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, 2025
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)
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).
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 5,759,172 shares of the registrant’s common stock, $0.01 par value per share, outstanding at May 12, 2025.
TABLE OF CONTENTS
ITEM
PART I
PAGE
1
FINANCIAL STATEMENTS
-
Consolidated Statements of Financial Condition as of March 31, 2025 (Unaudited) and December 31, 2024
Consolidated Statements of Income for the Three Months Ended March 31, 2025 and 2024 (Unaudited)
2
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2025 and 2024 (Unaudited)
3
Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2025 and 2024 (Unaudited)
4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2025 and 2024 (Unaudited)
5
Notes to Unaudited Consolidated Financial Statements
6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
41
CONTROLS AND PROCEDURES
PART II
1A
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
42
OTHER INFORMATION
EXHIBITS
SIGNATURES
43
PART I Financial Information
Item 1. Financial Statements
Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
March 31,
December 31,
2025
2024
(Dollars in thousands, except share data)
(Unaudited)
Assets
Cash and due from banks
$
2,841
2,710
Interest earning deposits
27,587
30,421
Cash and Cash Equivalents
30,428
33,131
Securities, at fair value
55,801
56,495
Federal Home Loan Bank stock, at cost
876
1,157
Loans receivable, net of allowance for credit losses of $5,170 in 2025 and $5,133 in 2024
551,640
544,620
Premises and equipment, net
7,338
7,218
Accrued interest receivable
2,930
2,819
Bank-owned life insurance
29,556
29,340
Other assets
10,427
10,724
Total Assets
688,996
685,504
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Interest bearing
493,005
476,566
Non-interest bearing
89,725
96,412
Total Deposits
582,730
572,978
Long-term debt
4,000
10,250
Advances from borrowers for taxes and insurance
2,323
3,225
Other liabilities and accrued interest payable
9,281
9,183
Total Liabilities
598,334
595,636
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,836,514 shares issued and 5,760,272 shares outstanding at March 31, 2025 and 6,836,514 shares issued and 5,735,226 shares outstanding at December 31, 2024
68
Additional paid-in capital
31,537
31,512
Treasury stock, at cost (1,076,242 shares at March 31, 2025 and 1,101,288 shares at December 31, 2024)
(13,083
)
(13,304
Unearned shares held by ESOP
(917
(938
Unearned shares held by compensation plans
(493
(311
Retained earnings
83,501
82,805
Accumulated other comprehensive loss
(9,951
(9,964
Total Stockholders' Equity
90,662
89,868
Total Liabilities and Stockholders' Equity
See notes to unaudited consolidated financial statements.
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31,
(Dollars in thousands, except per share data)
Interest Income
Loans, including fees
7,752
7,586
Investment securities, taxable
164
208
Investment securities, tax-exempt
217
Interest-earning deposits
234
598
Total Interest Income
8,367
8,609
Interest Expense
Deposits
2,842
3,244
50
220
Finance lease
10
12
Total Interest Expense
2,902
3,476
Net Interest Income
5,465
5,133
Provision (Credit) for Credit Losses
48
(352
Net Interest Income After Provision (Credit) for Credit Losses
5,417
5,485
Non-Interest Income
Service charges and fees
237
265
Debit card fees
187
195
Earnings on bank-owned life insurance
216
215
Unrealized gain on equity securities
46
11
Recovery on previously impaired investment securities
—
Earnings on annuity assets
22
Other
15
21
Total Non-Interest Income
724
707
Non-Interest Expense
Salaries and employee benefits
2,915
2,757
Occupancy and equipment
676
703
Professional services
314
327
Data processing
459
453
Telephone and communications
92
103
FDIC insurance
72
279
Postage and supplies
80
75
Advertising
51
259
247
Total Non-Interest Expense
4,878
4,995
Income before Income Taxes
1,263
1,197
Income Tax Expense
206
183
Net Income
1,057
1,014
Basic and diluted earnings per common share
0.19
0.17
Dividends declared per share
0.18
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
Other Comprehensive Income (Loss), net of tax (expense) benefit:
Unrealized holding gains (losses) on securities available for sale, net of tax (expense) benefit
14
(798
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income, net of tax expense
(1
Total Other Comprehensive Income (Loss)
13
Total Comprehensive Income
1,070
Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2025 and 2024 (Unaudited)
Unearned
Unearned Shares
Accumulated
Additional
Shares
Held by
Common
Paid-In
Treasury
Compensation
Retained
Comprehensive
Stock
Capital
ESOP
Plans
Earnings
Loss
Total
Balance - January 1, 2025
Net income
Other comprehensive income, net of tax expense of $3
ESOP shares earned (1,984 shares)
31
Compensation plan shares granted (27,197 shares)
256
(256
Compensation plan shares earned, net of forfeitures (7,813 shares)
74
89
Cash dividends declared ($0.18 per share)
(361
Common stock repurchased on vesting for payroll taxes (2,151 shares)
(35
Balance - March 31, 2025
Balance - January 1, 2024
31,456
(13,760
(1,023
(39
78,956
(9,385
86,273
Other comprehensive loss, net of tax benefit of $211
23
Compensation plan shares earned, net of forfeitures (1,086 shares)
Common stock repurchased on vesting for payroll taxes (1,504 shares)
(17
Balance - March 31, 2024
31,463
(13,777
(1,002
(29
79,970
(10,183
86,510
Consolidated Statements of Cash Flows (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of investment securities
18
Net amortization of deferred loan costs
63
124
Provision (Credit) for credit losses
(46
(11
Depreciation and amortization of premises and equipment
156
194
Deferred income tax (benefit) expense
(92
73
Increase in annuity asset
(22
Increase in cash surrender value of bank-owned life insurance
(216
(215
ESOP shares committed to be released
Stock based compensation expense
Increase in accrued interest receivable
(111
(148
Increase in other assets
(243
(141
Impairment of foreclosed real estate
8
Decrease in other liabilities
(13
(634
Net Cash Provided by (Used In) Operating Activities
718
(32
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in debt securities:
Maturities, prepayments and calls
739
743
Redemptions of Federal Home Loan Bank of New York Stock
281
450
Loan principal collections and originations, net
(7,122
601
Proceeds from claim on and surrender of bank-owned life insurance
651
6,585
Proceeds from sale of foreclosed real estate
37
Additions to premises and equipment
(150
(5
Net Cash (Used in) Provided by Investing Activities
(5,601
8,411
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
9,752
3,780
Net decrease in advances from borrowers for taxes and insurance
(902
(897
Repayment of long-term debt
(6,250
(10,000
Repayment of finance lease obligation
(24
Shares of common stock repurchased on vesting for payroll taxes
Cash dividends paid
Net Cash Provided by (Used in) Financing Activities
2,180
(7,156
Net (Decrease) Increase in Cash and Cash Equivalents
(2,703
1,223
CASH AND CASH EQUIVALENTS - BEGINNING
53,730
CASH AND CASH EQUIVALENTS - ENDING
54,953
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid
2,918
3,979
Income taxes paid
55
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain (loss) on securities available for sale
17
(1,009
Accrued purchases of property and equipment
240
Note 1 – Basis of Presentation and Significant Accounting Policies and Estimates
The interim unaudited consolidated financial statements include the accounts of Lake Shore Bancorp, Inc. (the “Company”, "Lake Shore Bancorp," “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 unaudited consolidated financial statements included herein as of March 31, 2025 and for the three months ended March 31, 2025 and 2024 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), 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 balance sheet at December 31, 2024 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 unaudited 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, 2024. The consolidated statements of income for the three months ended March 31, 2025 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2025.
The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 2 of the audited consolidated financial statements and notes thereto for the year ended December 31, 2024 and are contained in the Company's 2024 Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2024, other than the change in accounting estimate described below.
To prepare these unaudited 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 credit losses, securities valuation estimates, and income taxes.
Changes in Accounting Estimates
During the first quarter of 2025, the Company transitioned its allowance for credit losses ("ACL") methodology for loans and unfunded commitments from a vintage model to a discounted cash flow model for all loan segments and loans that are not individually evaluated. In particular, loan-level probability of default ("PD") and loss severity (also referred to as loss given default ("LGD")) is applied to derive a baseline expected loss as of the valuation date. These expected default and severity rates, which are regression-derived and based on benchmark historical performance data, are calibrated to incorporate the Company's reasonable and supportable forecasts of future losses as well as any necessary qualitative adjustments. The loan segments utilized in the discounted cash flow model are consistent with those used in the vintage model and previously disclosed by the Company.
