurring basis. The following is a description of the valuation methods used for assets
measured at fair value on a non-recurring basis.
Collateral-Dependent Loans. Loans for which repayment is substantially expected to be provided through the operations or
sale of collateral are considered collateral dependent. They are held at the lower of cost or fair value, and are considered to
be measured at fair value when recorded below cost. Collateral-dependent loans are valued based on the estimated fair
value of the collateral, less estimated costs to sell at the reporting date, based on either a recent appraisal or discounted cash
flows based on market conditions. Accordingly, collateral-dependent loans are classified within Level 3 of the fair value
hierarchy.
Foreclosed Real Estate and Repossessed Assets. Foreclosed real estate and repossessed assets are held at the lower of cost
or fair value and are considered to be measured at fair value when recorded below cost. The fair value of foreclosed real
estate is calculated using independent appraisals, less estimated selling costs. Certain repossessed assets may require
assumptions about factors that are not observable in an active market when determining fair value. Accordingly, foreclosed
real estate and repossessed assets are classified within Level 3 of the fair value hierarchy. Foreclosed real estate was $34,000
and $95,000 at December 31, 2023 and December 31, 2022 and was included as a component of other assets on the
consolidated statements of financial condition.
Mortgage Servicing Rights. Mortgage servicing rights do not trade in an active market with readily observable market
data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to
calculate the present value of estimated future net servicing income. The key assumptions used in the model include the
estimated life of loans sold with servicing retained and the estimated cost to service the loans. Loan servicing rights are
classified as Level 3 measurements due to the use of unobservable inputs, as well as management judgment and estimation.
F - 37
For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value
hierarchy used at December 31, 2023 and 2022 were as follows:
Measured at fair value on a non-recurring basis:
At December 31, 2023
Collateral-dependent loans
Foreclosed real estate
Mortgage servicing rights
At December 31, 2022
Mortgage servicing rights
Fair Value Measurements
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
Significant
Other
Unobservable
Inputs
(Level 3)
Fair Value
$
$
1,369
34
191
— $
—
—
— $
—
—
1,369
34
191
209
—
—
209
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:
(Dollars in thousands)
At December 31, 2023
Collateral-dependent
loans
$
Foreclosed real estate
Mortgage servicing
rights
At December 31, 2022
Mortgage servicing
rights
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Estimate
Valuation Technique
Unobservable Input
Range
1,369 Appraisal of collateral (1)
34 Appraisal of collateral (1)
191 Discounted Cash Flow Model (3)
Direct Disposal
Costs (2)
Direct Disposal
Costs (2)
Servicing Fees
Servicing Costs
Estimated Life of
Loans
Weighted
Average
9.75%
8.00%
0.25%
0.09%
8.00-
10.00%
8.00%
0.25%
0.09%
5.32 years
5.32 years
209 Discounted Cash Flow Model (3)
Servicing Fees
Servicing Costs
Estimated Life of
Loans
0.25%
0.15%
0.25%
0.15%
5.0 years
5.0 years
(1)
(2)
(3)
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.
The fair value basis of collateral-dependent 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.
The fair value is based on a discounted cash flow model. The model’s key assumptions are the estimated life of loans sold with servicing retained and the
estimated cost to service the loan.
