10-Q 1 lsbk-20210331x10q.htm 10-Q lsbk 20210331 10Q





United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021



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

 

20-4729288

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

31 East Fourth Street,  Dunkirk,  New York

 

14048

(Address of principal executive offices)

 

(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

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

LSBK

 

The Nasdaq Stock Market LLC



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,  and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]No  [ ]

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  [X]No  [ ]

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.



 

Large accelerated filer

Accelerated filer

Non-accelerated filer  

Smaller reporting company

Emerging growth company  

 

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. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [  ]        No  [X]



 

 

 

 



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:



There were 5,791,413 shares of the registrant’s common stock, $0.01 par value per share, outstanding at May 10, 2021.



 


 







 

 

 



 

TABLE OF CONTENTS

 



 

 

 

ITEM

 

PART I

PAGE



 

 

 

1

FINANCIAL STATEMENTS

 



-

Consolidated Statements of Financial Condition as of March 31, 2021 (Unaudited) and December 31, 2020

1



-

Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited)

2



-

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited)

3



-

Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31,  2021 and  2020 (Unaudited)

4



-

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and  2020 (Unaudited)

5



-

Notes to Unaudited Consolidated Financial Statements

6

2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

4

CONTROLS AND PROCEDURES

43



 

 

 



 

PART II

 



 

 

 

1A

RISK FACTORS

43

2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

43

6

EXHIBITS 

44

SIGNATURES

 

 

44



 

 





 

 


 

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary

















 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2021

 

2020



 

(Unaudited)

 

 

 



 

(Dollars in thousands, except share data)



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

8,673 

 

$

7,867 

Interest earning deposits

 

 

43,287 

 

 

35,108 

Cash and Cash Equivalents

 

 

51,960 

 

 

42,975 

Securities

 

 

75,382 

 

 

79,285 

Federal Home Loan Bank stock, at cost

 

 

1,837 

 

 

1,905 

Loans receivable, net of allowance for loan losses 2021 $6,004; 2020 $5,857

 

 

538,184 

 

 

524,143 

Premises and equipment, net

 

 

10,079 

 

 

8,974 

Accrued interest receivable

 

 

3,025 

 

 

2,987 

Bank owned life insurance

 

 

22,566 

 

 

22,461 

Other assets

 

 

2,712 

 

 

3,470 

Total Assets

 

$

705,745 

 

$

686,200 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

              Interest bearing

 

$

477,796 

 

$

468,313 

              Non-interest bearing

 

 

104,764 

 

 

91,946 

Total Deposits

 

 

582,560 

 

 

560,259 

Long-term debt

 

 

28,250 

 

 

29,750 

Advances from borrowers for taxes and insurance

 

 

2,332 

 

 

3,183 

Other liabilities

 

 

6,643 

 

 

7,084 

Total Liabilities

 

 

619,785 

 

 

600,276 

Stockholders' Equity

 

 

 

 

 

 

Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,836,514 shares issued and 5,799,518 shares outstanding at March 31, 2021 and 6,836,514 shares issued and 5,823,786 shares outstanding at December 31, 2020

 

 

68 

 

 

68 

Additional paid-in capital

 

 

31,230 

 

 

31,201 

Treasury stock, at cost (1,036,996 shares at March 31, 2021 and 1,012,728 shares at December 31, 2020)

 

 

(12,053)

 

 

(11,584)

Unearned shares held by ESOP

 

 

(1,258)

 

 

(1,279)

Unearned shares held by compensation plans

 

 

(280)

 

 

(118)

Retained earnings

 

 

66,908 

 

 

65,488 

Accumulated other comprehensive income

 

 

1,345 

 

 

2,148 

Total Stockholders' Equity

 

 

85,960 

 

 

85,924 

Total Liabilities and Stockholders' Equity

 

$

705,745 

 

$

686,200 



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 





 











1


 







 

 

 

 

Lake Shore Bancorp, Inc. and Subsidiary

 

 

 

 

Consolidated Statements of Income

 