The Company relies on benchmark and peer data when deriving its best estimate of PD, LGD, and other model assumptions, including prepayment and curtailment speeds, with consideration given to a bank's size and geographical region in relation to the Company's when included within respective peer data sets. As part of the Company's estimation process, it assesses the reasonableness of data, assumptions, and model methodology utilized to derive its allowance for credit losses.
For each of the modeled segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for various elements including, but not limited to, estimated prepayment speeds, curtailment rates,
PD rates, and LGD rates. The Company utilizes national unemployment and gross domestic product ("GDP") forecasts calibrated to peer benchmark data for its reasonable and supportable forecasting of expected default within the cash flow model. To further adjust the allowance for credit losses for expected losses not already reflected within the quantitative component of the calculation, the Company considers qualitative factors for current conditions known as of the valuation date, including, but not limited to, trends in the nature and volume of the loan portfolio, loan concentrations, changes in the experience, ability and depth of the Company’s lending management, and national and local economic conditions.
The allowance for credit losses is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that the Company believes do not share risk characteristics are evaluated on an individual basis. Non-accrual loans are individually evaluated and when deemed appropriate, are assigned a reserve based on such evaluation, which may be determined by the underlying collateral value or the loan-level estimated discounted cash flows. The Company considers several factors in its determination of whether to classify loans as collateral-dependent and individually evaluate such loans. When loans are considered to be collateral-dependent, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
These refinements have been accounted for as changes in accounting estimates under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250 - Accounting Changes and Error Corrections, with prospective application beginning in the period of change.
These changes, along with attribution changes in the Bank's loan portfolio as of the valuation date, resulted in a $37,000 increase in the ACL for loans and a $9,000 increase in the reserve for unfunded commitments at March 31, 2025 when compared to December 31, 2024.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2025 for items that should potentially be recognized or disclosed in the unaudited consolidated financial statements. The evaluation was conducted through the date these unaudited consolidated financial statements were issued.
As previously disclosed on a Current Report on Form 8-K, Lake Shore, MHC and the Company adopted an Amended and Restated Plan of Conversion and Reorganization of Lake Shore, MHC, pursuant to which Lake Shore, MHC will undertake a "second-step" conversion and the Bank will reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure, whereby Lake Shore, MHC will cease to exist and a newly-chartered stock holding company (the "New Bank Holding Company") will succeed to Lake Shore Bancorp as the stock holding company of Lake Shore Savings Bank. On May 14, 2025, the U.S. Securities and Exchange Commission declared the New Bank Holding Company’s Registration Statement on Form S-1 effective.
Note 2 – New Accounting Standards
Accounting Standards Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis;
7
however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40)." The amendments in this ASU require a public business entity to disclose additional information about specific expense categories in the notes to the financial statements at interim and annual reporting periods, including employee compensation, depreciation, intangible asset amortization, and other costs and expenses. Additionally, a public business entity must disclose a qualitative description of the amounts remaining in relevant expense captions which are not separately disaggregated quantitatively under the amendments included within this ASU. This ASU is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027. Early adoption of this ASU is permitted and may be applied prospectively to financial statements issued for reporting periods after the effective date of the ASU or retrospectively to any period presented in the financial statements.
Note 3 – Investment Securities
The amortized cost and fair value of securities are as follows:
March 31, 2025
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
SECURITIES
Debt Securities Available for Sale
U.S. government agencies
2,005
(104
1,901
Municipal bonds
40,705
(8,966
31,739
Mortgage-backed securities:
Collateralized mortgage obligations-private label
9
Collateralized mortgage obligations-government sponsored entities
9,814
(1,139
8,675
Government National Mortgage Association
53
(2
Federal National Mortgage Association
10,572
(1,526
9,046
Federal Home Loan Mortgage Corporation
5,114
(883
4,231
Asset-backed securities-private label
28
Asset-backed securities-government sponsored entities
Total Debt Securities Available for Sale
68,273
(12,620
55,681
Equity Securities
98
120
Total Securities
68,295
126
December 31, 2024
2,006
(155
1,851
40,719
(8,431
32,288
10,201
(1,259
8,942
54
(4
10,812
(1,799
9,013
5,229
(989
4,240
69,031
(12,637
56,422
69,053
79
Debt Securities
All of the Company's collateralized mortgage obligations are backed by one- to four-family residential mortgages.
At March 31, 2025 and December 31, 2024, seventeen municipal bonds with an amortized cost of $5.2 million and fair value of $3.8 million and eighteen municipal bonds with an amortized cost of $6.2 million and fair value of $4.6 million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At March 31, 2025 and December 31, 2024, no securities were pledged as collateral to the Federal Reserve Bank ("FRB") or the Federal Home Loan Bank of New York ("FHLBNY").
The following table sets forth the Company’s investment in available for sale debt securities with gross unrealized losses of less than twelve months and gross unrealized losses of twelve months or more and associated fair values for which an allowance for credit losses has not been recorded for the periods indicated:
Less than 12 months
12 months or more
Fair Value
362
(18
31,377
(8,948
Mortgage-backed securities
21,928
(3,550
55,206
(12,602
55,568
371
(9
31,917
(8,422
86
22,168
(4,050
22,254
(4,051
457
(10
55,936
(12,627
56,393
As of March 31, 2025, the Company's investment portfolio included two debt securities in the "unrealized losses less than twelve months" category and 169 debt securities in the "unrealized losses twelve months or more" category. As of
December 31, 2024, the Company's investment portfolio included seven debt securities in the "unrealized losses less than twelve months" category and 169 debt securities in the "unrealized losses twelve months or more" category.
As of March 31, 2025, the Company had 171 debt securities with a fair value of $55.6 million in an unrealized loss position. As of December 31, 2024, the Company had 176 debt securities with a fair value of $56.4 million in an unrealized loss position. The Company reviews securities in an unrealized loss position to evaluate credit risk. The Company considers payment history, risk ratings from external parties, financial statements for municipal and corporate securities, public statements from issuers and other available credible published sources in evaluating credit risk. No credit risk was found and no allowance for credit losses on securities available for sale was recorded as of March 31, 2025 or December 31, 2024. The unrealized losses are attributed to noncredit-related factors including changes in interest rates and other market conditions. The Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of the investments. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
Accrued interest of $316,000 as of March 31, 2025 and $254,000 as of December 31, 2024 on available-for-sale debt securities is included in accrued interest receivable on the consolidated statements of financial condition and is excluded from the estimate of credit losses.
During the three months ended March 31, 2025 and 2024, the Company did not sell any debt securities.
Scheduled contractual maturities of debt securities are as follows:
March 31, 2025:
Less than one year
297
293
After one year through five years
1,780
1,685
After five years through ten years
10,754
9,493
After ten years
29,879
22,169
25,562
22,012
Asset-backed securities
Total Debt Securities
The Company's mortgage-backed securities and asset-backed securities have stated maturities that may differ from actual maturities due to the borrowers' ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying assets and are generally influenced by interest rates. In the table above, mortgage-backed securities and asset-backed securities are shown in the aggregate.
At March 31, 2025 and December 31, 2024, equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock. During the three months ended March 31, 2025 and 2024, the Company recognized an unrealized gain of $46,000 and $11,000, respectively, on the equity securities, which was recorded in non-interest income in the consolidated statements of income. There were no purchases or sales of equity securities during the three months ended March 31, 2025 and 2024.
Note 4 - Loans and Allowance for Credit Losses
Loans consisted of the following segments as of March 31, 2025 and December 31, 2024:
Real Estate Loans:
Residential, one- to four-family (1)
157,880
161,331
Home Equity
47,238
47,456
Commercial (2)
323,546
320,984
Total real estate loans
528,664
529,771
Other Loans:
Commercial
14,794
15,728
Consumer
10,173
991
Total gross loans
553,631
546,490
Net deferred loan costs
3,179
3,263
Allowance for credit losses on loans
(5,170
(5,133
Loans receivable, net
Real estate loans of approximately $107.2 million and $39.4 million in unpaid principal balance were pledged as collateral for FHLBNY advances as of March 31, 2025 and December 31, 2024, respectively.