F - 38
The carrying amount and estimated fair value of the Company’s financial instruments, whether carried at cost or fair value,
are as follows:
$
$
Financial assets:
Cash and cash equivalents
Securities
Federal Home Loan Bank stock
Loans receivable, net
Accrued interest receivable
Bank-owned life insurance
Mortgage servicing rights
Financial liabilities:
Deposits
Long-term debt
Accrued interest payable
Financial assets:
Cash and cash equivalents
Securities
Federal Home Loan Bank stock
Loans receivable, net
Accrued interest receivable
Interest rate swap
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Fair Value Measurements at December 31, 2023
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
(Dollars in thousands)
Significant
Other
Observable
Inputs
(Level 2)
Estimated
Fair Value
Significant
Other
Unobservable
Inputs
(Level 3)
Carrying
Amount
$
$
53,730
60,442
2,293
555,828
2,835
29,355
191
590,924
35,250
829
53,730
60,442
2,293
530,735
2,835
29,355
191
589,243
34,757
829
53,730
18
—
—
—
—
—
—
—
—
$
— $
60,424
2,293
—
2,835
29,355
—
589,243
34,757
829
—
—
—
530,735
—
—
191
—
—
—
Fair Value Measurements at December 31, 2022
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
(Dollars in thousands)
Significant
Other
Observable
Inputs
(Level 2)
Estimated
Fair Value
Significant
Other
Unobservable
Inputs
(Level 3)
Carrying
Amount
$
9,633
73,047
2,330
573,537
2,796
273
209
570,119
12,596
24,950
66
9,633
73,047
2,330
546,278
2,796
273
209
571,521
12,596
23,946
66
$
9,633
8
—
—
—
—
—
—
—
—
$
— $
73,039
2,330
—
2,796
273
—
571,521
12,596
23,946
66
—
—
—
546,278
—
209
—
—
—
—
Note 14 - Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk-weightings and other factors. The Company is exempt from
consolidated capital requirements as those requirements do not apply to certain small savings and loan holding companies
or bank holding companies with consolidated assets under $3 billion.
As a result of the Economic Growth, Regulatory Relief, and Consumer Act, the federal banking agencies have developed a
minimum “Community Bank Leverage Ratio” (bank’s tier 1 capital to average total consolidated assets) for financial
F - 39
institutions with assets of less than $10 billion and limited amounts of off-balance-sheet exposures and trading assets and
liabilities. A “qualifying community bank” may elect to utilize the Community Bank Leverage Ratio (“CBLR”) in lieu of
the general applicable risk-based capital requirements under Basel III. If the community bank’s capital levels exceed the
CBLR it will be deemed to be in compliance with all other capital and leverage requirements, including the capital
requirements to be considered “well capitalized” under Basel III. 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 set the minimum CBLR at 9.00%. The Bank elected to be subject to the CBLR
when it became effective on January 1, 2020.
As of December 31, 2023 and 2022, the Bank was considered a “qualifying community bank” and its CBLR was 12.68%
and 12.40%, respectively, so it was 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.
Following is a reconciliation of the Bank’s GAAP capital to regulatory Tier 1 and CET 1 capital for December 31, 2023
and 2022:
December 31,
2023
2022
(Dollars in thousands)
GAAP (Equity) Capital:
Plus:
Unrealized losses on available-for-sale debt securities, net of tax
Tier 1 Capital and CET 1 Capital
$
$
82,487
$
9,385
91,872
$
77,051
10,332
87,383
Pursuant to an Individual Minimum Capital Requirement, the Bank has been directed by the OCC to maintain a Tier 1
Leverage capital ratio of 10% and a Total Risk-Based capital ratio of 13%. In order to be considered “well-capitalized” by
the OCC, a savings bank must maintain a Tier 1 Leverage capital ratio of 5% and a Total Risk-Based capital ratio of 10%.
At December 31, 2023, the Bank’s Tier 1 Leverage capital ratio was 12.68% and its Total Risk-Based capital ratio was
17.77% and accordingly the Bank was in compliance with its Individual Minimum Capital Requirement and was
considered well-capitalized.
Note 15 – Earnings per Share
Earnings per share was calculated for the years ended December 31, 2023 and 2022, respectively. Basic earnings per share
is based upon the weighted average number of common shares outstanding, exclusive of unearned shares held by the ESOP,
RRP and 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
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.
F - 40
The calculated basic and diluted earnings per share are as follows:
Numerator – net income
Denominator:
Basic weighted average shares outstanding
Increase in weighted average shares outstanding due to:
Stock options(1)
Diluted weighted average shares outstanding(1)
Earnings per share:
Basic
Diluted
Years Ended December 31,
2023
2022
$
4,820,000
$
5,708,000
5,855,505
—
5,855,505
5,879,438
—
5,879,438
$
$
0.82
0.82
$
$
0.97
0.97
(1)
Stock options to purchase 58,857 shares under the Company's 2006 Stock Option Plan and 13,101 shares under the EIP at $14.38 were outstanding during 2023, but
were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.
Note 16 – 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 was a
$487,000 allowance for credit losses associated with these commitments at December 31, 2023 and no loss reserve
associated with these commitments at December 31, 2022. The Company follows the same credit policies in making
commitments as it does for on-balance sheet instruments.