 

 

 



Three Months Ended March 31,



2021

2020



(Unaudited)



(Dollars in thousands, except per share data)

Interest Income

 

 

 

 

   Loans, including fees

$

5,577 

$

5,674 

   Investment securities, taxable

 

181 

 

262 

   Investment securities, tax-exempt

 

293 

 

289 

   Other

 

 

66 

         Total Interest Income

 

6,057 

 

6,291 

Interest Expense

 

 

 

 

   Deposits

 

627 

 

1,201 

   Long-term debt

 

143 

 

176 

   Other

 

17 

 

18 

         Total Interest Expense

 

787 

 

1,395 

         Net Interest Income

 

5,270 

 

4,896 

Provision for Loan Losses

 

150 

 

500 

         Net Interest Income after Provision for Loan Losses

 

5,120 

 

4,396 

Non-Interest Income

 

 

 

 

   Service charges and fees

 

230 

 

281 

   Debit card fees

 

202 

 

169 

   Earnings on bank owned life insurance

 

105 

 

122 

   Unrealized loss on equity securities

 

(6)

 

(36)

   Unrealized gain (loss) on interest rate swap

 

86 

 

(157)

   Recovery on previously impaired investment securities

 

21 

 

16 

   Net gain on sale of loans

 

157 

 

37 

   Other

 

25 

 

23 

         Total Non-Interest Income

 

820 

 

455 

Non-Interest Expense

 

 

 

 

   Salaries and employee benefits

 

2,101 

 

2,216 

   Occupancy and equipment

 

681 

 

641 

   Data processing

 

359 

 

332 

   Professional services

 

269 

 

215 

   Advertising

 

133 

 

173 

   Postage and supplies

 

64 

 

76 

   FDIC insurance

 

44 

 

   Other

 

302 

 

343 

         Total Non-Interest Expense

 

3,953 

 

3,998 

         Income before Income Taxes

 

1,987 

 

853 

Income Tax Expense

 

299 

 

122 

         Net Income

$

1,688 

$

731 

Basic and diluted earnings per common share

$

0.29 

$

0.12 

Dividends declared per share

$

0.13 

$

0.12 



 

 

 

 

See notes to consolidated financial statements.

 

 

























2


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income











 

 

 

 

 

 

 



 

 

Three Months Ended March 31,



 

 

2021

 

2020



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

1,688 

 

$

731 

Other Comprehensive (Loss) Income, net of tax expense:

 

 

 

 

 

 

 

Unrealized holding (losses) gains on securities, net of tax benefit (expense)

 

 

 

(786)

 

 

841 

Reclassification adjustments related to:

 

 

 

 

 

 

 

Recovery on previously impaired investment securities included in net income, net of tax expense

 

 

 

(17)

 

 

(13)

Total Other Comprehensive (Loss) Income

 

 

 

(803)

 

 

828 

Total Comprehensive Income

 

 

$

885 

 

$

1,559 



 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 





 





3


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31,  2021 and 2020 (Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Unearned

 

Unearned Shares

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Additional

 

 

 

 

Shares

 

Held by

 

 

 

 

Other

 

 

 



 

Common

 

Paid-In

 

Treasury

 

Held by

 

Compensation

 

Retained

 

Comprehensive

 

 

 



 

Stock

 

Capital

 

Stock

 

ESOP

 

Plans

 

Earnings

 

Income

 

Total



 

(Dollars in thousands, except share and per share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2020

 

$

68 

 

$

31,078 

 

$

(10,184)

 

$

(1,364)

 

$

(39)

 

$

61,950 

 

$

1,331 

 

$

82,840 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

731 

 

 

 -

 

 

731 

Other comprehensive income, net of tax expense of $220

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

828 

 

 

828 

ESOP shares earned (1,984 shares)

 

 

 -

 

 

 

 

 -

 

 

21 

 

 

 -

 

 

 -

 

 

 -

 

 

28 

Stock based compensation

 

 

 -

 

 

