Lake Shore Bancorp(LSBK) - 2022 Q4 - Annual Report

Loan Performance and Composition - Lake Shore Bancorp's total loans outstanding increased to $576.7 million at the end of 2022, up from $519.8 million at the end of 2021, representing an increase of approximately 10.9%[45] - Total loan originations for 2022 were $157.2 million, a decrease of 6.7% compared to $168.6 million in 2021[45] - The company reported principal repayments totaling $98.7 million in 2022, down from $161.5 million in 2021, indicating a significant reduction of approximately 38.8%[45] - The loan portfolio composition includes $175.9 million in residential loans, $53.1 million in home equity loans, and $304.0 million in commercial loans as of December 31, 2022[42] - As of December 31, 2022, commercial real estate loans totaled $304.0 million, representing 52.7% of the total loan portfolio[47] - Multi-family apartment complexes accounted for 47.4% of the commercial real estate loan portfolio, totaling $156.2 million[47] - Construction loans amounted to $22.9 million, or 4.0% of the total loan portfolio as of December 31, 2022[52] - One- to four-family residential loans totaled $175.9 million, representing 30.5% of the total loan portfolio[55] - Home equity loans and lines of credit reached $53.1 million, accounting for 9.2% of the total loan portfolio[67] - Commercial business loans totaled $19.6 million, or 3.4% of the total loan portfolio as of December 31, 2022[71] - Jumbo loans amounted to $8.0 million, representing 4.6% of the one- to four-family residential mortgage portfolio[59] - The company sold $1.3 million of fixed-rate, conforming long-term residential mortgage loans during 2022 to manage interest rate risk[58] - The company has begun selling long-term, lower-yielding fixed-rate residential mortgages at origination in the secondary market[55] - At December 31, 2022, home equity loans where the company does not hold the first mortgage represented 31.3% of the outstanding principal within the home equity loan portfolio[68] - As of December 31, 2022, consumer loans totaled $1.2 million, representing less than 1% of the total loan portfolio[73] - Sold participations in commercial real estate loans amounted to $20.7 million, while commercial business loans totaled $258,000 as of December 31, 2022[75] Regulatory and Compliance Issues - The company is subject to regulatory oversight by the Federal Reserve Board and the Office of the Comptroller of the Currency, which impacts its operational strategies[22] - The company has been designated as being in "Troubled Condition" by the OCC, requiring prior notification for board member changes and certain severance payments[136] - A Consent Order was entered into with the OCC on February 9, 2023, mandating the establishment of a compliance committee and a written strategic plan for the Bank[134] - The company is subject to periodic examination by the OCC to ensure compliance with capital adequacy, asset quality, and other regulatory standards[140] - The bank's capital distribution is governed by federal regulations, requiring applications to be filed with the OCC prior to any dividend payments[152] - The Board of Directors has suspended quarterly dividend payments to focus capital resources on operational and compliance issues[154] - The Bank is under a Consent Order with the OCC due to deficiencies in information technology, security, and compliance, which may increase non-interest expenses and adversely affect financial performance[199] - The Bank's ability to pay dividends has been suspended by the Board of Directors to focus on addressing operational and compliance deficiencies[208] - The Bank must create a compliance committee to oversee adherence to the Consent Order and submit monthly reports to the Board and the OCC[202] - The Bank is expected to face increased costs due to remediation actions required by the Consent Order, which may burden management and internal resources[203] - Changes in laws and regulations may adversely affect the Bank's operations and increase compliance costs[207] Asset Quality and Loan Loss Allowance - The allowance for loan losses is maintained through provisions charged to income, reflecting the evaluation of inherent losses in the loan portfolio[92] - The company has a high level of asset quality, with a significant proportion of loans collateralized by stable property values in Western New York[81] - Loans classified as "Substandard" indicate defined weaknesses, while "Doubtful" loans have characteristics making full collection highly questionable[89] - The company may require additional loss allowances based on regulatory reviews of the allowance for loan losses[94] - Troubled debt restructurings (TDRs) occur when concessions are granted to borrowers facing financial difficulties, impacting the allowance for loan losses[87] - The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors[95] - Non-performing loans are reviewed periodically, with management determining impairment based on the borrower's financial condition[84] - As of December 31, 2022, the total allocated allowance for loan losses was $6.93 million, representing 98.1% of the total allowance, compared to $5.89 million (96.3%) in 2021[98] - The commercial real estate loans allowance increased to $5.40 million (76.4% of total allowance) in 2022 from $4.38 million (71.5%) in 2021, indicating a rise in risk assessment[98] - The total unallocated allowance for loan losses decreased to $135,000 in 2022 from $224,000 in 2021, reflecting improved credit quality[98] Capital and Funding Strategy - The company's Tier 1 Leverage capital ratio was 12.40% and Total Risk-Based capital ratio was 18.09% as of December 31, 2022, indicating compliance with the Individual Minimum Capital Requirement[137] - The company is required to maintain a Tier 1 Leverage capital ratio of 10% and a Total Risk-Based capital ratio of 13% as per the Individual Minimum Capital Requirement[137] - The bank's deposits at December 31, 2022, included $8.1 million in the IntraFi Network Deposits program, down from $13.4 million in 2021, indicating a shift in funding strategy[116] - Time deposits with remaining terms to maturity of less than one year amounted to $78.5 million in 2022, an increase from $72.6 million in 2021[119] - As of December 31, 2022, the company had $82.5 million in uninsured deposits exceeding the FDIC insurance limit of $250,000, down from $106.8 million in 2021[120] - The company reported $28.3 million in time deposits with balances of $250,000 or more, with $17.9 million maturing over twelve months[120] - At December 31, 2022, the company had $12.6 million in short-term borrowings and $25.0 million in long-term debt from the FHLBNY, compared to $22.0 million in long-term debt in 2021[120] Employee and Operational Strategies - The company employs 113 full-time and 7 part-time employees, with a focus on employee development and retention through educational opportunities and a comprehensive benefits package[127][129] - The bank's investment policy is reviewed and approved annually by the Board of Directors, ensuring compliance with risk management guidelines[100] - The bank's classification of investments includes two private-label asset-backed securities with a fair value of $96,000 as of December 31, 2022, reflecting ongoing credit risk assessments[109] Community and Market Position - The company anticipates continued lending opportunities driven by economic growth in the Western New York region, despite challenges posed by the COVID-19 pandemic[31] - Lake Shore Bancorp's market area includes approximately 1.0 million residents in Erie and Chautauqua Counties, with a diverse economic base and significant investment in healthcare and education sectors[28] - The company faces intense competition from various financial institutions, including commercial banks and online service providers, which may impact its growth and profitability[36] - Lake Shore Savings Bank received an "outstanding" rating in its most recent Community Reinvestment Act examination[162]