The following commitments to extend credit were outstanding as of the dates specified:
Contract Amount
December 31,
2023
December 31,
2022
(Dollars in thousands)
Commitments to grant loans
Unfunded commitments to fund loans and lines of credit
Commercial and Standby letters of credit
$
$
21,045
75,721
1,212
26,334
74,848
-
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 17 – Parent Company Only Financial Information
The following condensed financial statements summarize the financial position and results of operations and cash flows of
the parent savings and loan holding company, Lake Shore Bancorp, Inc., as of December 31, 2023 and 2022 and for the
years ended December 31, 2023 and 2022.
F - 41
Statements of Financial Condition
Assets
Cash and due from banks
Investment in subsidiary
ESOP loan receivable
Other assets
Total assets
Liabilities and Stockholders' Equity
Other liabilities
Total stockholders' equity
Total liabilities and stockholders' equity
Statements of Income
Interest Income
Dividend distributed by bank subsidiary
Other
Total Income
Non-interest Expenses
Income before income taxes and equity in undistributed net income of subsidiary
Income tax benefit
Income before undistributed net income of subsidiary
Equity in undistributed net income of subsidiary
Net Income
Statements of Comprehensive Income (Loss)
Net Income
Other Comprehensive Income (Loss), net of tax (expense) benefit:
Unrealized holding gains (losses) on securities available for sale of subsidiary, net
of tax (expense) benefit 2023 ($241); 2022 $3,004
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income of
subsidiary, net of tax expense 2023 $2; 2022 $3
Net loss on sale of securities included in net income, net of tax benefit of $12
Total Other Comprehensive Income (Loss)
Total Comprehensive Income (Loss)
F - 42
December 31,
2023
2022
(Dollars in thousands)
$
2,272
82,487
1,294
337
86,390
$
117
86,273
86,390
$
For the Years Ended
December 31,
2023
2022
(Dollars in thousands)
183
—
7
190
577
(387)
(81)
(306)
5,126
4,820
$
$
2,084
77,050
1,359
721
81,214
30
81,184
81,214
145
3,000
5
3,150
494
2,656
(99)
2,755
2,953
5,708
For the Years Ended
December 31,
2023
2022
(Dollars in thousands)
4,820
$
5,708
905
(11,298)
(5)
47
947
5,767
$
(12)
—
(11,310)
(5,602)
$
$
$
$
$
$
$
Statements of Cash Flows
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
4,820
$
For the Years Ended
December 31,
2023
2022
(Dollars in thousands)
ESOP shares committed to be released
Stock based compensation expense
Decrease (increase) in other assets
Increase in other liabilities
Equity in undistributed earnings of subsidiary
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Payments received on ESOP loan
Net Cash Provided by Investing Activities
Cash Flows from Financing Activities:
Purchase of treasury stock
Cash dividends paid
Net Cash Used in Financing Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - Ending
Note 18 – Treasury Stock
86
17
297
87
(5,126)
181
65
65
(58)
—
(58)
188
2,084
2,272
$
$
5,708
110
225
(631)
4
(2,953)
2,463
61
61
(85)
(1,440)
(1,525)
999
1,085
2,084
During the year ended December 31, 2023, the Company did not repurchase any shares of common stock under the existing
stock repurchase program. As of December 31, 2023, there were 30,626 shares remaining to be repurchased under the
existing stock repurchase program. During the year ended December 31, 2023, the Company transferred 8,282 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 year ended December 31, 2023, there were 22,296 shares
transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per share due to
forfeitures. The Company repurchased 4,923 shares upon the vesting of shares under the 2012 Equity Incentive Plan for the
purpose of remitting payroll taxes on behalf of awardees who were employees, at an average cost of $11.60 per share, during
the year ended December 31, 2023.
During the year ended December 31, 2022, the Company repurchased 5,701 shares of common stock at an average cost of
$14.91 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase
program. As of December 31, 2022, there were 30,626 shares remaining to be repurchased under the existing stock
repurchase program. During the year ended December 31, 2022, the Company transferred 29,132 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 year ended December 31, 2022, there were 10,616 shares transferred back into
treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per share due to forfeitures.