Total loans are stated at the principal amounts outstanding, net of unamortized loan fees and costs, with interest income accrued based upon the outstanding principal balance and the terms of the loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Loans are reported by the portfolio segments identified above and are analyzed by management on this basis. All loan policies identified below apply to all segments of the loan portfolio.
Accrued interest on loans of $2.6 million and $2.5 million at March 31, 2025 and December 31, 2024, respectively, is included in accrued interest receivable on the consolidated balance sheet and is excluded from the estimate of credit losses.
Allowance for Credit Losses for Loans
The loan portfolio is segmented into the following loan types by risk level:
Included in the Real Estate Loans for one-to four-family and commercial real estate are loans to finance the construction of either a one- to four-family owner occupied home or commercial real estate. At the end of the construction period, the loan automatically converts to either a one- to four-family residential mortgage or a commercial real estate 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 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 or other third party. Construction loans also expose us to the risk of construction delays which may impair the borrower’s ability to repay the loan.
The following tables detail the changes in the allowance for credit losses by loan segment as well as the distribution of the allowance for credit losses and gross loans receivable by loan segment and impairment method at or for the three months ended March 31, 2025 and 2024.
Real Estate Loans
Other Loans
One- to Four-Family(1)
Commercial Real Estate (2)
Allowance for Credit Loss on Loans
390
137
4,171
421
Charge-offs
(7
Recoveries
Provision (credit)
320
(20
26
(290
39
Balance – March 31, 2025
714
117
4,197
131
5,170
Ending balance: individually evaluated
Ending balance: collectively evaluated
5,167
Gross Loans Receivable(3):
Ending balance
1,451
1,337
3,442
156,429
46,587
322,209
10,170
550,189
March 31, 2024
Balance- January 1, 2024
532
213
5,231
471
16
6,463
(8
(Credit) provision
(31
36
(227
(223
Balance – March 31, 2024
504
249
5,004
467
6,237
169,509
50,684
319,964
16,886
1,025
558,068
138
1,242
1,380
169,371
318,722
556,688
The following table summarizes the distribution of the allowance for credit losses and loans receivable by loan segment and impairment method as of December 31, 2024:
Allowance for Credit Losses on Loans
Balance – December 31, 2024
Ending Balance
1,373
161,200
319,742
545,117
Allowance for Credit Losses on Unfunded Loan Commitments
The Company’s allowance for credit losses on unfunded loan commitments is recognized as a liability and included within other liabilities on the unaudited consolidated statements of financial condition, with adjustments to the reserve recognized in (credit) provision for credit losses on the unaudited consolidated statements of income. The Company’s activity in the allowance for credit losses on unfunded loan commitments for the three months ended March 31, 2025 and the three months ended March 31, 2024 was as follows:
For the three months ended March 31, 2025
Balance at December 31, 2024
(Credit) Provision for Credit Losses
Balance at March 31, 2025
323
For the three months ended March 31, 2024
Balance at December 31, 2023
487
(129
Balance at March 31, 2024
358
Non-accrual Loans and Delinquency Status
The following table presents the amortized cost basis of loans on non-accrual status and loans on non-accrual status with no allowance for credit losses recorded. The Company did not have any loans past due 90 days or more and still accruing at March 31, 2025 and December 31, 2024.
Total Non-accrual
Non-accrual with no Allowance for Credit Losses
1,484
1,891
663
683
1,322
1,226
Total loans
3,472
3,804
3,469
There was no interest income recognized on non-accrual loans during the three months ended March 31, 2025 and the three months ended March 31, 2024. The accrual of interest on loans is discontinued when in management’s opinion, the borrower may be unable to meet payments as they become due. A loan does not have to be 90 days delinquent in order to be classified as non-accrual. When interest accrual is discontinued, all unpaid accrued interest is reversed. If ultimate collection of principal is in doubt, all cash receipts on non-accrual loans are applied to reduce the principal balance.
The following tables provide an analysis of past due loans as of the dates indicated:
30-59 Days
60-89 Days
90 Days or More
Total Past
Current
Total Gross Loans
Past Due
Due
Receivable
Residential, one- to four-family(1)
312
341
900
156,980
Home equity
122
57
575
754
46,484
Commercial(2)
10,165
441
305
2,253
2,999
550,632
December 31, 2024:
1,035
454
662
2,151
159,180
318
596
940
46,516
986
1,356
482
2,500
4,338
542,152
Collateral-Dependent Loans
Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk
characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is measured on an individual loan basis based on the difference between the fair value of the loan’s collateral, which is adjusted for liquidation costs, and the amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance for credit losses is required. Refer to Note 8 - Fair Value of Financial Instruments for additional information.
The following table presents an analysis of the amortized cost of collateral-dependent loans of the Company as of March 31, 2025 and December 31, 2024 by collateral type and loan segment:
Residential
Business
Properties
Land
Property
Loans
Residential, one- to four-family
200
1,026
96
2,347
143
343
1,369
There was no allowance for credit losses recorded on the above noted collateral-dependent loans as of March 31, 2025 and December 31, 2024.
Credit Quality Indicators
The Company’s policies provide for the classification of loans as follows:
Each commercial loan is individually assigned a loan classification. The Company’s consumer loans, including residential one- to four-family loans and home equity loans, are classified by using the delinquency status as the basis for classifying these loans. Generally, all consumer loans more than 90 days past due are classified and placed in non-accrual. Such loans that are well-secured and in the process of collection will remain in accrual status.
Asset quality indicators for all loans and the Company’s risk rating process are reviewed on a monthly basis. Risk ratings are updated as circumstances that could affect the repayment of individual loans are brought to management’s attention through an established monitoring process. Written action plans are maintained and reviewed on a quarterly basis for all classified commercial loans. In addition to the Company’s internal process, an outsourced independent credit review
function is in place for commercial and certain consumer loans to further assess assigned risk classifications and monitor compliance with internal lending policies and procedures.
The following table presents gross loans by credit quality indicator by origination year at March 31, 2025 as well as gross charge-offs by year of origination for the three months ended March 31, 2025:
2023
2022
2021
Prior
Revolving Loans
Residential, one-to four-family(1):
Pass
636
5,173
11,184
32,625
26,343
80,237
156,198
Substandard
496
35
1,151
1,682
Doubtful
33,121
26,378
81,388
Current period gross charge-offs
Home Equity(2):
418
100
2,473
2,181
70
495
40,760
46,497
741
41,501
Commercial Real Estate(3):
5,101
36,446
17,738
83,763
39,954
128,549
644
312,195
Special mention
1,390
1,683
9,668
18,031
139,607
Commercial Loans:
3,084
885
1,869
403
1,974
3,231
11,446
140
146
286
2,106
956
3,062
543
4,226
4,187
Consumer Loans:
9,361
224
99
188
203
The following table presents gross loans by credit quality indicator by origination year at December 31, 2024 as well as gross charge-offs by year of origination for the year ended December 31, 2024:
2020
5,554
11,684
33,058
26,594
16,272
66,081
159,243
447
1,377
2,088
33,504
26,859
67,458
102
2,712
2,297
76
34
574
40,899
46,694
762
41,661
33,959
17,498
84,218
41,871
33,021
97,472
308,683
895
1,646
2,541
8,517
9,759
35,158
107,636
3,232
981
1,980
483
349
1,745
2,725
11,496
165
782
1,093
2,183
3,139
648
4,074
4,463
258
118
115
223
228
Modifications with Borrowers Experiencing Financial Difficulty:
Occasionally, the Company modifies loans to borrowers in financial distress by providing modifications to loans that it would not normally grant. Such modifications could include principal forgiveness, term extension, a significant payment delay, an interest rate reduction or the addition of a co-borrower or guarantor. When principal forgiveness is provided, the amount of the forgiveness is charged-off against the allowance for credit losses.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification.
In some cases, the Company provides multiple types of modifications on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification may be granted, such as principal forgiveness.
There were no loans modified to borrowers experiencing financial difficulty during the three months ended March 31, 2025 or 2024.
There were no modified loans that were past due or on non-accrual as of March 31, 2025 or December 31, 2024.
There were no loans to borrowers experiencing financial difficulty during the three months ended March 31, 2025 and 2024 that had a payment default and were modified in the twelve months prior.
Foreclosed real estate consists of property acquired in settlement of loans which is carried at its fair value less estimated selling costs. Write-downs from cost to fair value less estimated selling costs are recorded at the date of acquisition or repossession and are charged to the allowance for credit losses. There was no foreclosed real estate at March 31, 2025, and December 31, 2024. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction was $928,000 at March 31, 2025 and $927,000 at December 31, 2024.