11 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

11 

Compensation plan shares granted (20,830 shares)

 

 

 -

 

 

 -

 

 

196 

 

 

 -

 

 

(196)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (1,889 shares)

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

20 

 

 

 -

 

 

 -

 

 

29 

Purchase of treasury stock, at cost (26,900 shares)

 

 

 -

 

 

 -

 

 

(377)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(377)

Cash dividends declared ($0.12 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(259)

 

 

 -

 

 

(259)

Balance - March 31, 2020

 

$

68 

 

$

31,105 

 

$

(10,365)

 

$

(1,343)

 

$

(215)

 

$

62,422 

 

$

2,159 

 

$

83,831 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Unearned

 

Unearned Shares

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Additional

 

 

 

 

Shares

 

Held by

 

 

 

 

Other

 

 

 



 

Common

 

Paid-In

 

Treasury

 

Held by

 

Compensation

 

Retained

 

Comprehensive

 

 

 



 

Stock

 

Capital

 

Stock

 

ESOP

 

Plans

 

Earnings

 

Income

 

Total



 

(Dollars in thousands, except share and per share data)

Balance - January 1, 2021

 

$

68 

 

$

31,201 

 

$

(11,584)

 

$

(1,279)

 

$

(118)

 

$

65,488 

 

$

2,148 

 

$

85,924 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,688 

 

 

 -

 

 

1,688 

Other comprehensive loss, net of tax benefit of $213

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(803)

 

 

(803)

ESOP shares earned (1,984 shares)

 

 

 -

 

 

 

 

 -

 

 

21 

 

 

 -

 

 

 -

 

 

 -

 

 

29 

Stock based compensation

 

 

 -

 

 

11 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

11 

Compensation plan shares granted (20,958 shares)

 

 

 -

 

 

 -

 

 

196 

 

 

 -

 

 

(196)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (1,392 shares)

 

 

 -

 

 

 -

 

 

(13)

 

 

 -

 

 

13 

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (2,057 shares)

 

 

 -

 

 

10 

 

 

 -

 

 

 -

 

 

21 

 

 

 -

 

 

 -

 

 

31 

Purchase of treasury stock, at cost (43,834 shares)

 

 

 -

 

 

 -

 

 

(652)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(652)

Cash dividends declared ($0.13 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(268)

 

 

 -

 

 

(268)

Balance - March 31, 2021

 

$

68 

 

$

31,230 

 

$

(12,053)

 

$

(1,258)

 

$

(280)

 

$

66,908 

 

$

1,345 

 

$

85,960 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













































4


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows





 

 

 

 

 

 



 

Three Months Ended March 31,



 

2021

 

2020



 

(Unaudited)



 

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

1,688 

 

$

731 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Net amortization of investment securities

 

 

42 

 

 

Net amortization of deferred loan costs

 

 

72 

 

 

138 

Provision for loan losses

 

 

150 

 

 

500 

Recovery on previously impaired investment securities

 

 

(21)

 

 

(16)

Unrealized loss on equity securities

 

 

 

 

36 

Unrealized (gain) loss on interest rate swap

 

 

(86)

 

 

157 

Originations of loans held for sale

 

 

(3,334)

 

 

(1,666)

Proceeds from sales of loans held for sale

 

 

3,491 

 

 

1,703 

Gain on sale of loans held for sale

 

 

(157)

 

 

(37)

Depreciation and amortization

 

 

215 

 

 

210 

Increase in bank owned life insurance, net

 

 

(105)

 

 

(122)

ESOP shares committed to be released

 

 

29 

 

 

28 

Stock based compensation expense

 

 

42 

 

 

40 

Increase in accrued interest receivable

 

 

(38)

 

 

(67)

Decrease in other assets

 

 

126 

 

 

97 

Writedowns of foreclosed real estate

 

 

 

 

 -

Decrease in other liabilities

 

 

(614)

 

 

(353)

Net Cash Provided by Operating Activities

 

 

1,513 

 

 