F - 43
Note 19 – Other Comprehensive Income (Loss)
In addition to presenting the consolidated statements of comprehensive income (loss) 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 Years Ended December 31, 2023
Tax (Expense)
Benefit
Pre-Tax
Amount
Net of Tax
Amount
For The Years Ended December 31, 2022
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
Less: reclassification adjustment related
to:
Loss on sale of securities included in
net income
Recovery on previously impaired
investment securities included in net
income
Total Other Comprehensive Income
(Loss)
$
1,146
$
(241) $
905
$
(14,302) $
3,004
$
(11,298)
59
(7)
(12)
2
47
(5)
—
(15)
—
3
—
(12)
$
1,198
$
(251) $
947
$
(14,317) $
3,007
$
(11,310)
The following table presents the amounts reclassified out of the single component of the Company’s accumulated other
comprehensive loss for the indicated periods:
Details about Accumulated Other
Comprehensive Loss
Components
Amounts Reclassified from Accumulated
Other Comprehensive Loss
for the years ended December 31,
2023
2022
(Dollars in thousands)
Affected Line Item
on the Consolidated
Statements of Income
Net unrealized gains (losses) on securities
available for sale:
Loss on sale of securities included in net
income
Recovery on previously impaired
investment securities
Provision for income tax (benefit) expense
Total reclassification for the period
$
$
Note 20 – Revenue Recognition
59
$
(7)
(10)
42
$
— Loss on sale of securities available for sale
Recovery on previously impaired investment
securities
Income tax expense
(15)
3
(12) Net Income
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 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.
Debit Card Fees
Debit card fees are 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. The Company’s performance obligation for
F - 44
interchange income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.
Payment is typically immediately.
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 and Other Service Charges
Fees and other service charges are primarily comprised of ATM fees, merchant services income and other service charges.
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 and other service charges are largely satisfied, and related 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 Foreclosed Real Estate
The Company records a gain or loss from the sale of foreclosed real estate 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 foreclosed real estate
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 foreclosed real estate 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 foreclosed real estate are generally recorded in non-
interest expense on the consolidated statements of income as an offset to foreclosed real estate expenses. There were no
sales of foreclosed real estate during the years ended December 31, 2023 and 2022, 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 December 31, 2023 and 2022, the Company did not have any significant contract balances.
F - 45
The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the
years ended December 31, 2023 and 2022:
Non-Interest Income
In-Scope of Topic 606:
Debit card fees
Service charges on deposit accounts
Fees and other service charges
Other
Non-interest Income (in-scope of Topic 606)
Non-interest Income (out of scope of Topic 606)
Total Non-Interest Income
For the years ended December 31,
2022
2023
(Dollars in thousands)
$
$
846
709
127
34
1,716
919
2,635
$
$
846
727
126
37
1,736
968
2,704
F - 46
Subsidiaries of Lake Shore Bancorp, Inc.
Company
Lake Shore Savings Bank
Percent Owned
100.0% by Lake Shore Bancorp, Inc.
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-141829 and No. 333-
185624) of Lake Shore Bancorp, Inc. and subsidiary of our report dated March 22, 2024, relating to the consolidated
financial statements, which appears in this annual report on Form 10-K for the year ended December 31, 2023.
Exhibit 23.1
/s/ Baker Tilly US, LLP
Pittsburgh, Pennsylvania
March 22, 2024
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Kim C. Liddell, certify that:
1. I have reviewed this annual report on Form 10-K of Lake Shore Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present
in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
March 22, 2024
/s/ Kim C. Liddell
Kim C. Liddell
President and Chief Executive Officer
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Taylor M. Gilden, certify that:
1. I have reviewed this annual report on Form 10-K of Lake Shore Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present
in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
March 22, 2024
/s/ Taylor M. Gilden
Taylor M. Gilden
Chief Financial Officer
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Lake Shore Bancorp, Inc. (the “Company”) on Form 10-K for the year ended December
31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kim C. Liddell, President and
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act
of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)); and
2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and
results of operations of the Company as of the dates and for the periods covered by the Report.
March 22, 2024
/s/ Kim C. Liddell
Kim C. Liddell
President and Chief Executive Officer
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Lake Shore Bancorp, Inc. (the “Company”) on Form 10-K for the year ended December
31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Taylor M. Gilden, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of
2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)); and
2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and
results of operations of the Company as of the dates and for the periods covered by the Report.