Note 5 – Earnings per Share
Earnings per share was calculated for the three months ended March 31, 2025 and 2024, in accordance with ASC 260 - Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Basic earnings per share is based upon the weighted average number of common shares outstanding, exclusive of unearned shares held by the Employee Stock Ownership Plan of Lake Shore Bancorp, Inc. (the “ESOP”). Unvested shares of restricted stock which have voting rights and are eligible to receive dividends are included in the calculation of the weighted average number of common shares outstanding. Diluted earnings per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. Stock options are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would be dilutive and computed using the treasury stock method.
The calculated basic and diluted earnings per share are as follows:
Numerator – net income
1,057,000
1,014,000
Denominator:
Basic weighted average shares outstanding
5,646,299
5,846,255
Increase in weighted average shares outstanding due to:
Stock options(1)
4,249
Diluted weighted average shares outstanding(1)
5,650,548
Earnings per share:
Basic
Diluted
19
Note 6 – Commitments to Extend Credit
The Company has commitments to extend credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.
The Company’s exposure to credit losses is represented by the contractual amount of these commitments. There was a $323,000 and $316,000 allowance for credit losses associated with these commitments at March 31, 2025 and December 31, 2024, respectively.
The following commitments to extend credit were outstanding as of the dates specified:
Contract Amount
Commitments to grant loans
11,758
3,098
Unfunded commitments to fund loans and lines of credit
94,704
96,711
Commercial and Standby letters of credit
765
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
Note 7 – Stock-based Compensation
As of March 31, 2025, the Company had three active stock-based compensation plans, which are described below. The compensation cost related to these plans was $120,000 and $38,000 for the three months ended March 31, 2025 and 2024, respectively, and is included within salary and benefits expense in the non-interest expense section of the consolidated statements of income.
2006 Stock Option Plan
The Company’s 2006 Stock Option Plan (the “Stock Option Plan”), which was approved by the Company’s stockholders, permitted the grant of options to its employees and non-employee directors for up to 297,562 shares of common stock. The Stock Option Plan expired on October 24, 2016, and grants of options can no longer be awarded.
Both incentive stock options and non-qualified stock options have been granted under the Stock Option Plan. The exercise price of each stock option equals the market price of the Company’s common stock on the date of grant and an option’s maximum term is ten years. The stock options generally vest over a five year period.
20
A summary of the status of the Stock Option Plan during the three months ended March 31, 2025 and 2024 is presented below:
Options
Weighted Average Exercise Price
Remaining Contractual Life
Outstanding at beginning of year
27,822
14.38
58,857
Forfeited
(29,715
Outstanding at end of period
1.6 years
29,142
2.6 years
Options exercisable at end of period
:At March 31, 2025, stock options granted under this plan had an intrinsic value of $40,000 and there were no remaining options available for grant under the Stock Option Plan. At March 31, 2025, all compensation cost and expense related to the Stock Option Plan had been recognized in prior periods.
2012 Equity Incentive Plan
The Company’s 2012 Equity Incentive Plan (the “2012 EIP”), which was approved by the Company’s stockholders on May 23, 2012, authorizes the issuance of up to 180,000 shares of common stock pursuant to grants of restricted stock awards and up to 20,000 shares of common stock pursuant to grants of incentive stock options and non-qualified stock options, subject to permitted adjustments for certain corporate transactions. Employees and non-employee directors of Lake Shore Bancorp or its subsidiaries were eligible to receive awards under the 2012 EIP, except that non-employees may not be granted incentive stock options. The 2012 EIP expired on April 24, 2024, and grants of awards can no longer be made.
A summary of the status of unvested restricted stock awards under the 2012 EIP for the three months ended March 31, 2025 and 2024 is as follows:
For the Three MonthsEnded March 31, 2025
Weighted Average Grant Price (per Share)
For the Three MonthsEnded March 31, 2024
Unvested shares outstanding at beginning of year
57,001
11.10
18,118
13.91
Vested
(5,193
14.96
(10,926
13.64
Unvested shares outstanding at end of period
51,808
10.71
7,192
14.33
As of March 31, 2025, there were 126,739 shares of restricted stock vested or distributed to eligible participants under the 2012 EIP and the plan expired on April 24, 2024. Accordingly, there were no remaining shares available for grant. Compensation expense related to unvested restricted stock awards under the EIP amounted to $80,000 and $15,000 for the three months ended March 31, 2025 and 2024, respectively. At March 31, 2025, $278,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 23.3 months.
A summary of the status of stock options under the 2012 EIP for the three months ended March 31, 2025 and 2024 is presented below:
Exercise Price
Intrinsic Value
13,100
11.76
28,000
13,101
(2,407
53,000
6.9 years
10,694
3,794
5,000
Compensation expense related to unvested stock options under the 2012 EIP amounted to $1,000, for the three months ended March 31, 2025. There was no compensation expense related to unvested stock options under the 2012 EIP for the three months ended March 31, 2024. At March 31, 2025, $27,000 of unrecognized compensation cost related to unvested stock options is expected to be recognized over a period of 4.1 years. During April 2024, the Company granted all remaining options available under the 2012 EIP. The 2012 EIP expired on April 24, 2024 and no additional options were available for grant nor issued after this date.
2025 Equity Incentive Plan
On February 4, 2025 the stockholders of Lake Shore Bancorp, Inc. approved the Company's 2025 Equity Incentive Plan ("2025 EIP") which authorized the issuance of up to 300,000 shares of common stock pursuant to grants of restricted stock, restricted stock units, non-qualified stock options, and incentive stock options. Employees of the Company and Lake Shore Savings Bank and non-employee members of the Company's Board of Directors are eligible to receive grants of stock-based awards under the 2025 EIP.
The Compensation Committee of the Board of Directors granted restricted stock awards under the 2025 EIP during the three months ended March 31, 2025 as follows:
Grant Date
Number of Restricted Stock Awards
Vesting
Fair Value per Share of Award on Grant Date
Awardees
March 12, 2025
4,720
100% on March 12, 2026
15.77
Non-employee directors
22,477
25% per year for four years with first vesting on March 12, 2026
Employees
A summary of the status of unvested restricted stock awards under the 2025 EIP for the three months ended March 31, 2025 is as follows:
At March 31, 2025
Granted
27,197
As of March 31, 2025, there were no shares of restricted stock vested or distributed to eligible participants under the 2025 EIP. There were 272,803 remaining shares available for grant. Compensation expense related to unvested restricted stock awards under the 2025 EIP amounted to $8,000 for the three months ended March 31, 2025. At March 31, 2025, $420,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 41.7 months.
Employee Stock Ownership Plan (“ESOP”)
The Company established the ESOP for the benefit of eligible employees of the Company and Bank. All Company and Bank employees meeting certain age and service requirements are eligible to participate in the ESOP. Participants’ benefits become fully vested after five years of service once the employee is eligible to participate in the ESOP. The Company utilized $2.6 million of the proceeds of its 2006 stock offering to extend a loan to the ESOP and the ESOP used such proceeds to purchase 238,050 shares of stock on the open market at an average price of $10.70 per share, plus commission expenses. As a result of the purchase of shares by the ESOP, total stockholders’ equity of the Company was reduced by $2.6 million. As of March 31, 2025, the balance of the loan to the ESOP was $1.2 million and the fair value of unallocated
shares was $1.4 million. As of March 31, 2025, there were 72,449 allocated shares and 87,284 unallocated shares compared to 66,117 allocated shares and 95,219 unallocated shares at December 31, 2024. The ESOP compensation expense was $31,000 for the three months ended March 31, 2025 and $23,000 for the three months ended March 31, 2024 based on 1,984 shares earned in each of those quarters.