1,386 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Activity in debt securities:

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

5,331 

 

 

2,563 

Purchases

 

 

(2,471)

 

 

(1,453)

Purchases of Federal Home Loan Bank Stock

 

 

(2)

 

 

(22)

Redemptions of Federal Home Loan Bank Stock

 

 

70 

 

 

22 

Loan origination and principal collections, net

 

 

(14,263)

 

 

(3,176)

Additions to premises and equipment

 

 

(223)

 

 

(253)

Net Cash Used in Investing Activities

 

 

(11,558)

 

 

(2,319)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net increase in deposits

 

 

22,301 

 

 

17,723 

Net decrease in advances from borrowers for taxes and insurance

 

 

(851)

 

 

(904)

Proceeds from issuance of long-term debt

 

 

 -

 

 

1,200 

Repayment of long-term debt

 

 

(1,500)

 

 

(1,200)

Purchase of treasury stock

 

 

(652)

 

 

(377)

Cash dividends paid

 

 

(268)

 

 

(259)

Net Cash Provided by Financing Activities

 

 

19,030 

 

 

16,183 

Net Increase in Cash and Cash Equivalents

 

 

8,985 

 

 

15,250 

CASH AND CASH EQUIVALENTS - BEGINNING

 

 

42,975 

 

 

30,289 

CASH AND CASH EQUIVALENTS - ENDING

 

$

51,960 

 

$

45,539 

SUPPLEMENTARY CASH FLOWS INFORMATION

 

 

 

 

 

 

Interest paid

 

$

790 

 

$

1,396 

Income taxes paid

 

$

 -

 

$

 -



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 











5


 

Lake Shore Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)



Note 1 – Basis of Presentation



The interim consolidated financial statements include the accounts of Lake Shore Bancorp, Inc. (the “Company”, “us”, “our”, or “we”) and Lake Shore Savings Bank (the “Bank”), its wholly owned subsidiary.  All intercompany accounts and transactions of the consolidated subsidiary have been eliminated in consolidation.



The interim consolidated financial statements included herein as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all information or footnotes necessary for a complete presentation of the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated statement of financial condition at December 31, 2020 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.  The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading.  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  The consolidated statements of income for the three months ended March 31, 2021 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2021.



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 loan losses, securities valuation estimates, evaluation of impairment of securities and income taxes.



The Company has evaluated events and transactions occurring subsequent to the statement of financial condition as of March 31, 2021 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.



Note 2 – New Accounting Standards



Accounting Standards to be Adopted



In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”).  ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model).  Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.  Further, ASU 2016-13 made certain targeted amendments to the existing impairment standards for available for sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. 



6


 

The Company has determined its data requirements and is developing its methodologies for calculating the expected credit losses under ASU 2016-13 which has allowed the Company to run parallel loss reserve calculations. Data integrity associated with these methodologies is being reviewed and enhancements to the current process are being considered.  We expect that the new guidance will result in an increase to the allowance for loan losses given that the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss under the current accounting standard.  The extent of this increase is still being evaluated.  We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial reporting procedures.



ASU 2016-13 was originally effective for the Company in 2020. In November 2019, the FASB issued guidance to defer the effective date for smaller reporting companies such as the Company until January 1, 2023.



Note 3 – COVID-19

During the first quarter of 2020, an outbreak of a novel strain of coronavirus (COVID-19) was originally identified in Wuhan, China, and has since spread to a number of countries around the world, including the United States. The World Health Organization declared COVID-19 to be a global pandemic.  The direct and indirect effects of COVID-19 and its associated impacts on business activities, retail, travel, productivity and other economic activities have had, are currently having and may for some time continue to have a destabilizing effect on financial markets and economic activity.  As a result, Federal and State, including New York State, governments have passed legislation to counteract the economic impact of the pandemic.  The legislation had a direct impact on the banking industry and our financial operations, as described in Note 3 of the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.  The Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”), in addition to providing financial assistance to both businesses and consumers, created a forbearance program for federally-backed mortgage loans and protected borrowers from negative credit reporting due to loan accommodations related to the national emergency. This legislation allowed the Company to provide loan payment deferrals to those borrowers that had incurred a significant economic impact as a result of the pandemic and allowed the Company to provide this relief without accounting for such loans as past due or as a troubled debt restructuring ("TDR)". New York State has also passed legislation which prevents residential evictions, foreclosure proceedings, tax lien sales or foreclosures, credit discrimination and negative credit reporting related to the COVID-19 pandemic. These moratoriums were originally going to last until May 1, 2021, but were extended until August 31, 2021 by New York State legislation that was signed into state law on May 4, 2021.



