Lake Shore Bancorp(LSBK) - 2021 Q4 - Annual Report

Loan Performance - Lake Shore Bancorp's total loans outstanding at the end of 2021 were $519.779 million, a decrease from $526.632 million at the end of 2020, reflecting a reduction of approximately 1.6%[45] - The company originated a total of $168.609 million in loans during 2021, compared to $188.473 million in 2020, indicating a decline of about 10.5% year-over-year[45] - Principal repayments for total loans in 2021 amounted to $161.462 million, up from $114.156 million in 2020, representing an increase of approximately 41.5%[45] - The loan portfolio composition includes $158.826 million in residential one-to four-family loans and $266.525 million in commercial loans as of December 31, 2021[42] - The company originated $50.081 million in residential one- to four-family loans in 2021, an increase from $43.802 million in 2020, reflecting a growth of approximately 5.8%[45] - The company reported a significant increase in commercial loan originations, with $47.333 million in 2021 compared to $58.403 million in 2020, a decrease of about 19%[45] - As of December 31, 2021, commercial real estate loans totaled $266.5 million, representing 51.3% of the total loan portfolio[47] - Multi-family apartment complexes collateralized loans made up 44.7% of the commercial real estate loan portfolio, totaling $119.0 million[47] - Construction loans amounted to $21.8 million, or 4.2% of the total loan portfolio, as of December 31, 2021[52] - One- to four-family residential loans totaled $158.8 million, representing 30.6% of the total loan portfolio[55] - Home equity loans and lines of credit totaled $48.0 million, accounting for 9.2% of the total loan portfolio[67] - Commercial business loans reached $23.2 million, or 4.5% of the total loan portfolio, as of December 31, 2021[71] - Jumbo loans totaled $10.0 million, representing 6.3% of the one- to four-family residential mortgage portfolio[59] Risk Management - The company sold $13.0 million of long-term fixed-rate residential mortgage loans in 2021 to mitigate long-term interest rate risk[46] - The company retains the majority of loans originated, but sells residential mortgage loans into the secondary market to manage interest rate risk[38] - The allowance for loan losses reflects the evaluation of losses inherent in the loan portfolio, with provisions charged to income[96] - The allowance for loan losses at the end of 2021 was $6,118,000, an increase from $5,857,000 at the end of 2020[102] - The allocated component of the allowance for loan losses was $5,894,000, representing 96.3% of the total allowance, while the unallocated component was $224,000, or 3.7%[102] - The commercial real estate loans accounted for 71.5% of the total allowance for loan losses in 2021, up from 69.2% in 2020[102] Economic Environment - The local economy's growth, particularly in Erie and Chautauqua counties, is crucial for the company's future growth possibilities, as it significantly depends on population, income levels, deposits, and housing starts[200] - The COVID-19 pandemic has had a significant economic impact on the communities where the company operates, affecting borrowers and depositors, with ongoing volatility expected[201][202] - High inflation levels are currently affecting the national economy, with the consumer price index increasing to 7.0% in 2021, which could adversely impact the company's business and results of operations[203] - Changes in the Federal Reserve Board's monetary or fiscal policies could negatively affect the company's results of operations and financial condition, as these policies influence bank loans, investments, and deposits[204] Compliance and Regulations - The company must comply with the Truth in Lending Act and other federal laws governing credit transactions and consumer protection[183] - Lake Shore Savings is classified as "well-capitalized" with at least 5% leverage capital and 6.5% common equity Tier 1 risk-based capital[155] - Lake Shore Savings Bank is in compliance with the loans-to-one borrower limitations, which restrict loans to a single borrower to 15% of unimpaired capital and surplus[158] - The bank maintained a liquidity ratio of liquid assets not subject to pledge as a percentage of deposits and borrowings of 15% or greater[165] - The company has exercised a one-time opt-out regarding the inclusion of unrealized gains and losses on certain "available-for-sale" securities for regulatory capital calculations[145] - The minimum capital standards require a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, with a well-capitalized status requiring a CET1 ratio of 6.5%[144] Employee and Operational Policies - The company employed 104 full-time and 3 part-time employees, with 21.1% having been employed for 15 years or longer[131] - The company has implemented safety protocols to ensure employee safety during the COVID-19 pandemic, prioritizing health and wellness[133] - The company provides a comprehensive benefits package, including health, dental, life, and disability insurance, along with a generous paid time off policy[134] Cybersecurity and Data Security - A data security incident in November 2021 led to unauthorized access to certain data, prompting the company to enhance its security measures and notify affected customers[207][209] - The company maintains insurance coverage, including cybersecurity insurance, but the coverage may not fully cover all losses incurred from incidents like the November 2021 breach[208] - The company relies heavily on communications and information systems, making it vulnerable to hardware and cybersecurity issues, which could lead to operational impairments and financial losses[210]