Note 8 - Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of March 31, 2025 and December 31, 2024 and have not been re-evaluated or updated for purposes of these unaudited consolidated financial statements subsequent to those respective dates. The estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported here.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities measurements (Level 1) and the lowest priority to unobservable input measurements (Level 3). The three levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the inputs and assumptions that market participants would use in pricing the assets or liabilities.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s consolidated statements of financial condition contain investment securities that are recorded at fair value on a recurring basis. For financial instruments measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2025 and December 31, 2024 were as follows:
Fair Value Measurements at March 31, 2025
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Other Unobservable Inputs
(Level 1)
(Level 2)
(Level 3)
Measured at fair value on a recurring basis:
Securities:
Asset-backed securities:
Private label
Government sponsored entities
Fair Value Measurements at December 31, 2024
24
Level 2 inputs for assets or liabilities measured at fair value on a recurring basis might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment projections, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. The following is a description of valuation methodologies used for financial assets recorded at fair value on a recurring basis:
In addition to disclosure of the fair value of assets on a recurring basis, GAAP requires disclosures for assets and liabilities measured at fair value on a non-recurring basis. The following is a description of the valuation methods used for assets that may be measured at fair value on a non-recurring basis.
Collateral-Dependent Loans. Loans for which repayment is substantially expected to be provided through the operations or sale of collateral are considered collateral dependent. They are held at the lower of cost or fair value, and are considered to be measured at fair value when recorded below cost. Collateral-dependent loans are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, based on either a recent appraisal performed by a third-party independent appraiser or discounted cash flows based on current market conditions. Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy. The Company did not record an allowance for credit losses for its collateral-dependent loans as of March 31, 2025 and December 31, 2024.
Foreclosed Real Estate and Repossessed Assets. Foreclosed real estate and repossessed assets are held at the lower of cost or fair value and are considered to be measured at fair value when recorded below cost. The fair value of foreclosed real estate is calculated using independent appraisals, less estimated selling costs. Certain repossessed assets may require assumptions about factors that are not observable in an active market when determining fair value. Accordingly, foreclosed real estate and repossessed assets are classified within Level 3 of the fair value hierarchy. There was no foreclosed real estate at March 31, 2025 and December 31, 2024. The Company did not have repossessed assets at March 31, 2025 and December 31, 2024.
Mortgage Servicing Rights. Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The key assumptions used in the model include the estimated life of loans sold with servicing retained and the estimated cost to service the loans. Loan servicing rights are classified as Level 3 measurements due to the use of unobservable inputs, as well as management judgment and estimation. Mortgage servicing rights amounted to $175,000 and $177,000 at March 31, 2025 and December 31, 2024, respectively, and were included as a component of other assets on the consolidated statements of financial condition.
25
For assets subject to measurement at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2025 and December 31, 2024 were as follows:
Fair Value Measurements
Measured at fair value on a non-recurring basis:
Mortgage servicing rights
175
At December 31, 2024
177
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Estimate
Valuation Technique
Unobservable Input
Range
Weighted Average
Discounted Cash Flow Model (1)
Servicing Fees
0.25
%
Servicing Costs
0.10
Estimated Life of Loans
4.67 - 5.84 years
5.27 years
5.17 - 6.17 years
5.67 years
The carrying amount and estimated fair value, based on the exit price notion, of the Company’s financial instruments, whether carried at cost or fair value, are as follows:
Carrying
Estimated
Amount
Financial assets:
Cash and cash equivalents
Securities
Federal Home Loan Bank stock
540,896
Financial liabilities:
582,684
3,974
Accrued interest payable
83
525,728
572,082
10,199
27
Note 9 – Treasury Stock
During the three months ended March 31, 2025, the Company did not repurchase any shares of common stock under the existing stock repurchase program. As of March 31, 2025, there were 30,626 shares remaining to be repurchased under the existing stock repurchase program. During the three months ended March 31, 2025, the Company transferred 27,197 shares of common stock out of treasury stock under the 2025 Equity Incentive Plan, at an average cost of $9.39 per share, to fund awards that had been granted under the plan. During the three months ended March 31, 2025, the Company repurchased 2,151 shares upon vesting of shares under the 2012 Equity Incentive Plan for the purpose of remitting payroll taxes on behalf of awardees who were employees, at an average cost of $16.17 per share.
During the three months ended March 31, 2024, the Company did not repurchase any shares of common stock under the existing stock repurchase program. As of March 31, 2024, there were 30,626 shares remaining to be repurchased under the existing stock repurchase program. During the three months ended March 31, 2024, the Company repurchased 1,504 shares upon vesting of shares under the 2012 Equity Incentive Plan for the purpose of remitting payroll taxes on behalf of awardees who were employees, at an average cost of $11.62 per share.
Note 10 – Other Comprehensive Income (Loss)
In addition to presenting the consolidated statements of other comprehensive income (loss) herein, the following table shows the tax effects allocated to the Company’s single component of other comprehensive income (loss) for the periods presented:
For the Three Months March 31, 2025
For the Three Months March 31, 2024
Pre-Tax Amount
Tax (Expense)
Net of Tax Amount
Tax Benefit
Net unrealized gains (losses) on securities available for sale:
Net unrealized gains (losses) arising during the period
(3
211
Less: reclassification adjustment related to:
Recovery on previously impaired investment securities included in net income
The following table presents the amounts reclassified out of the single component of the Company’s accumulated other comprehensive loss for the indicated periods:
Amounts Reclassified from Accumulated
Details about Accumulated Other
Other Comprehensive Loss
Affected Line Item
Comprehensive Loss
for the three months ended March 31,
on the Consolidated
Components
Statements of Income
Net unrealized (losses) gains on securities available for sale:
Total reclassification for the period
Increase to Net Income
Forward-Looking Statements
Safe-Harbor
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections about the Company’s and the Bank’s industry, and management’s beliefs and assumptions. Words such as anticipates, expects, intends, plans, believes, estimates and variations of such words and expressions are intended to identify forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, actual results may differ materially from those expressed or forecast in such forward-looking statements.
Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, Part II, Item 1A of this Quarterly Report on Form 10-Q and the following:
Any and all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may differ from actual outcomes. They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Except as required by law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition, results of operations and other relevant statistical data. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of March 31, 2025 compared to the consolidated financial condition as of December 31, 2024 and the consolidated results of operations for the three months ended March 31, 2025 and 2024.
Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on loans and investments and the interest expense we pay on deposits, borrowings, and other interest-bearing liabilities. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on these balances.
Our operations are also affected by non-interest income, such as service charges and fees, debit card fees, earnings on bank owned life insurance, and other non-interest income activities as well as non-interest expenses which include salaries and employee benefits, occupancy and equipment costs, data processing, professional services, advertising, FDIC insurance, and other general and administrative expenses.
Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing and commercial real estate, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in the Western New York area, and our operations and earnings are influenced by local economic conditions. Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences, and levels of personal income and savings in our primary market area. Operations are also significantly impacted by government policies and actions of regulatory authorities. Future changes in applicable law, regulations, or government policies may materially impact the Company.
Recent Events
On January 27, 2025, the Boards of Directors of Lake Shore, MHC, Lake Shore Bancorp and Lake Shore Savings Bank adopted a Plan of Conversion and Reorganization (the "Plan") pursuant to which Lake Shore, MHC will undertake a "second-step" conversion and Lake Shore Savings Bank, the wholly-owned subsidiary of Lake Shore Bancorp, will reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure. Following the conversion and reorganization, Lake Shore, MHC will cease to exist and a newly-chartered stock holding company (the "New Bank Holding Company") will succeed to Lake Shore Bancorp as the stock holding company of Lake Shore Savings Bank. In connection with the second step conversion, Lake Shore Savings Bank is seeking regulatory approval to convert its charter to a New York-chartered commercial bank. As of March 31, 2025, Lake Shore, MHC owned approximately 63.1% of the outstanding shares of common stock of Lake Shore Bancorp. The proposed transaction is expected to be completed in the third quarter of 2025, subject to regulatory approval, approval by the members of Lake Shore, MHC (i.e., depositors of the Bank), and approval by the stockholders of the Company, including by a separate vote of approval by the Company's minority stockholders. On March 11, 2025, Lake Shore, MHC, Lake Shore Bancorp and Lake Shore Savings Bank amended the Plan of Conversion and Reorganization, which increased the individual and group purchase limits from 75,000 shares to 150,000 shares. Further, on March 11, 2025, the Company suspended the payment of dividends pending the completion of the second-step conversion. On May 14, 2025, the U.S. Securities and Exchange Commission declared the New Bank Holding Company’s Registration Statement on Form S-1 effective.
Management Strategy
There have been no material changes in the Company’s management strategy from what was disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.