The Company implemented a loan modification program at the onset of the pandemic in the 2nd quarter of 2020 for impacted customers, in line with regulatory guidance, allowing customers to defer loan payments.  The majority of loan deferrals were granted for deferral of principal and interest payments for 90 days, and up to 180 days in some instances, with the loan repayment period extended by the deferral period.  The requests were evaluated individually and approved modifications were based on the unique circumstances of each borrower. At its maximum, the Company approved loan payment deferral requests of up to 90 days on 219 loans, representing $103.1 million, or 21.1% of the Bank’s loan portfolio. The number of loan payment deferral requests has decreased significantly and as of March 31, 2021, three borrowers representing five loans and $15.5 million, or 2.9% of the Bank’s loan portfolio, remained in the loan deferral program, as indicated below:







 

 

 

 

 

Loan Type

Number of Loans

 

Balance Outstanding

Weighted Average Interest Rate



 

 

 

 

 

Commercial real estate

$

13,965  4.51 

%

Commercial business

 

1,541  5.15 

 



$

15,506  4.57 

%



7


 

These loans were current at the time of modification and were not considered troubled debt restructurings based on the regulatory guidance and we have not accounted for the loans as TDRs, nor have we designated the loans as past due or non-accrual. At this time management has not downgraded its classification of the remaining five loans in the loan deferral program due to the quality of knowledge that our loan officers have obtained from their discussions with the borrowers and due to the strength of the collateral and guarantors.  Management continues to carefully monitor those borrowers who remain on payment deferral for additional signs of distress that would result in a downgrade in loan classification.

 

The Company originated 86 commercial loans representing $30.7 million under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) during 2020 to assist business customers who suffered from the economic impact of the pandemic. On December 27, 2020, President Trump signed another COVID-19 relief bill that extended and modified several provisions of the PPP.  The SBA reactivated the PPP on January 11, 2021.  The Bank is originating additional PPP loans from this modified program, which will currently extend until May 31, 2021.  In the three months ended March 31, 2021, the Bank had originated and received SBA approval on 29 PPP loans totaling $9.7 million and received $158,000 in related net deferred PPP fees under the 2021 PPP authorization.  Upon funding the loans, the net fees were deferred and will be amortized over the life of the loans as an adjustment to yield.  As of March 31, 2021, 18 PPP loans totaling $5.1 million had been forgiven by the SBA.  It is expected that most customers that received a PPP loan in 2020 will apply and receive PPP loan forgiveness during the next nine months, upon which any unamortized deferred fees will be recognized as an adjustment to interest income.  During the three months ended March 31, 2021, a total of $81,000 in net PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.  At March 31, 2021, there were $23.0 million in PPP loans outstanding and recorded as commercial business loans. PPP loans are fully guaranteed by the SBA and are not considered when determining the allowance for loan losses. In addition, these loans are classified as pass and are reported as current when determining payment status.    



The Company continues to evaluate the disruption caused by the pandemic and the impact of the federal and state regulations that have been enacted due to the pandemic, as these events may have a material adverse impact on the Company’s future results, operations, financial position, capital and liquidity.  At this time the Company cannot quantify the potential impact of the pandemic on future operations.



