10-Q: Lake Shore Bancorp Reports Strong Q3 Earnings, Boosted by Conversion

Lake Shore Bancorp, Inc. announced significantly improved net income and earnings per share for the third quarter and first nine months of 2025, following a successful second-step conversion and capital raise.

Summary

• Net income for the three months ended September 30, 2025, increased by 77.1% to $2.359 million, up from $1.332 million in the prior year period.
• Basic and diluted earnings per common share for the three months ended September 30, 2025, rose to $0.32 from $0.18 year-over-year.
• Net income for the nine months ended September 30, 2025, increased by 54.1% to $5.335 million, compared to $3.462 million in the same period of 2024.
• Basic and diluted earnings per common share for the nine months ended September 30, 2025, grew to $0.70 from $0.46 year-over-year.
• Net interest income for the three months increased by 18.1% to $6.355 million, and for the nine months, it increased by 14.1% to $17.942 million.
• Net interest margin improved to 3.72% for the three months and 3.68% for the nine months ended September 30, 2025, compared to 3.28% and 3.17% respectively in 2024.
• Total assets increased by $57.3 million, or 8.4%, to $742.8 million at September 30, 2025, from $685.5 million at December 31, 2024.
• Cash and cash equivalents surged by $50.5 million, or 152.4%, to $83.6 million, primarily due to the second-step conversion and stock offering.
• Total stockholders' equity increased by $49.4 million, or 55.0%, to $139.3 million, largely driven by the conversion and stock offering.
• Non-performing assets decreased by $2.0 million, or 51.8%, to $1.8 million at September 30, 2025, from $3.8 million at December 31, 2024.
• The allowance for credit losses as a percentage of non-performing loans significantly improved to 265.57% at September 30, 2025, from 134.91% at December 31, 2024.
• The Community Bank Leverage Ratio (CBLR) increased to 16.34% at September 30, 2025, from 13.83% at December 31, 2024, well above the 9.0% minimum for well-capitalized status.

Sentiment

Score: 8

Explanation: The company reported strong financial results with significant increases in net income and EPS, driven by improved net interest income and effective cost management. The successful second-step conversion and associated capital raise substantially strengthened the balance sheet and capital ratios. Asset quality improved markedly with a significant reduction in non-performing assets and high allowance for credit losses coverage. The announced dividend and future share repurchase plan signal confidence in future performance and a commitment to shareholder returns. These factors collectively indicate a strong financial position and positive outlook.

Positives

• Net income for the three months ended September 30, 2025, increased by 77.1% to $2.359 million.
• Basic and diluted earnings per common share for the three months ended September 30, 2025, increased to $0.32.
• Net interest income for the three months ended September 30, 2025, increased by $972,000, or 18.1%.
• Net interest margin improved to 3.72% for the three months ended September 30, 2025.
• Interest expense decreased by $472,000, or 13.6%, for the three months ended September 30, 2025, due to lower average interest rates and reduced interest-bearing liabilities.
• Non-interest income increased by $274,000, or 34.6%, for the three months ended September 30, 2025, driven by a death benefit from bank-owned life insurance and unrealized gains on equity securities.
• Total assets increased by $57.3 million, or 8.4%, to $742.8 million at September 30, 2025.
• Cash and cash equivalents increased by $50.5 million, or 152.4%, to $83.6 million.
• Loans receivable, net, increased by $8.0 million, or 1.5%, to $552.6 million.
• Total deposits increased by $17.4 million, or 3.0%, to $590.3 million, with a strategic focus on organic growth.
• Long-term debt decreased by $8.3 million, or 80.5%, to $2.0 million, reducing reliance on wholesale funding.
• Total stockholders' equity increased by $49.4 million, or 55.0%, to $139.3 million, significantly strengthened by the second-step conversion and stock offering.
• Non-performing assets decreased by $2.0 million, or 51.8%, to $1.8 million.
• Allowance for credit losses as a percent of non-performing loans improved to 265.57%.
• The Bank's Community Bank Leverage Ratio (CBLR) of 16.34% and Total Risk-Based capital ratio of 22.76% indicate it is well-capitalized, exceeding regulatory requirements.

Negatives

• The credit to provision for credit losses decreased to $(269) thousand for the three months ended September 30, 2025, from $(229) thousand in the prior year, indicating a smaller reduction in reserves despite improved asset quality.
• The credit to provision for credit losses on loans and unfunded commitments decreased to $(221) thousand for the nine months ended September 30, 2025, from $(866) thousand in the prior year, indicating a smaller reduction in reserves despite improved asset quality.
• Residential, oneto four-family real estate loans decreased by $9.320 million, or 5.8%, from December 31, 2024.
• Non-interest bearing deposits decreased by $7.360 million, or 7.6%, from December 31, 2024.

