About Lake Shore Bancorp

Lake Shore Bancorp, Inc. operates as the bank holding company for Lake Shore Savings Bank that provides various banking products and services. The company is a subsidiary of Lake Shore, MHC. The 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. The company's revenues are principally derived from interest earned on its loans and investment securities. The company's revenues 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 the sale of loans or securities, maturities and calls of investment securities and income resulting from operations in prior periods. As of December 31, 2022, the company's securities were debt securities, such as the U.S. government agencies; municipal bonds; mortgage-backed securities, including collateralized mortgage obligations-private label, collateralized mortgage obligations-government sponsored entities, Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation; and asset-backed securities, including private label and government sponsored entities. Market Area The bank is a community bank that offers a variety of banking products to serve the market areas surrounding its branch offices located within the Western New York region of New York State. The company's geographic market area for loans and deposits is principally located within Erie and Chautauqua counties, within Western New York. The company's 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. Lending Activities The company's principal lending activity is the origination of fixed rate and adjustable-rate mortgage loans collateralized by commercial and residential real estate primarily located within its market area. The company also originates commercial business loans, home equity loans, and consumer loans. The company retains the majority of loans that it originates. However, the company may sell residential mortgage loans into the secondary market, with retention of servicing rights, in order to manage interest rate when deemed appropriate. Commercial Real Estate Loans: The company remained focused on originating commercial real estate loans and has assembled a strong team of loan officers to grow this portfolio. As such, the company'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 office buildings, warehouses, retail properties, mixed use properties, self-storage units and multi-family apartment complexes; and is typically held as collateral for the loan. For the majority of the company's commercial real estate loan portfolio, the collateral is primarily located within its primary market area. The company's 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. The company originates 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 20 to 25 years. Commercial Construction: The company originates loans primarily to established local developers to finance the construction of commercial and multi-family properties. It provides construction loans to local developers for the construction of one-to four-family residential developments. The company also originates 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. The majority of the company's commercial real estate construction loans are variable rate loans with rates tied to the prime rate, plus a premium. At the end of the construction period, the loan may convert to a commercial real estate mortgage. One- to Four-Family Residential Mortgage Lending: The company's residential mortgage loan originations are obtained from customers, residents of its local communities or referrals from local real estate agents, brokers, attorneys, or builders. The majority of residential loans originated are fixed rate loans; although the company does offer adjustable rate loan products to its customers. One- to four-family residential mortgage loan originations are generally for terms up to 30 years, however, the company does 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 the company customarily contain 'due-on-sale' clauses that permit it to accelerate the indebtedness of the loan upon transfer of ownership of the mortgaged property. The company's residential lending policies and procedures ensure that the majority of one- to four-family residential mortgage loans generally conform to secondary market guidelines, although it also originates non-conforming loans. The company underwrites all conforming loans (i.e. loans with less than a $647,200 loan balance during 2022) using the criteria required by the Federal Home Loan Mortgage Corporation (FHLMC). The company originates one- to four-family residential mortgage loans with a loan-to-value ratio up to 100%, and up to 101% with its 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. The company may offer loans through programs offered by the State of New York Mortgage Agency (SONYMA) which are originated for sale. The company retains all servicing rights for one- to four-family residential mortgage loans that it sells. The company also originates loans above the lending limit for conforming loans, which it refers to as 'jumbo loans.' The company originates jumbo loans with fixed-rates and terms of up to 30 years. The company originates 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 term 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%. The company offers adjustable-rate mortgage loans with a maximum term of 30 years. The bank originates construction-to-permanent loans for the purpose of construction of primary and secondary residences. The company 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 majority of the company's one- to four-family residential loans are backed by property located in Western New York and are affected by economic conditions in this market area. Home Equity Loans and Lines of Credit: The company provides all-in-one home equity lines of credit and has provided home equity loans in the past to its customers. Home equity lines of credit are generally made for owner-occupied homes, and are secured by first or second mortgages on residences. The all-in-one home equity line of credit product has interest rates tied to the prime rate and generally have a 15-year draw period and a 15-year payback period. All-in-one home equity lines of credit have 30-year maximum terms. In 2020, the company began offering an investment property line of credit, which is similar to its home equity line of credit product. The investment property line of credit loans are generally made for non-owner occupied one-to four-family residential properties with a first-lien position and a loan to value ratio up to 70%. Commercial Loans: In addition to commercial real estate loans, the company engages 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. Most of the company's 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, the company collateralizes 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. The company offers 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. In addition, commercial business lending generally requires substantially greater oversight efforts compared to residential real estate lending. The company engages 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, the company offers a variety of consumer loans. The largest component of the company's consumer loan portfolio are personal consumer loans and overdraft lines of credit. Its consumer loan portfolio also consists of vehicle loans, loans secured by certificates of deposit, secured and unsecured property improvement loans, and other secured loans. Investment Activities The company has classified all of its investments in debt securities as available for sale. The company's securities portfolio consists of collateralized mortgage obligations, mortgage-backed securities, asset-backed securities, the U.S. Government Agency bonds, and municipal bonds. Nearly all of the company's 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 the company invests 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 the company's portfolio are unlimited general obligation bonds. The company also has investments in equity securities, specifically 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 the company's level of borrowings from the FHLBNY. Deposits The company offers a variety of deposit accounts having a range of interest rates and terms. It offers 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, the company offers commercial savings, checking, and money market accounts designed for the small to medium sized businesses operating in its market area. Properties The company conducts its business through its corporate headquarters, administrative offices, and branch offices. Supervision and Regulation The bank, a federally chartered savings bank, is subject to regulation, examination, and supervision by the Office of the Comptroller of the Currency (OCC), while the company 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. The bank is also regulated, to a lesser extent, by the Federal Deposit Insurance Corporation (FDIC) with respect to insurance of deposit accounts and the Federal Reserve Board, with respect to the payment of dividends and other matters. The 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. The bank is also required to pay assessments to the OCC to fund the agency's operations. As a federal savings bank, the bank 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 bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. The bank's 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 the bank are also 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; and The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. The company is a savings and loan holding company within the meaning of the Home Owners' Loan Act. The company, a federal corporation, is regulated by The Board of Governors of the Federal Reserve System (the Federal Reserve Board). The company's common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. The company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934. The bank is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The bank is subject to the supervision and regulation of the Office of the Comptroller of the Currency (OCC). History Lake Shore Bancorp, Inc. was founded in 1891.