8


 

Note 4 – Investment Securities

The amortized cost and fair value of securities are as follows:



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2021



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

2,010 

 

$

206 

 

$

 -

 

$

2,216 

Municipal bonds

 

 

42,681 

 

 

1,067 

 

 

(148)

 

 

43,600 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

16 

 

 

 -

 

 

 -

 

 

16 

Collateralized mortgage obligations-government sponsored entities

 

 

19,075 

 

 

475 

 

 

(121)

 

 

19,429 

Government National Mortgage Association

 

 

100 

 

 

10 

 

 

 -

 

 

110 

Federal National Mortgage Association

 

 

3,806 

 

 

94 

 

 

(39)

 

 

3,861 

Federal Home Loan Mortgage Corporation

 

 

5,923 

 

 

128 

 

 

(107)

 

 

5,944 

Asset-backed securities-private label

 

 

 -

 

 

136 

 

 

 -

 

 

136 

Asset-backed securities-government sponsored entities

 

 

22 

 

 

 

 

 -

 

 

24 

Total Debt Securities Available for Sale

 

$

73,633 

 

$

2,118 

 

$

(415)

 

$

75,336 

Equity Securities

 

 

22 

 

 

24 

 

 

 -

 

 

46 

Total Securities

 

$

73,655 

 

$

2,142 

 

$

(415)

 

$

75,382 









9


 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2020



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

2,010 

 

$

327 

 

$

 -

 

$

2,337 

Municipal bonds

 

 

43,466 

 

 

1,430 

 

 

(3)

 

 

44,893 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

16 

 

 

 -

 

 

 -

 

 

16 

Collateralized mortgage obligations-government sponsored entities

 

 

22,527 

 

 

549 

 

 

(25)

 

 

23,051 

Government National Mortgage Association

 

 

116 

 

 

11 

 

 

 -

 

 

127 

Federal National Mortgage Association

 

 

4,209 

 

 

130 

 

 

 -

 

 

4,339 

Federal Home Loan Mortgage Corporation

 

 

4,143 

 

 

152 

 

 

(2)

 

 

4,293 

Asset-backed securities-private label

 

 

 -

 

 

147 

 

 

 -

 

 

147 

Asset-backed securities-government sponsored entities

 

 

27 

 

 

 

 

 -

 

 

30 

Total Debt Securities Available for Sale

 

$

76,514 

 

$

2,749 

 

$

(30)

 

$

79,233 

Equity Securities

 

 

22 

 

 

30 

 

 

 -

 

 

52 

Total Securities

 

$

76,536 

 

$

2,779 

 

$

(30)

 

$

79,285 



Debt Securities

All of our collateralized mortgage obligations are backed by one- to four-family residential mortgages.

At March 31, 2021 and December 31, 2020, thirty-one municipal bonds with a cost of $10.8 million and fair value of $11.2 million were pledged under a collateral agreement with the Federal Reserve Bank (“FRB”) of New York for liquidity borrowing. In addition, at March 31, 2021 twenty municipal bonds with a cost of $6.0 million and fair value of $6.2 million were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2020, sixteen municipal bonds with a cost of $4.2 million and fair value of $4.4 million were pledged as collateral for customer deposits in excess of the FDIC insurance limits.                

10


 

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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Less than 12 months

 

12 months or more

 

Total



 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross



 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized



 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses



 

(Dollars in thousands)

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

8,818 

 

 

(148)

 

$

 -

 

$

 -

 

$

8,818 

 

$

(148)

Mortgage-backed securities

 

 

8,539 

 

 

(266)

 

 

37 

 

 

(1)

 

 

8,576 

 

 

(267)



 

$

17,357 

 

$

(414)

 

$

37 

 

$

(1)

 

$

17,394 

 

$

(415)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

539 

 

 

(3)

 

$

 -

 

$

 -

 

$

539 

 

$

(3)

Mortgage-backed securities

 

 

7,166 

 

 

(26)

 

 

76 

 

 

(1)

 

 

7,242 

 

 

(27)



 

$

7,705 

 

$

(29)

 

$

76 

 

$

(1)

 

$

7,781 

 

$

(30)



The Company reviews all investment securities on an ongoing basis for the presence of other-than-temporary-impairment (“OTTI”) with formal reviews performed quarterly.   