Risks

• The strength of the United States economy in general and of the local economies in which operations are conducted.
• The effect of changes in monetary and fiscal policy, including changes in interest rate policies of the Board of Governors of the Federal Reserve System.
• Inflation, and market and monetary fluctuations.
• Climate change.
• Tariffs.
• Deterioration in the credit quality of the loan portfolio and/or the value of the collateral securing repayment of loans.
• Unanticipated changes in the liquidity position.
• Reduction in the value of investment securities.
• The cost and ability to attract and retain key employees.
• Regulatory or legal developments, tax policy changes.
• Ability to implement and execute the business plan and strategy and expand operations.
• The ability of customers to make loan payments.
• The effect of competition on rates of deposit and loan growth and net interest margin.
• Ability to continue to control costs and expenses.
• Any future FDIC insurance premium increases, or special assessment may adversely affect earnings.
• Risks from data loss or other security breaches, including cyber-attacks on the company or its third-party vendors or service providers.
• The failure of financial institutions may adversely affect the business, and the market price of common stock.
• Risks relating to pandemics and other public health issues.
• Risks relating to geopolitical conflicts.
• Changes in accounting principles, policies, or guidelines.
• Success in managing the risks involved in the business.
• 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').
• Deterioration of forecasted economic conditions may lead to further required increases to the allowance for credit losses.
• Concentration of credit risk to a particular industry, counterparty, borrower or issuer.

Future Outlook

The company anticipates sufficient funds to meet current funding commitments and may consider wholesale funding options in the future to maintain liquidity and manage costs. No material capital expenditures are anticipated in 2025. The company plans to commence a share repurchase program for up to 5% of its outstanding common stock after July 20, 2026.

Management Comments

• Our financial performance for the three months ended September 30, 2025 was positively impacted by a $972,000 increase in net interest income along with an increase in non-interest income.
• Net income for the nine months ended September 30, 2025 was positively impacted by a $2.2 million increase in net interest income along with a decrease in non-interest expenses.
• We remained strategically focused on originating shorter duration, adjustable-rate loans to diversify our asset mix and to manage interest rate risk while continuing to reduce our reliance on wholesale funding sources.
• Our strategic focus remains centered on organic growth of deposits among our retail and commercial customers to reduce our reliance on wholesale funding and to strengthen customer relationships.
• 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.

Industry Context

The banking industry, including Lake Shore Bancorp, is significantly influenced by broader economic conditions, competitive pressures, and the monetary and fiscal policies set by the federal government, particularly the Federal Reserve's interest rate decisions. Lending activities are shaped by demand for housing and commercial real estate, competition among lenders, and the availability of funds. Deposit balances and funding costs are sensitive to prevailing market rates and customer preferences. The company's operations are concentrated in Western New York, making local economic conditions a key factor. The competitive interest rate environment has influenced customer demand for specific deposit products, leading to an increase in money market and core time deposits.

Corporate Governance

Related Party Transactions

• The Employee Stock Ownership Plan (ESOP) purchased 396,036 shares of stock in the new company at an average cost of $10.00, funded by a $4.0 million loan from the company as part of the conversion proceeds.

Stakeholder Impact

• Shareholders: Benefited from the successful second-step conversion, the associated stock offering, a declared cash dividend, and the announcement of a future share repurchase plan, all contributing to increased equity and potential returns.
• Employees: The Employee Stock Ownership Plan (ESOP) received additional shares, enhancing employee benefits and alignment with company performance.
• Customers: The conversion of Lake Shore Savings Bank to Lake Shore Bank (a New York commercial bank) and the strategic focus on organic deposit growth aim to strengthen customer relationships and service offerings.
• Creditors: The repayment of $8.3 million in long-term debt with the FHLBNY demonstrates prudent balance sheet management and reduces financial leverage.

Next Steps

• Payment of a cash dividend of $0.09 per share on November 12, 2025, to stockholders of record as of November 3, 2025.
• Commencement of a plan to repurchase up to 5% of outstanding shares of common stock, expected to begin after July 20, 2026.

Key Dates

Recommendation

The company demonstrated robust financial performance with substantial increases in net income and EPS, driven by improved net interest income and effective cost management. The successful second-step conversion and associated capital raise significantly strengthened the balance sheet and capital ratios. Asset quality improved markedly with a significant reduction in non-performing assets and a high allowance for credit losses coverage. The announced dividend and future share repurchase plan signal confidence in future performance and a commitment to shareholder returns. These factors collectively indicate a strong financial position and positive outlook, making it an attractive investment.

Keywords

Banking, Financial Services, Community Bank, SEC Filing, 10-Q, Earnings Report, Net Interest Income, Loan Portfolio, Deposits, Capital Ratios, Asset Quality, Second-Step Conversion, Stock Offering, Share Repurchase, Dividend, Western New York