Lake Shore Bancorp(US:LSBK)2024-03-22 21:05Stock Information - Lake Shore Bancorp's common stock is traded on the Nasdaq Global Market under the symbol "LSBK" with 63.96% of shares held by Lake Shore, MHC as of December 31, 2023[18]. Loan Portfolio - The loan portfolio totals $558.536 million, with $172.005 million in residential one- to four-family loans and $316.986 million in commercial loans[44]. - The company retains the majority of loans originated, with a focus on fixed-rate and adjustable-rate mortgage loans[41]. - The loan maturity table indicates that a significant portion of loans is due beyond 15 years, totaling $152.976 million[44]. - Total loans outstanding at the end of 2023 were $558.5 million, a decrease of 3.1% from $576.7 million in 2022[46]. - Total loan originations for 2023 were $56.3 million, down 64.1% from $157.2 million in 2022[46]. - Commercial real estate loans totaled $300.5 million, representing 53.8% of the total loan portfolio as of December 31, 2023[46]. - One- to four-family residential loans amounted to $172.0 million, accounting for 30.8% of the total loan portfolio[54]. - Home equity loans and lines of credit reached $51.9 million, making up 9.3% of the total loan portfolio[65]. - Construction loans totaled $16.4 million, representing 2.9% of the total loan portfolio[52]. - Jumbo loans totaled $5.7 million, or 3.3% of the one- to four-family residential mortgage portfolio[58]. - As of December 31, 2023, commercial business loans totaled $16.5 million, representing 3.0% of the total loan portfolio[67]. - Consumer loans amounted to $1.1 million, accounting for 0.2% of the total loan portfolio, with a decline in volume due to borrowers opting for home equity lines of credit[69]. Economic Environment - The primary market area includes Erie and Chautauqua Counties, with a combined population of approximately 1.1 million as of July 1, 2022[30]. - The company anticipates continued lending opportunities driven by economic growth in the region, despite the impact of the COVID-19 pandemic[33]. - Competition for loans and deposits is intense, with significant pressure from both traditional banks and online service providers[37]. - The local economies served are diversified, with principal employment sectors including service-related industries, wholesale and retail trade, and durable-goods manufacturing[34]. - Local economic conditions in Western New York, particularly in Erie and Chautauqua counties, are critical for future growth, with risks associated with population and income levels[206]. - As of December 31, 2023, the year-over-year consumer price index (CPI) increase was 3.4%, leading to a 100 basis points interest rate hike by the Federal Reserve in 2023[207]. - High inflation and rising interest rates may adversely affect loan demand and borrowers' repayment ability, impacting overall business performance[207]. Asset Quality and Credit Losses - The company maintains a high level of asset quality, with a focus on commercial real estate and one- to four-family residential mortgage loans[77]. - The allowance for credit losses on loans and unfunded commitments is a valuation allowance for expected credit losses, reviewed quarterly[87]. - The company adopted ASU 2016-13 (Topic 326) on January 1, 2023, replacing the incurred loss methodology with CECL for financial instruments[87]. - Loans classified as "Substandard" indicate potential loss if deficiencies are not corrected, while "Doubtful" loans have a high likelihood of non-collection[85]. - Non-performing loans are evaluated individually, and losses are recorded against the allowance for credit losses when collection is deemed unlikely[80]. - As of December 31, 2023, the total allocated allowance for credit losses was $6,463,000, a decrease from $6,930,000 in 2022, representing a 6.7% decline[92]. - The commercial real estate loans accounted for 81.0% of the total allowance in 2023, slightly down from 81.3% in 2022[92]. - The total unallocated allowance for credit losses was $0 as of December 31, 2023, compared to $135,000 (1.9% of total allowance) in 2022[92]. Deposits and Funding - The total deposits in the IntraFi Network Deposits program rose to $12.9 million in 2023 from $8.1 million in 2022, reflecting a 59.3% increase[109]. - Brokered time deposits increased significantly to $16.0 million in 2023 from $1.7 million in 2022, indicating a substantial growth of 841.2%[109]. - The total time deposit accounts amounted to $150,502,000 as of December 31, 2023, compared to $152,958,000 in 2022, showing a slight decrease of 1.6%[112]. - Uninsured deposits in excess of the FDIC insurance limit of $250,000 were $75.7 million, or 12.8% of total deposits, compared to $82.5 million, or 16.6% in 2022[113]. Regulatory Compliance and Governance - The Bank has been designated as being in "Troubled Condition" and must notify the OCC prior to changes in senior executive officers or board members[128]. - A Consent Order was entered into with the OCC on February 9, 2023, requiring the Bank to create a compliance committee and develop a corporate governance program[126]. - The Bank 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[129]. - The Bank's non-interest expenses are expected to remain elevated due to the Agreement with the Federal Reserve Bank of Philadelphia and the Consent Order[132]. - The Bank's management is committed to addressing compliance issues outlined in the Order and the Agreement with the Federal Reserve Bank[194]. - The Bank's BSA/AML compliance programs have been cited for deficiencies, which could lead to additional sanctions and operational restrictions[195]. - Lake Shore Savings is in compliance with Regulation O regarding extensions of credit to insiders, ensuring adherence to federal regulations[161]. - The bank is required to notify its primary federal regulator within 36 hours of a significant computer-security incident, as per the final rule effective April 1, 2022[163]. Capital and Dividends - Lake Shore, MHC is soliciting members to vote on a proposal to waive dividends aggregating up to $0.72 per share, with a special meeting scheduled for April 2, 2024[183]. - The Federal Reserve Board may restrict the ability of Lake Shore, MHC to pay dividends if a subsidiary bank becomes undercapitalized[182]. - The company announced the suspension of quarterly dividend payments on February 15, 2023, pending approval from the Federal Reserve Board to resume payments[183]. - Lake Shore Bancorp's ability to pay dividends is significantly influenced by Lake Shore Savings' capacity to make capital distributions[198]. - The Bank's ability to distribute capital is limited to net income for the current and prior two calendar years under OCC regulations[199]. - The ability to pay dividends to stockholders may be significantly impaired if the Federal Reserve Board does not grant the dividend waiver request[203]. Cybersecurity and Data Security - The company experienced a data security incident in November 2021, which led to increased operating costs and the implementation of additional security measures[210]. - Ongoing expenses related to cybersecurity enhancements and hiring key personnel have been incurred as a result of the 2021 incident[213]. - The company relies heavily on information systems, making it vulnerable to potential breaches that could harm reputation and financial condition[214]. - Future incidents could have a material adverse effect on business operations and financial results, leading to increased regulatory scrutiny and potential liabilities[214].