At March 31, 2021, the Company’s investment portfolio included thirty-three securities in the “unrealized losses less than twelve months” category and one security in the “unrealized losses twelve months or more” category. Management has the intent and ability to hold these securities until maturity. Management believes 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. The unrealized losses on debt securities shown in the previous tables were recorded as a component of other comprehensive income, net of tax expense on the Company’s consolidated statements of stockholders’ equity.



The following table presents a summary of the credit-related OTTI charges recognized as components of income:



 

 

 

 

 

 



 

For The Three Months Ended March 31,



 

2021

 

2020



 

(Dollars in thousands)

Beginning balance

 

$

221 

 

$

294 

Additions:

 

 

 

 

 

 

Credit loss not previously recognized

 

 

 -

 

 

 -

Reductions:

 

 

 

 

 

 

Losses realized during the period on OTTI previously recognized

 

 

 -

 

 

 -

Receipt of cash flows on previously recorded OTTI

 

 

(21)

 

 

(16)

Ending balance

 

$

200 

 

$

278 



A deterioration in credit quality and/or other factors that may limit the liquidity of a security in our portfolio might adversely affect the fair values of the Company’s investment portfolio and may increase the potential that certain unrealized losses will be designated as “other-than-temporary” and that the Company may incur additional write-downs in future periods.



During the three months ended March 31, 2021 and 2020, the Company did not sell any debt securities.  



11


 

Scheduled contractual maturities of debt securities are as follows:





 

 

 

 

 

 



 

Amortized

 

Fair



 

Cost

 

Value



 

(Dollars in thousands)

March 31, 2021:

 

 

 

 

 

 

Less than one year

 

$

665 

 

$

678 

After one year through five years

 

 

5,419 

 

 

5,434 

After five years through ten years

 

 

10,252 

 

 

10,578 

After ten years

 

 

28,355 

 

 

29,126 

Mortgage-backed securities

 

 

28,920 

 

 

29,360 

Asset-backed securities

 

 

22 

 

 

160 



 

$

73,633 

 

$

75,336 



Equity Securities



At March 31, 2021 and December 31, 2020, equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock. During the three months ended March 31, 2021 and 2020, the Company recognized an unrealized loss of $6,000 and $36,000, 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 three months ended March 31, 2021 and 2020.

              

Note 5 - Allowance for Loan Losses



Management segregates the loan portfolio into loan types and analyzes the risk level for each loan type when determining its allowance for loan losses.  The loan types are as follows:



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 ensure that its one- to four-family residential mortgage loans generally conform to secondary market guidelines.  

·

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.

·

Construction – are loans to finance the construction of either one- to four-family owner occupied homes or commercial real estate.  At the end of the construction period, the loan automatically converts to either a one- to four-family or commercial 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

12


 

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.  Construction loans also expose us to the risk of construction delays which may impair the borrower’s ability to repay the loan. 



Other Loans:

·

Commercial – includes business installment loans, lines of credit, and other commercial loans.  Most of our commercial loans have fixed interest rates, and 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.



The allowance for loan losses is a valuation account that reflects the Company’s evaluation of the losses inherent in its loan portfolio. In order to determine the adequacy of the allowance for loan losses, the Company estimates losses by loan type using historical loss factors, as well as other environmental factors, such as trends in loan volume and loan type, loan concentrations, changes in the experience, ability and depth of the Company’s lending management, and national and local economic conditions. The Company's determination as to the classification of loans and the amount of loss allowances are subject to review by bank regulators, which can require the establishment of additional loss allowances.



The Company also reviews all loans on which the collectability of principal may not be reasonably assured, by reviewing payment status, financial conditions and estimated value of loan collateral. These loans are assigned an internal loan grade, and the Company assigns an amount of loss allowances to these classified loans based on loan grade.