March 22, 2024
/s/ Taylor M. Gilden
Taylor M. Gilden
Chief Financial Officer
LAKE SHORE BANCORP, INC. CLAWBACK POLICY
The Board of Directors (the “Board”) of Lake Shore Bancorp, Inc. (the “Company”) believes
that it is in the best interests of the Company and its shareholders to adopt this Clawback Policy (this
“Policy”), which provides for the recovery of certain incentive compensation in the event of an
accounting restatement.
The Company has adopted this Policy as a supplement to any other clawback policies or
provisions in effect now or in the future at the Company. To the extent this Policy applies to
compensation payable to a person covered by this Policy, it shall supersede any other conflicting
provision or policy maintained by the Company and shall be the only clawback policy applicable to
such compensation and no other clawback policy shall apply; provided that, if such other policy or
provision provides that a greater amount of such compensation shall be subject to clawback, such
other policy or provision shall apply to the amount in excess of the amount subject to clawback under
this Policy.
This Policy shall be interpreted to comply with the clawback rules found in 17 C.F.R.
§240.10D and the related listing rules of the national securities exchange or national securities
association (the “Exchange”) on which the Company has listed securities, and, to the extent this
Policy is any manner deemed inconsistent with such rules, this Policy shall be treated as retroactively
amended to be compliant with such rules.
1. Definitions.
(a) “Executive Officer” means the Company’s president, principal financial officer, principal
accounting officer (or if there is no such accounting officer, the controller), any vice-president
of the Company in charge of a principal business unit, division, or function (such as sales,
administration, or finance), any other officer who performs a policy-making function, or any
other person who performs similar policy-making functions for the Company. An executive
officer of the Company’s parent or subsidiary is deemed an “Executive Officer” if the executive
officer performs policy making functions for the Company.
(b) “Financial Reporting Measure” means any measure that is determined and presented in
accordance with the accounting principles used in preparing the Company’s financial
statements, and any measure that is derived wholly or in part from such measure; provided,
however, that a Financial Reporting Measure is not required to be presented within the
Company’s financial statements or included in a filing with the Securities and Exchange
Commission to qualify as a “Financial Reporting Measure.” For purposes of this Policy,
“Financial Reporting Measure” includes, but is not limited to, stock price and total shareholder
return.
(c) “Incentive-Based Compensation” means any compensation that is granted, earned, or
vested based wholly or in part upon the attainment of a Financial Reporting Measure.
(d) “Received” means incentive-based compensation received in the Company’s fiscal period
during which the Financial Reporting Measure specified in the incentive-based compensation
award is attained, even if the payment or grant of the incentive-based compensation occurs
after the end of that period.
2. Application of the Policy. This Policy shall only apply in the event that the Company is required
to prepare an accounting restatement due to its material noncompliance with any financial reporting
requirement under the Federal securities laws, including any required accounting restatement to
correct an error in previously issued financial statements that is material to the previously issued
financial statements, or that would result in a material misstatement if the error were corrected in the
current period or left uncorrected in the current period.
3. Recovery Period. The Incentive-Based Compensation subject to clawback is the Incentive-Based
Compensation Received during the three completed fiscal years immediately preceding the date that
the Company is required to prepare an accounting restatement as described in Section 2; provided
that the individual served as an Executive Officer at any time during the performance period
applicable to the Incentive-Based Compensation in question. The date that the Company is required
to prepare an accounting restatement shall be determined pursuant to 17 C.F.R. §240.10D-1(b)(1)(ii).
(a) Notwithstanding the foregoing, the Policy shall only apply if the Incentive-Based
Compensation is Received (1) while the Company has a class of securities listed on an
Exchange and (2) on or after October 2, 2023.
(b) See 17 C.F.R. §240.10D-1(b)(1)(i)(D) for certain circumstances under which this Policy
will apply to Incentive-Based Compensation received during a transition period arising due to
a change in the Company’s fiscal year.
4. Erroneously Awarded Compensation. The amount of Incentive-Based Compensation subject to
the Policy (“Erroneously Awarded Compensation”) is the amount of Incentive-Based Compensation
Received that exceeds the amount of Incentive Based-Compensation that otherwise would have been
Received had it been determined based on the restated amounts in the Company’s financial
statements and shall be computed without regard to any taxes paid.