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Critical Accounting Estimates
The Company's consolidated financial statements are prepared in accordance with GAAP. As a result, the Company is required to make certain estimates, judgments, and assumptions that it believes are reasonable based upon the information available at that time. Critical accounting estimates includes the areas where the Company has made what it considers to be particularly difficult, subjective, or complex judgments concerning estimates, and where these estimates can significantly affect the Company's financial results under different assumptions and conditions. These estimates, judgments, and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Significant accounting policies followed by the Company are presented in Note 2 - Summary of Significant Accounting Policies, to the Audited Consolidated Financial Statements included within Part II. Item 8. of its Annual Report on Form 10-K for the year ended December 31, 2024, and in Note 1: Basis of Presentation and Significant Accounting Policies and Estimates in Part I. Item 1. of this Form 10-Q.
Allowance for Credit Losses
Management considers the allowance for credit losses to be a critical accounting estimate, given the uncertainty in estimating lifetime credit losses attributable to its portfolios of assets exhibiting credit risk, particularly in its loan portfolio, and the material effect that such judgments can have on our results of operations. Determining the amount requires significant judgment on the part of management, is multi-faceted, and can be imprecise. The level of the allowance for credit losses on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions, and expectations of the future based on reasonable and supportable forecasts.
The allowance is established through a provision for credit losses in the Consolidated Statements of Income, and evaluation of the adequacy of the allowance for credit losses is performed by management on a quarterly basis. While management uses available information to anticipate credit losses, future additions to the allowance may be necessary based on changes in economic conditions or the composition of its portfolios. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. As of March 31, 2025 and December 31, 2024, the allowance for credit losses on loans totaled $5.2 million and $5.1 million, respectively. Due to the nature and composition of the Bank's lending activities, a significant portion of the allowance for credit losses on loans is allocated to the commercial real estate portfolio. As of March 31, 2025 and December 31, 2024, the allowance for credit losses on loans allocated to the total commercial real estate portfolio was $4.2 million, or 81.2%, and $4.2 million, or 81.3%, respectively.
The Company's methodology for maintaining its allowance for credit losses is based on historical loan-level performance experience and data, peer data, current economic information, and reasonable and supportable forecasts. Accordingly, the estimation of the allowance for credit losses is impacted by the economic forecasts utilized, which require the use of significant judgment. Deterioration to forecasted economic conditions may lead to further required increases to the allowance for credit losses. Conversely, improvements to forecasted economic conditions may warrant further reductions to the allowance for credit losses. In estimating the allowance for credit losses, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate.
The allowance for credit losses is sensitive to various forecasted macroeconomic drivers, including the Federal Open Market Committee's ("FOMC") median forecasted U.S. civilian unemployment rate and the year-over-year change in U.S. Gross Domestic Product ("GDP"). While it is difficult to estimate how potential changes to various factors may impact the allowance for credit losses because such changes to factors may not occur at the same rate or in the same direction, management compared the modeled allowance for credit losses on loans to a hypothetical model using a downside economic forecast. Using an immediate "shock" or increase of 20 basis points in the FOMC's projected rate of U.S. civilian unemployment, and a decrease of 100 basis points in the FOMC's projected rate of U.S. GDP growth, this would increase the model's total calculated allowance for credit losses on loans by $275,000, or 5.3%, representing a five basis points increase to the coverage ratio of the allowance for credit losses as a percentage of net loans, assuming all other quantitative
and qualitative factors are kept at current levels, as of March 31, 2025. This example is only one of the numerous possible economic scenarios that could be utilized in assessing the sensitivity of the allowance for credit losses and does not represent management’s assumptions or judgment of factors as of March 31, 2025.
Unexpected changes in economic growth could adversely affect our results of operations, including causing increases in delinquencies and default rates on loans, which would adversely impact our charge-offs, allowance for credit losses, and provision for credit losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.
Analysis of Net Interest Income
Net interest income represents the difference between the interest we earn on our interest-earning assets, such as commercial and residential mortgage loans and investment securities, and the expense we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on them.
Average Balances, Interest and Average Yields. The following table sets forth certain information relating to our average balance sheets and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for credit losses but include non-accrual loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. The net amortization of deferred loan fees and costs were $63,000 and $124,000 for
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the three months ended March 31, 2025 and 2024, respectively. Interest income on securities does not include a tax equivalent adjustment for tax exempt securities.
For the Three Months Ended
Average
Interest Income/
Yield/
Balance
Expense
Rate(2)
Interest-earning assets:
23,562
3.97
44,038
5.43
Securities(1)
57,804
381
2.64
61,728
425
2.75
545,561
5.68
556,151
5.46
Total interest-earning assets
626,927
5.34
661,917
5.20
51,656
50,866
Total assets
678,583
712,783
Interest-bearing liabilities
Demand & NOW accounts
62,784
69,753
Money market accounts
152,680
867
2.27
139,794
966
2.76
Savings accounts
53,541
0.07
62,684
Time deposits
208,804
1,951
3.74
222,179
2,250
4.05
Borrowed funds & other interest-bearing liabilities
60
3.85
232
3.14
Total interest-bearing liabilities
484,046
2.40
523,966
2.65
Other non-interest bearing liabilities
103,593
102,299
Stockholders' equity
90,944
86,518
Total liabilities & stockholders' equity
Net interest income
Interest rate spread
2.94
2.55
Net interest margin
3.49
3.10
Rate Volume Analysis. The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table shows the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest rates. The effect of a change in volume is measured by applying the average rate during the later period to the volume change between
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the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period.
Three Months Ended March 31, 2025
Compared to
Three Months Ended March 31, 2024
Rate
Volume
Net Change
(161
(203
(364
(26
(44
316
166
(379
(242
Interest-bearing liabilities:
(172
(99
(174
(125
(299
Total deposits
(346
(56
(402
Other interest-bearing liabilities:
52
(224
(294
(280
(574
Total change in net interest income
431
332
As shown in the above tables, the increase in net interest income for the three months ended March 31, 2025 was primarily impacted by a decrease in the average interest rate paid on interest-bearing liabilities and a decrease in the average balance of interest-bearing liabilities and an increase in the average yield of interest-earning assets, partially offset by a decrease in the average balance of interest-earning assets when compared to the prior year period. The average interest rate paid on interest-bearing liabilities decreased 25 basis points from 2.65% during the three months ended March 31, 2024 to 2.40% during the three months ended March 31, 2025. The decrease in the average interest rate paid on interest-bearing liabilities during the three months ended March 31, 2025 was primarily due to a 24 basis points decrease in the average interest rate paid on deposit accounts. The decrease in average interest rate paid on deposit accounts was primarily due to the decrease in market interest rates and time deposit repricing. The average balance of interest-bearing liabilities decreased $39.9 million, from $524.0 million during the three months ended March 31, 2024 to $484.0 million during the three months ended March 31, 2025 as a result of decreases in the average balance of deposits of $16.6 million and the average balance of borrowed funds and other interest-bearing liabilities of $23.3 million. The average yield of interest-earning assets increased by 14 basis points to 5.34% for the three months ended March 31, 2025 as compared to the same period of the prior year as a result of a 22 basis points increase in the average yield of the loan portfolio. The average balance of interest-earning assets for the three months ended March 31, 2025 decreased by $35.0 million, or 5.3%, when compared to the prior year period primarily due to a decrease in the average balance of interest-earning deposits of $20.5 million, or 46.5%. Net interest margin increased to 3.49% for the three months ended March 31, 2025 as compared to 3.10% for the same period of the prior year.
Comparison of Financial Condition at March 31, 2025 and December 31, 2024
Total assets at March 31, 2025 were $689.0 million, an increase of $3.5 million, or 0.5%, as compared to $685.5 million at December 31, 2024 primarily due to increases in net loans, partially offset by a decrease in cash and cash equivalents.
Cash and cash equivalents decreased by $2.7 million, or 8.2%, from $33.1 million at December 31, 2024 to $30.4 million at March 31, 2025. The decrease was primarily due to an increase in loans receivable, net of $7.0 million, or 1.3%, and a decrease in long-term debt due to the repayment of Federal Home Loan Bank of New York ("FHLBNY") borrowings of
$6.3 million. The decrease in cash and cash equivalents was partially offset by an increase in total deposits of $9.8 million, or 1.7%.
Securities, at fair value, decreased by $694,000, or 1.2%, from $56.5 million at December 31, 2024 to $55.8 million at March 31, 2025, primarily due to securities paydowns of $739,000, partially offset by a $62,000 increase in the market value of the securities.
Net loans receivable increased during the three months ended March 31, 2025, as shown in the table below:
At March 31,
At December 31,
Change
(3,451
(2.1
(218
(0.5
2,562
0.8
(1,107
(0.2
(934
(5.9
9,182
926.5
7,141
1.3
Allowance for credit losses
(37
0.7
(84
(2.6
7,020
The loans receivable, net balance increased $7.0 million, or 1.3%, from $544.6 million at December 31, 2024 to $551.6 million at March 31, 2025. The increase was primarily due to increases in consumer loans and commercial real estate loans, partially offset by a decrease in residential, one-to four-family real estate loans. During the three months ended March 31, 2025, we remained strategically focused on originating shorter duration, adjustable-rate commercial and consumer loans to diversify our asset mix and to manage interest rate risk while reducing our reliance on wholesale funding sources.
Asset Quality. The following tables set forth activity in our allowance for credit losses on loans and other ratios at or for the dates indicated:
At or For the Three Months Ended March 31,
Balance at beginning of period
(Credit) provision for credit losses
Charge-offs:
Other loans:
Total charge-offs
Recoveries:
Real estate loans:
Total recoveries
Net (charge-offs) recoveries
Balance at end of period
Average loans outstanding, including fees
Allowance for credit losses as a percent of loans at amortized cost
0.93
1.12
Allowance for credit losses as a percent of non-performing loans at amortized cost
148.89
157.62
When compared to December 31, 2024, the current modeled allowance for credit losses related to the loan portfolio increased by approximately $37 thousand, or 0.72%, of which $19 thousand was due to an increase in loan balance and $18 thousand was due to an increase in reserve rate for the blended portfolio. Such allowance for credit losses was calculated utilizing a discounted cash flow model as further described in Part I Item 1 - Note 1 - Basis of Presentation and Significant Accounting Policies and Estimates.
For the Three Months Ended March 31,
Ratio of net recoveries (charge-offs) to average loans outstanding by loan type, annualized:
0.01
(0.13
(2.24
Ratio of net recoveries to average loans outstanding
For the three months ended March 31, 2025, consumer loan net charge-offs to average consumer loans outstanding, annualized, improved to (0.13)% from (2.24)% for the prior year period. This improvement was primarily driven by an increase in average consumer loans outstanding of $3.4 million.
Loans accounted for on a non-accrual basis:
Total non-accrual loans
Total non-performing loans
Foreclosed real estate
Total non-performing assets
Ratios:
Non-performing loans as a percent of total loans at amortized cost:
0.62
0.69
Non-performing assets as a percent of total assets:
0.50
0.55
(1) Includes one- to four- family construction loans.
(2) Includes Commercial construction loans.
Total non-performing assets decreased by $332,000, or 8.7%, to $3.5 million at March 31, 2025 from $3.8 million at December 31, 2024, primarily due to a decrease in non-accrual loans of $332,000. The Company had no loans past due 90 days or more but still accruing at March 31, 2025 or December 31, 2024. On March 26, 2025, one commercial relationship with two loans representing a total amortized cost of $1.2 million on non-accrual status was sold at foreclosure. Subject to customary foreclosure proceedings, the Company expects the sale to close during the second quarter of the year.
Other assets decreased $297,000, or 2.8%, to $10.4 million at March 31, 2025 from $10.7 million at December 31, 2024 primarily due to the proceeds received from a bank-owned life insurance death benefit which was in process at the end of 2024.
The table below shows changes in deposit balances by type of deposit account between March 31, 2025 and December 31, 2024:
Core deposits
Demand deposits and NOW accounts:
(6,687
(6.9
63,117
65,020
(1,903
(2.9
Time deposits less than or equal to $250,000
185,574
173,745
11,829
6.8
Money market
155,671
149,550
6,121
4.1
Savings
53,757
54,322
(565
(1.0
Total core deposits
547,844
539,049
8,795
1.6
Non-core deposits
Time deposits greater than $250,000
34,886
33,929
957
2.8
Total non-core deposits
1.7
The increase in total deposits was primarily due to a 6.8% increase in time deposits less than or equal to $250,000, a 4.1% increase in money market accounts, and a 2.8% increase in time deposits greater than $250,000. The decreases were partially
offset by a 6.9% decrease in non-interest bearing transaction accounts, a 2.9% decrease in interest-bearing transaction accounts, and a 1.0% decrease in savings accounts. The increase in time deposits and money market deposits was primarily due to an increase in customer demand for these types of deposit products as the result of the high and competitive interest rate environment. Our strategic focus is centered on organic growth of deposits among our retail and commercial customers to reduce our reliance on wholesale funding and to strengthen customer relationships. At March 31, 2025 and December 31, 2024, our percentage of uninsured deposits to total deposits was 11.8% and 13.5%, respectively.
During the three months ended March 31, 2025, long-term borrowings decreased by $6.3 million, or 61.0%, to $4.0 million at March 31, 2025 from $10.3 million at December 31, 2024 in connection with the repayment of $6.3 million of long-term debt with the FHLBNY. The borrowings were paid off at maturity as part of a balance sheet management strategy to focus on organic deposit growth and reduce reliance on wholesale funding sources.
Total stockholders’ equity increased $794,000, or 0.9%, to $90.7 million at March 31, 2025 from $89.9 million at December 31, 2024. The increase in stockholders’ equity was primarily attributed to $1.1 million in net income earned during the three months ended March 31, 2025.
Comparison of Results of Operations for the Three Months Ended March 31, 2025 and 2024
General. Net income increased to $1.1 million during the three months ended March 31, 2025, or $0.19 per diluted share, an increase of $43,000, or 4.2%, compared to net income of $1.0 million, or $0.17 per diluted share, for the three months ended March 31, 2024. Our financial performance for the three months ended March 31, 2025 was positively impacted by an increase in net interest income along with a decrease in non-interest expenses.
Net Interest Income. Net interest income for the first quarter of 2025 increased by $332,000, or 6.5%, to $5.5 million as compared to $5.1 million for the first quarter of 2024. Net interest margin and interest rate spread were 3.49% and 2.94%, respectively, for the three months ended March 31, 2025 as compared to 3.10% and 2.55%, respectively, for the three months ended March 31, 2024.
Interest Income. Interest income for the three months ended March 31, 2025 was $8.4 million, a decrease of $242,000, or 2.8%, compared to $8.6 million for the three months ended March 31, 2024. The decrease in interest income from the three months ended March 31, 2024 was primarily due to a decrease in the average balance of interest-earning assets of $35.0 million, or 5.3%. The decrease was partially offset by a 14 basis points increase in the average yield on interest-earning assets.
During the three months ended March 31, 2025 as compared to three months ended March 31, 2024, there was a $364,000 decrease in interest earned on interest-earning deposits due to a decrease in the average balance and yield of interest-earning deposits of $20.5 million, or 46.5%, and 146 basis points, respectively. The decrease in the average balance of interest-earning deposits was primarily attributable to the repayment of long-term debt and decrease in brokered deposits since the first quarter of 2024 as we reduced our reliance on wholesale funding. The decrease in the average yield of interest-earning deposits was primarily attributable to a decline in market rates since the first quarter of 2024.
Additionally, during the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, there was a $44,000 decrease in interest earned on securities due to a decrease in the average balance and yield of securities of $3.9 million, or 6.4%, and 11 basis points, respectively. The decrease in the average balance of securities was primarily attributable to securities paydowns since the first quarter of 2024. These decreases were partially offset by a $166,000 increase in interest income on loans due to a 22 basis points increase in the average yield on loans. The increase in the average yield on loans was primarily attributable to the origination and repricing of loans at higher interest rates since the first quarter of 2024.
Interest Expense. Interest expense for the three months ended March 31, 2025 was $2.9 million, a decrease of $574,000, or 16.5%, from $3.5 million for the three months ended March 31, 2024. The decrease in interest expense when compared to the first quarter of 2024 was primarily due to a 25 basis points decrease in average interest rate paid on interest-bearing liabilities and a $39.9 million, or 7.6%, decrease in the average balance of interest-bearing liabilities.
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During the three months ended March 31, 2025 as compared to three months ended March 31, 2024, interest expense on deposits decreased by $402,000, or 12.4%, due to a 24 basis points decrease in the average interest rate paid on deposit accounts and a $16.6 million, or 3.4%, decrease in the average balance of deposits. The decrease in the average interest rate paid on deposit accounts was primarily due to the decrease in market interest rates and time deposit repricing in the first quarter of 2025. Average interest-bearing deposit balances decreased 3.4% during the first quarter of 2025 from the first quarter of 2024 due to a decrease in all deposit categories except money market accounts.
During the three months ended March 31, 2025, interest expense on borrowed funds and other interest-bearing liabilities decreased by $172,000, or 74.1%, compared to three months ended March 31, 2024, primarily due to a $23.3 million, or 78.9%, decrease in average borrowed funds and other interest-bearing liabilities outstanding due to the repayment of $25.0 million of FHLBNY borrowings during 2024 and $6.3 million during the first quarter of 2025.
Provision (Credit) for Credit Losses. We recorded a provision for credit losses of $48,000 for the three months ended March 31, 2025, as compared to a credit to the provision of $352,000 for the three months ended March 31, 2024. The provision for credit losses for the three months ended March 31, 2025 was attributable to a $39,000 provision to the allowance for credit losses on loans and a $9,000 provision to the allowance for credit losses for unfunded commitments. These increases during the three months ended March 31, 2025 were the result of an increase to the quantitative estimated loss calculation inclusive of forecasted economic trends, primarily related to the mortgage loan pools, including residential mortgages and commercial real estate mortgages.
Non-Interest Income. Non-interest income was $724,000 for the three months ended March 31, 2025, an increase of $17,000, or 2.4%, as compared to $707,000 for the three months ended March 31, 2024. The increase was primarily due to a $35,000 increase in unrealized gain on equity securities and a $22,000 increase in earnings on annuity assets in connection with the purchase of annuities during the fourth quarter of 2024.
Non-Interest Expense. Non-interest expense was $4.9 million for the three months ended March 31, 2025, a decrease of $117,000, or 2.3%, as compared to $5.0 million for the three months ended March 31, 2024. The decrease from the prior year quarter was primarily related to a decrease in FDIC insurance of $207,000, or 74.2%, as the result of a decrease in premium assessments.
Income Tax Expense. Income tax expense was $206,000 for the three months ended March 31, 2025, an increase of $23,000, or 12.6%, as compared to $183,000 for the three months ended March 31, 2024. The increase in income tax expense from the prior year quarter was due to an increase in pre-tax income earned during the current quarter along with an increase in the effective tax rate in the first quarter of 2025. The effective tax rate was 16.3% for the three months ended March 31, 2025 as compared to 15.3% for the three months ended March 31, 2024.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business. Liquidity is primarily needed to fund loan commitments, to pay the deposit withdrawal requirements of our customers as well as to fund current and planned expenditures. Our primary sources of funds consist of deposits, scheduled amortization and prepayments of loans and securities, maturities and sales of investments and loans, excess cash, interest earning deposits at other financial institutions, and funds provided from operations.
We have written agreements with the FHLBNY, which allows us to borrow the maximum lending values designated by the type of collateral pledged. As of March 31, 2025, the maximum amount that we can borrow from the FHLBNY, based on the market value of certain fixed-rate residential, one- to four-family loans pledged to FHLBNY, was $90.1 million, which was collateralized by certain fixed-rate residential, one- to four-family loans. At March 31, 2025, and December 31, 2024, we had outstanding advances under this agreement of $4.0 million and $10.3 million, respectively. As of March 31, 2025, we had available borrowing capacity of $86.1 million under the aforementioned agreement with the FHLBNY.
We have a written agreement with the Federal Reserve Bank discount window for overnight borrowings which is collateralized by a pledge of our securities, and allows us to borrow up to the value of the securities pledged. At March 31, 2025, and December 31, 2024, there were no securities pledged to the Federal Reserve Bank and we had no balances
outstanding. Additionally, as of March 31, 2025, the Bank has uncollateralized intraday credit with the Federal Reserve Bank that allows for certain transactions to not be rejected for which there are insufficient funds in our Federal Reserve Master Account during normal hours of operation.
Lastly, we have also established an unsecured line of credit with a correspondent bank for $20.0 million. There were no borrowings on this line as of March 31, 2025 and December 31, 2024.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, calls of investment securities, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.
Our primary investing activities include the origination of loans and the purchase of investment securities. For the three months ended March 31, 2025, we originated loans of approximately $18.1 million as compared to approximately $16.2 million of loans originated during the three months ended March 31, 2024. Principal repayments and other deductions exceeded originations during the three months ended March 31, 2025 by $7.1 million. The Company did not make any purchases of investment securities or sell any investment securities during the three months ended March 31, 2025 and 2024.
We have loan commitments to borrowers and borrowers have unused overdraft lines of protection, unused home equity lines of credit, and unused commercial lines of credit that may require funding at a future date. We believe we have sufficient funds to fulfill these commitments, including sources of funds available through the use of FHLBNY advances or other liquidity sources. Total deposits were $582.7 million at March 31, 2025 as compared to $573.0 million at December 31, 2024. Approximately $188.7 million of time deposit accounts are scheduled to mature within one year as of March 31, 2025. Based on our deposit retention experience, current pricing strategy, and competitive pricing policies, we anticipate that a significant portion of these time deposits will remain with us following their maturity.
We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLBNY, will be carefully considered as we monitor our liquidity needs. Therefore, in order to maintain sufficient liquidity and manage our cost of funds, we may consider wholesale funding options, including additional borrowings from the FHLBNY, in the future.
We do not anticipate any material capital expenditures in 2025. We do not have any balloon or other payments due on any long-term obligations, other than the borrowing agreements noted above. At March 31, 2025, the Bank exceeded all of its regulatory capital requirements.
Regulatory Capital
Federal regulations require a federal savings bank to meet certain capital standards, as discussed in the “Supervision and Regulation” section included in our Annual Report on Form 10-K for the year ended December 31, 2024.
The federal banking agencies have developed a “Community Bank Leverage Ratio” ("CBLR") (bank’s tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A “qualifying community bank” may elect to utilize the Community Bank Leverage Ratio in lieu of the general applicable risk-based capital requirements under Basel III. If the community bank exceeds this ratio it will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Basel III. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio at 9.0%. The Bank elected to be subject to this new definition when it became effective on January 1, 2020, and has continued to use the Community Bank Leverage Ratio since that time. As of March 31, 2025 and December 31, 2024, the Bank’s Community Bank Leverage Ratio was 14.31% and 13.83%, respectively.
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In order to be considered “well-capitalized” by the OCC, a non-CBLR savings bank must maintain a Tier 1 Leverage capital ratio of 5% and a Total Risk-Based capital ratio of 10%. At March 31, 2025 and December 31, 2024, the Bank’s Tier 1 Leverage capital ratio was 14.31% and 13.83%, respectively, and its Total Risk-Based capital ratio was 18.67% and 18.79%, respectively. Accordingly, the Bank was considered to be well-capitalized under applicable regulatory capital requirements.
Off-Balance Sheet Arrangements
Other than loan commitments, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Refer to Note 6 in the Notes to our unaudited consolidated financial statements for a summary of loan commitments outstanding as of March 31, 2025.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosure is not required as the Company is a smaller reporting company.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Item 1A. Risk Factors.
Refer to Part I, Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 2024 and Forward-Looking Statements from Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q for a discussion of certain risks affecting us. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.
There have been no material changes to the risk factors since the filing of the Annual Report on Form 10-K for the year ended December 31, 2024.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each month of the quarter ended March 31, 2025. The Company has suspended its stock repurchase program.
COMPANY PURCHASES OF EQUITY SECURITIES
Period
Total Numberof SharesPurchased(1)
Average PricePaid per Share(1)
Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs
Maximum Numberof Shares that MayYet be PurchasedUnder the Plansor Programs (2)
January 1 through January 31, 2025
30,626
February 1 through February 28, 2025
16.17
March 1 through March 31, 2025
Item 5. Other Information
During the first quarter of 2025, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.
Item 6. Exhibits
31.1
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*
32.1
Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS
Inline XBRL Instance Document*
101.SCH
Inline XBRL Taxonomy Extension Schema Document*
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
Inline XBRL Taxonomy Label Linkbase Document*
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document*
104
Cover Page Interactive Date File (formatted as inline XBRL and contained in Exhibit 101)*
________________
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
May 15, 2025
By:
/s/ Kim C. Liddell
Kim C. Liddell
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Taylor M. Gilden
Taylor M. Gilden
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)