(a) For Incentive-Based Compensation based on stock price or total shareholder return,
where the amount of Erroneously Awarded Compensation is not subject to mathematical
recalculation directly from the information in an accounting restatement: (1) the amount shall
be based on a reasonable estimate of the effect of the accounting restatement on the stock
price or total shareholder return upon which the Incentive-Based Compensation was
received; and (2) the Company must maintain documentation of the determination of that
reasonable estimate and provide such documentation to the Exchange.
5. Recovery Exceptions. The Company shall recover reasonably promptly any Erroneously
Awarded Compensation except to the extent that the conditions of paragraphs (a), (b), or (c) below
apply. The Compensation Committee of the Board of Directors (the “Committee”) shall determine
the repayment schedule for each amount of Erroneously Awarded Compensation in a manner that
complies with this “reasonably promptly” requirement. Such determination shall be consistent with
any applicable legal guidance, by the Securities and Exchange Commission, judicial opinion, or
otherwise. The determination of “reasonably promptly” may vary from case to case and the
Committee is authorized to adopt additional rules to further describe what repayment schedules
satisfy this requirement.
(a) Erroneously Awarded Compensation need not be recovered if the direct expense paid to a
third party to assist in enforcing the Policy would exceed the amount to be recovered and the
Committee has made a determination that recovery would be impracticable. Before
concluding that it would be impracticable to recover any amount of Erroneously Awarded
Compensation based on expense of enforcement, the Company shall make a reasonable
attempt to recover such Erroneously Awarded Compensation, document such reasonable
attempt(s) to recover, and provide that documentation to the Exchange, as required.
(b) If applicable, Erroneously Awarded Compensation need not be recovered if recovery
would violate home country law where that law was adopted prior to November 28, 2022.
Before concluding that it would be impracticable to recover any amount of Erroneously
Awarded Compensation based on violation of home country law, the Company shall obtain
an opinion of home country counsel, acceptable to the Exchange, that recovery would result
in such a violation and shall provide such opinion to the Exchange.
(c) Erroneously Awarded Compensation need not be recovered if recovery would likely
cause an otherwise tax-qualified retirement plan, under which benefits are broadly available
to employees of the Company, to fail to meet the requirements of 26 U.S.C. §401(a)(13) or
26 U.S.C. §411(a) and regulations thereunder.
6. Committee Decisions. Decisions of the Committee with respect to this Policy shall be final,
conclusive and binding on all Executive Officers subject to this Policy, unless determined by a
court of competent jurisdiction to be an abuse of discretion.
7. No Indemnification. Notwithstanding anything to the contrary in any other policy of the Company
or any agreement between the Company and an Executive Officer, no Executive Officer shall be
indemnified by the Company against the loss of any Erroneously Awarded Compensation.
8. Agreement to Policy by Executive Officers. The Committee shall take reasonable steps to inform
Executive Officers of this Policy and the Executive Officers shall acknowledge receipt and adherence
to this Policy in writing.
9. Exhibit Filing Requirement. A copy of this Policy and any amendments thereto shall be filed as an
exhibit to the Company’s annual report on Form 10-K.
10. Amendment. The Board may amend, modify or supplement all or any portion of this Policy at
any time and from time to time in its discretion.
[TO BE SIGNED BY EACH OF THE COMPANY S EXECUTIVE OFFICERS]
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Clawback Policy Acknowledgment
I, the undersigned, agree and acknowledge that I am fully bound by, and subject to, all of the terms
and conditions of Lake Shore Bancorp, Inc.’s Clawback Policy (as may be amended, restated,
supplemented or otherwise modified from time to time, the “Policy”) and that I have been provided a
copy of the Policy. In the event of any inconsistency between the Policy and the terms of any
employment or similar agreement to which I am a party, or the terms of any compensation plan,
program or agreement under which any compensation has been granted, awarded, earned or paid, the
terms of the Policy shall govern. If the Committee determines that any amounts granted, awarded,
earned or paid to me must be forfeited or reimbursed to the Company, I will promptly take any action
necessary to effectuate such forfeiture and/or reimbursement.
Name
Title
Date: