EDGAR 10-K Filing

Company CIK: 1341318
Filing Year: 2025
Filename: 1341318_10-K_2025_0000950170-25-039548.json

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ITEM 1. BUSINESS
Item 1. Business.
Forward-Looking Statements
This annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on Lake Shore Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance. 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 reflect management's current views of future events and operations. These forward-looking statements are based on information currently available as of the date of this report. It is important to note that these forward-looking statements are not guarantees of future performance and involve and are subject to significant risks, contingencies, and uncertainties, many of which are difficult to predict and are generally beyond our control. 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, data loss or other security breaches, including a breach of our operational or security systems, policies or procedures, including cyber-attacks on us or on our third party vendors or service providers, economic conditions, the effect of changes in monetary and fiscal policy, inflation, unanticipated changes in our liquidity position, climate change, geopolitical conflicts, public health issues, increased unemployment, deterioration in the credit quality of the loan portfolio and/or the value of the collateral securing repayment of loans, reduction in the value of investment securities, the cost and ability to attract and retain key employees, regulatory or legal developments and changes, tax policy changes, and our ability to implement and execute our business plan and strategy and expand our operations. These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements, as our financial performance could differ materially due to various risks or uncertainties. We do not undertake to publicly update or revise our forward-looking statements if future changes make it clear that any projected results expressed or implied therein will not be realized.
General
Lake Shore Bancorp, Inc. (“Lake Shore Bancorp,” the “Company,” “us,” or “we”) operates as a mid-tier, federally chartered savings and loan holding company for Lake Shore Savings Bank (“Lake Shore Savings” or the “Bank”). A majority of Lake Shore Bancorp’s issued and outstanding common stock (63.4% as of December 31, 2024) is held by Lake Shore, MHC (the “MHC”), a federally chartered mutual holding company, which serves as the parent company to Lake Shore Bancorp. The remaining shares of common stock are owned by public stockholders and Lake Shore Bancorp’s Employee Stock Ownership Plan (“ESOP”). Our common stock is traded on the Nasdaq Global Market under the symbol “LSBK”. Unless the context otherwise requires, all references herein to Lake Shore Bancorp or Lake Shore Savings include Lake Shore Bancorp and Lake Shore Savings on a consolidated basis.
Lake Shore, MHC
Lake Shore, MHC was organized in 2006 as a federally chartered mutual holding company. The MHC does not engage in any substantial business activity other than its investment in a majority of the common stock of Lake Shore Bancorp. The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) is the regulator for the MHC. Federal law and regulations require that as long as the MHC is in existence, it must own at least a majority of Lake Shore Bancorp’s common stock.
Lake Shore Bancorp, Inc.
Lake Shore Bancorp, Inc. was organized in 2006 for the purpose of acting as the savings and loan holding company for Lake Shore Savings Bank in connection with the Company’s initial public stock offering. The Company, a federal corporation, is regulated by the Federal Reserve Board. The Company owns all of the issued and outstanding capital stock of Lake Shore Savings Bank.
Lake Shore Savings Bank
Lake Shore Savings Bank was chartered as a New York savings and loan association in 1891. In 2006, the Bank converted from a New York-chartered mutual savings and loan association to a federal savings bank charter. The Bank is subject to the supervision and regulation of the Office of the Comptroller of the Currency (“OCC”).
Lake Shore Savings Bank’s principal business consists of attracting retail deposits from the general public in the areas surrounding its branch offices and investing those deposits, together with funds generated from operations, primarily in commercial real estate loans, one- to four-family residential mortgage loans, home equity lines of credit and, to a lesser extent, commercial business loans, consumer loans, and investment securities. Our revenues are principally derived from interest earned on our loans and investment securities. Our primary sources of funds for lending and investments are deposits, borrowings, receipts of principal and interest payments on loans and securities, proceeds from sales of loans or securities, maturities and calls of investment securities and income resulting from operations in prior periods.
Available Information
Lake Shore Bancorp’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website, www.lakeshoresavings.com, on the “Investor Relations” page under “About Us”. Such reports are also available on the Securities and Exchange Commission’s website at www.sec.gov. Information on our website shall not be considered a part of this Form 10-K.
Market Area
Lake Shore Savings Bank is a community bank that offers a variety of banking products to serve the market areas surrounding our ten branch offices located within the Western New York region of New York State.
Our geographic market area for loans and deposits is principally located within Erie and Chautauqua Counties of Western New York. As of the most recent United States Census Bureau population census as of July 1, 2023, Erie and Chautauqua Counties had an estimated combined population of approximately 1.1 million. Our market area is bounded by Lake Erie to the west and Canada to the north, and includes the city of Buffalo, the second largest metropolitan area in the State of New York by population. The market area includes several hospitals, a medical school and a major cancer research and treatment facility, along with a centralized medical campus to cultivate clinical care, research, education and entrepreneurship. The area has several colleges and universities, community colleges and various vocational and technical schools. Western New York is home to professional sports franchises and an international airport. The area hosts a broad diversity of industry, commercial establishments and financial institutions as well as a skilled and productive workforce.
New York State currently has several incentive programs for businesses to invest in the Western New York region. One example is the “Start-Up NY” program, which offers tax incentives to start, expand or relocate a qualified business to a tax-free area within the state, primarily near a university or community college campus, in order to access top talent and research facilities. Qualified businesses for this program include advance materials & manufacturing, biotech & life sciences, tech & electronics, and optics & imaging. This program has generated significant interest in Western New York for new business development due to its proximity to Canada, history of being a strong industrial and manufacturing center, and the number of quality colleges and universities in the area.
The Erie County region and the City of Buffalo experienced strong economic expansion prior to the onset of the COVID-19 pandemic, including major growth in the health care and education sectors, and resurgence in the central business district, which has led to an influx of private investment in development of hotels and housing in the downtown sector. The Buffalo Niagara Medical Campus has grown significantly with the construction of a new children’s hospital, expansion of an existing cancer/research hospital and construction of a new medical school by the State University of New York at Buffalo. Development on the waterfront has centered on redevelopment of property for mixed use, including public access and private development that includes office space, ice rinks, hotels and restaurants. There has also been an increased interest in innovative start-up companies, driven by the investment of 43North, which holds an annual competition enhanced by significant funding to attract innovative start-up companies to relocate to Buffalo, NY. This type of economic development has had a positive impact on the small business and middle-market customers that we focus on and we believe
we will be able to capitalize on opportunities created by this economic growth. Given the significant restructuring of the local economy that has occurred within the region over the past few decades, the regional economy is considered diversified with a housing market that remains strong and various commercial and housing development projects continue to move forward to address local demand. The lending opportunities in our market area remain dynamic and we believe that such activity will continue.
Our primary market area has historically been stable, with a diversified base of employers and employment sectors. The local economies that we serve are not dependent on one key employer. Transportation equipment is a large manufacturing industry in the Buffalo area, as well as production of automobile component parts. The principal employment sectors are service-related, wholesale and retail trade, and durable-goods manufacturing.
Our future growth will be influenced by the strength of our regional economy, other demographic trends and the competitive environment. We believe that we have developed lending products and marketing strategies to address the credit-related needs of the residents and small businesses we serve in our local market area.
Competition
We face intense competition both in making loans and attracting deposits. Western New York has a significant number of financial institutions, including a super regional bank which has its headquarters in Buffalo, NY, and branches of large money centers and regional and super regional banks which have resulted from the consolidation of the banking industry in New York and surrounding states. Many of these competitors have greater resources and offer additional services than we do. We also face significant competition from online service providers who offer financial services, including loan and deposit products.
Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, online retail mortgage lenders and other financial service companies. The most direct competition for deposits comes from commercial banks, savings banks, credit unions, and online banks. We face additional competition for deposits from non-depository competitors such as mutual funds, securities and brokerage firms and insurance companies. With our longstanding history in Chautauqua County, we had the third most, or 15.2% of the deposit market share of the county as of June 30, 2024, while our largest two competitors held 25.8% and 20.5%, respectively. Meanwhile, we continue our expansion in Erie County, where we held 0.5% of the deposit market share as of June 30, 2024, an increase from 0.4% in 2023, while the overall deposits at banks and savings institutions experienced a significant decrease during the same period.
Many of our competitors are larger and have greater financial resources than us. Some of our competitors are not subject to the same degree of regulation as that imposed on federal savings banks or federally insured institutions, and these other institutions may be able to price loans and deposits more aggressively. Competition for deposits and the origination of loans may limit our growth and adversely impact our profitability in the future.
We expect competitive pressure to remain intense primarily due to technological advances and the continuing trend of consolidation in the financial services industry. Technological advances have lowered barriers to entry in our local market area by allowing banks to expand their geographic reach by providing services over the internet and have made it possible for non-depository institutions, including fintech companies, to offer products and services that have traditionally been provided by banks. We attempt to be competitive with all financial institutions in our service area with respect to interest rates paid on interest-bearing deposit products and interest rates charged on loans. We believe the primary factors in competing for deposits and loans is through personalized service, knowledge of the local market area and our economy, local decision making, technological convenience via mobile and online banking and active participation and support of the communities we serve.
Lending Activities
General. Our principal lending activity is the origination of fixed rate and adjustable rate mortgage loans collateralized by commercial and residential real estate primarily located within our market area. We also originate commercial business loans, home equity loans and consumer loans. We retain the majority of loans that we originate. However, we may sell residential mortgage loans into the secondary market, with retention of servicing rights, in order to
manage interest rate and liquidity risk when deemed appropriate. Additional efforts to manage interest rate risk include the origination of shorter-term, adjustable rate loans.
The loan portfolio composition table is set forth in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Report.
Loan Maturity. The following tables present the contractual maturity of our gross loans at December 31, 2024 and sets forth our fixed and adjustable rate loans at December 31, 2024, that are contractually due after December 31, 2025. The table does not include the effect of prepayments or scheduled principal amortization. Loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less.
Real Estate
Other Loans
Residential, One- to Four-Family(1)
Home Equity
Commercial(2)
Commercial
Consumer
Total
(Dollars in thousands)
Amounts due in:
One year or less
$
$
$
24,196
$
4,659
$
$
29,983
After one year through five years
1,904
2,838
99,436
7,186
111,699
After five years through 15 years
33,724
24,939
197,352
3,883
-
259,898
Beyond 15 years
125,613
19,297
-
-
-
144,910
Total
$
161,331
$
47,456
$
320,984
$
15,728
$
$
546,490
Interest rate terms on amounts due after one year:
Fixed rate
$
157,153
$
5,795
$
110,579
$
8,321
$
$
282,183
Adjustable rate
4,088
41,279
186,209
2,748
-
234,324
Total
$
161,241
$
47,074
$
296,788
$
11,069
$
$
516,507
(1)Includes one- to four-family construction loans.
(2)Includes commercial construction loans.
The following table presents our gross loan originations, purchases, sales, and principal repayments for the years indicated. There were no sales of any loans in 2024 or 2023.
For the Year Ended December 31,
(Dollars in thousands)
Total Loans:
Balance outstanding at beginning of year
$
558,536
$
576,709
Originations:
Real estate loans:
Residential, one- to four-family(1)
5,750
12,496
Home equity
7,236
13,470
Commercial (2)
34,850
26,400
Other loans:
Commercial
5,120
3,560
Consumer
Total originations
53,320
56,336
Deduct:
Principal repayments:
Real estate loans
58,925
67,359
Commercial and consumer loans
6,429
7,029
Total principal repayments
65,354
74,388
Transfers to foreclosed real estate
-
Loans charged off
Total deductions
65,366
74,509
Balance outstanding at end of year
$
546,490
$
558,536
(1)Includes one- to four-family construction loans.
(2)Includes commercial construction loans.
Commercial Real Estate Loans. We remained focused on originating commercial real estate loans and have assembled a strong team of loan officers to grow this portfolio. As such, our primary lending activity is the origination of commercial real estate loans to finance the purchase or construction of real property or to refinance real property. For the majority of our commercial real estate loan portfolio, the collateral is primarily located within our primary market area, Erie and Chautauqua Counties. At December 31, 2024, commercial real estate loans, which include construction loans, totaled $321.0 million and represented 58.7% of our total gross loan portfolio.
Commercial real estate loans that are collateralized by residential properties and multi-family apartment complexes made up 40.0% of the commercial real estate loan portfolio as of December 31, 2024 and totaled $128.3 million with a weighted average interest rate of 5.45%. Commercial real estate construction loans and commercial real estate loans secured by land totaled $21.8 million, or 6.7% of the commercial real estate portfolio, at December 31, 2024 with a weighted average interest rate of 7.85%. Non-residential, non owner-occupied commercial real estate loans amounted to $112.6 million, or 35.1% of our commercial real estate portfolio, while non-residential, owner-occupied commercial real estate loans amounted to $58.3 million, or 18.2% of our commercial real estate portfolio. These amounts can be further disaggregated into the following concentrations:
At December 31, 2024
Gross Loan Balance
% of Total Commercial Real Estate
Weighted Average Interest Rate
Non-Residential, Non Owner-Occupied:
Office
$
39,813
12.4
%
5.41
%
Retail
28,101
8.8
%
5.63
%
Hotel/Motel
11,317
3.5
%
7.07
%
Self Storage
9,218
2.9
%
5.11
%
Warehouse
7,677
2.4
%
5.82
%
Other
16,493
5.1
%
5.44
%
Total Non-Residential, Non Owner-Occupied
$
112,619
35.1
%
5.63
%
Non-Residential, Owner-Occupied
Office
$
24,952
7.8
%
6.16
%
Warehouse
13,316
4.1
%
5.34
%
Restaurant
11,804
3.7
%
6.87
%
Other
8,253
2.6
%
6.52
%
Total Non-Residential, Owner-Occupied
$
58,325
18.2
%
6.18
%
In underwriting commercial real estate loans, consideration is given to historic and expected net operating income generated by the real estate, the age and condition of the collateral, the financial resources and income level of the borrower and any guarantors, current and projected occupancy levels, location of the property, and the borrower’s business experience. Our commercial real estate loans are appraised by third party independent appraisers approved by the board of directors and reviewed by an independent firm prior to acceptance. Personal guarantees are typically obtained from commercial real estate borrowers.
We originate a variety of fixed and adjustable-rate commercial real estate loans generally for terms of 5 to 10 years and payments based on an amortization schedule of up to 25 years. Adjustable-rate loans are typically based on an index such as the prime rate or the FHLBNY advance rates with an added spread based on the type, size and risk of the loan. The rate is typically fixed for the first five years of the loan. Some adjustable-rate loans are subject to an interest rate floor. We typically lend up to a maximum loan-to-value ratio of 50% to 80% depending on the type and condition of the property being financed. Commercial real estate loans require a minimum debt service coverage ratio ranging from 1.15 to 1.50 depending on the type of property being financed and the strength of the personal guarantees of the owners. Fixed rate loans are typically subject to prepayment premiums if the loan is paid off within five years of origination and prior to the scheduled maturity.
At December 31, 2024, the average loan balance outstanding in the commercial real estate loan portfolio was $875,000 and the largest individual commercial real estate loan outstanding, net of participations sold, was a $10.6 million loan secured by multi-family real estate. This loan was performing in accordance with its original repayment terms at December 31, 2024.
Commercial real estate loans have larger balances and involve a greater degree of risk than one- to four-family residential loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on commercial real estate loans often depend on the successful operation and management of the properties or underlying businesses. As a result, repayment of such loans may be subject to a greater extent, than residential, one- to four-family real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on commercial real estate loans, we require borrowers and/or loan guarantors to provide annual financial statements on larger multi-family and commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider the net cash flow of the project, the borrower’s expertise, credit history and the value of the underlying property. In addition, we monitor the tenancy of the properties as to occupancy, lease rates, term of lease and tenant credit worthiness. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers, which generally require substantially greater evaluation and oversight efforts. Our loan policies limit the amount of loans to a single borrower or group of borrowers to reduce this risk and are designed to set such
limits within those prescribed by applicable federal statutes and regulations. We engage a third party to periodically conduct a credit review of the commercial real estate portfolio, including compliance with our underwriting standards and policy requirements. In addition, we engage a third party to perform property site inspections on an annual basis as required by our Commercial Loan Policy.
We originate commercial construction loans primarily to established local developers to finance the construction of commercial and multi-family properties. We provide construction loans to local developers for the construction of one-to four-family residential developments. We also originate renovation loans, enabling a borrower to partially or totally refurbish an existing structure, which are structured as construction loans and monitored in the same manner.
These loans typically have a construction period of up to 24 months or longer, whereby draws are taken and interest only payments are made. As part of the draw process, inspection and lien checks are required prior to the disbursement of the proceeds. Interest rates on disbursed funds are based on the rates and terms set at closing. The majority of our commercial real estate construction loans are variable rate loans with rates tied to the prime rate, plus a premium. A floor rate may also be established in conjunction with a variable rate loan. A minimum of interest only payments on disbursed funds must be made on a monthly basis during the construction period. At the end of the construction period, the loan typically converts to a commercial real estate mortgage.
Construction loans can be affected by economic conditions and the value of the underlying property. Construction loans may have additional risks related to advancing loan funds during construction due to the uncertain value of the property prior to the completion of construction. The repayment of a construction loan is, to a large degree, dependent on the successful and timely completion of the construction of the subject property. Construction delays may further impair the borrower’s ability to repay the loan. We limit our risks during the construction period as disbursements are not made until the required work for each advance has been completed and a lien check has been performed.
One- to Four-Family Residential Mortgage Lending. At December 31, 2024, our one- to four-family residential loans (including residential construction loans) totaled $161.3 million and represented 29.5% of the total gross loan portfolio. Our residential mortgage loan originations are obtained from customers, residents of our local communities or referrals from local real estate agents, brokers, attorneys, or builders. The majority of residential loans originated are fixed rate loans (approximately 97.5% of the residential, one- to four-family portfolio at December 31, 2024); although we do offer adjustable rate loan products to our customers. We have historically retained the majority of residential mortgage loans that we originate.
One- to four-family residential mortgage loan originations are generally for terms up to 30 years; however, we do offer and have successfully originated loans with shorter terms of 10, 15, or 20 years. One- to four-family residential real estate loans may remain outstanding for significantly shorter periods than their contractual terms as borrowers may refinance or prepay loans at their option without penalty. Conventional one- to four-family residential mortgage loans originated by us customarily contain “due-on-sale” clauses that permit us to accelerate the indebtedness of the loan upon transfer of ownership of the mortgaged property. We do not offer “interest only” mortgage loans or “negative amortization” mortgage loans.
Our residential lending policies and procedures ensure that the majority of one- to four-family residential mortgage loans that we originate generally conform to secondary market guidelines, although we also originate non-conforming loans. We underwrite all conforming loans (i.e. loans with less than a $766,550 loan balance during 2024) using the criteria required by the Federal Home Loan Mortgage Corporation (“FHLMC”). We originate one- to four-family residential mortgage loans with a loan-to-value ratio up to 100%, and up to 101% with our United States Department of Agriculture (“USDA”) Rural Development Guaranteed Loan Program (“GLP”) mortgage loan product. Mortgages originated with a loan-to-value ratio exceeding 80% normally require private mortgage insurance.
During 2024, there were no one- to four-family residential mortgage loans sold to the secondary mortgage market. We may offer loans through programs offered by the State of New York Mortgage Agency (“SONYMA”) which are originated for sale. We retain all servicing rights for one- to four-family residential mortgage loans that we sell.
We also originate loans above the lending limit for conforming loans, which we refer to as “jumbo loans.” We originate jumbo loans with fixed-rates and terms of up to 30 years. At December 31, 2024, residential, one- to four-family loans with balances in excess of the 2024 conforming loan limit totaled $4.7 million, or 3.5% of the one- to four-family
residential mortgage portfolio. Jumbo loans carry greater risk than conforming loans as there are a limited number of potential buyers for this type of real estate which results in greater price volatility. As a result, these loan types are subject to more conservative underwriting requirements.
We originate one- to four-family mortgage loans on non-owner occupied properties that the borrower holds for investment purposes. These loans have a higher interest rate and shorter terms than loans for an owner-occupied property. The loans typically have a fixed interest rate, terms up to 25 years and a loan to value ratio up to 75%. As of December 31, 2024 these loans represented $18.4 million, or 11.4% of the one- to four-family residential mortgage portfolio.
We offer adjustable rate mortgage loans with a maximum term of 30 years. When an adjustable rate mortgage is originated, the initial interest rate is established based on market conditions and competitor rates. The rate adjusts annually after one, five, or seven years, depending on the loan product. After the initial fixed rate time period, the interest rate on these loans will re-price based upon a specific U.S. Treasury index plus an additional margin, taking into consideration the cap and floor rates established at the time of loan origination.
The retention of adjustable rate one- to four-family residential mortgage loans in our loan portfolio helps reduce our exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of the pricing of adjustable rate residential mortgage loans. During periods of rising interest rates, the risk of default on one- to four-family residential adjustable rate mortgage loans may increase due to the increase of interest cost to the borrower. Furthermore, changes in the interest rates on adjustable rate mortgages may be limited by an initial fixed-rate period or by contractual limits on periodic interest rate adjustments, and as such adjustable rate loans may not adjust as quickly as our interest-bearing liabilities during a period of rapid increases in interest rates.
We originate construction-to-permanent loans for the purpose of construction of primary and secondary residences. At December 31, 2024, there were no residential construction-to-permanent loans outstanding. We issue a commitment that has one closing which encompasses both the construction phase and permanent financing. The construction phase is a maximum of twelve months and requires the borrower to make interest only payments at the rate stated in the loan agreement. The loan to value on construction-to-permanent loans cannot exceed 80.0% of the estimated completed value at the end of the project.
Construction lending generally involves a greater degree of risk as the repayment of the loan is dependent on the successful and timely completion of the project. Lake Shore Savings completes inspections during the construction phase prior to any disbursements, which limits our risk. Construction delays may impair the borrower’s ability to repay the loan.
One- to four-family real estate loans can be affected by economic conditions and the value of the underlying collateral. The majority of our one- to four-family residential loans are secured by property located in Western New York and are affected by economic conditions in this market area. Western New York’s housing market has consistently demonstrated stability in home prices resulting in stable collateral value and lower risk of loss.
Home Equity Loans and Lines of Credit. We currently provide all-in-one home equity lines of credit and have provided home equity loans in the past to our customers. Home equity lines of credit are generally made for owner-occupied homes and are secured by first or second mortgages on residences. At December 31, 2024, home equity loans and lines of credit totaled $47.5 million and represented 8.7% of the total gross loan portfolio. The all-in-one home equity line of credit must have a minimum line amount of $5,000 up to a maximum of 90% of the total loan-to-value ratio for qualified borrowers. The all-in-one home equity line of credit product has interest rates tied to the prime rate and generally has a 15 year draw period and a 15 year payback period. Since 2010, our adjustable rate home equity loans include limits on decreases in the interest rate of the loan. The decrease in the interest rate may not be below the “floor” rate established at the time of origination. A customer has the option to convert either a portion, or the entire line of credit balance, to a term loan at a fixed rate of interest. As the customer pays down the balance on the term loan, the funds available on the line of credit increase by a like amount. All-in-one home equity lines of credit have 30 year maximum terms.
Home equity loans can be affected by economic conditions and the value of the underlying property. Home equity loans may have increased risk of loss if we do not hold the first mortgage resulting in Lake Shore Savings Bank being in a secondary position in the event of collateral liquidation. At December 31, 2024, home equity loans and lines of credit where we do not hold the first mortgage represented 19.7% of the outstanding principal within our home equity loan portfolio.
During periods of rising interest rates, the risk of default on home equity loans may increase due to the increase of interest cost to the borrower.
Commercial Business Loans. In addition to commercial real estate loans, we also engage in commercial business lending, (also known as C&I lending) primarily to small businesses. A commercial business loan may be a business installment loan, line of credit, or other commercial loan. At December 31, 2024, commercial business loans totaled $15.7 million, or 2.9% of the total gross loan portfolio. Most of our commercial business loans have fixed interest rates and are for terms generally not in excess of five years, while commercial lines of credit have variable interest rates. In underwriting commercial business loans, consideration is typically given to the financial condition and the debt service coverage capabilities of the borrower/operating entity, projected cash flows and collateral value. Whenever possible, we collateralize these loans with a first lien on general business assets and a specific lien on the equipment being purchased and require personal guarantees from principals of the borrower. We offer commercial loan services designed to give business owners borrowing opportunities for modernization, inventory, equipment, construction, real estate, purchases or improvements, working capital, vehicle purchases, and the refinancing of existing corporate debt.
At December 31, 2024, our largest individual commercial business loan had an unpaid principal balance of $1.3 million and was secured by business equipment. At December 31, 2024, this loan was performing in accordance with its contractual terms.
Commercial business loans are generally considered to involve a higher degree of risk than residential mortgage loans because the collateral underlying the loans may be in the form of furniture, fixtures, and equipment and/or inventory subject to market obsolescence and accounts receivable which must be monitored. Commercial business loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower’s operation. Such risks can be significantly affected by economic conditions. In addition, commercial business lending generally requires substantially greater oversight efforts compared to residential real estate lending. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary form of repayment and may be insufficient to recover the outstanding balance of the loan. We engage a third party to conduct an annual credit review of the commercial business loan portfolio, including compliance with our underwriting standards and policy requirements.
Consumer Loans. To a lesser extent, we offer a variety of consumer loans. At December 31, 2024, consumer loans totaled $1.0 million, or 0.2% of the total gross loan portfolio. Generally, the volume of consumer lending has declined as borrowers have opted for home equity lines of credit, which have lower interest rates. The largest component of our consumer loan portfolio are personal consumer loans and overdraft lines of credit. Our consumer loan portfolio also consists of vehicle loans, loans secured by certificates of deposit, secured and unsecured property improvement loans, and other secured loans.
Consumer loans tend to have a higher credit risk due to the loans being either unsecured or secured by rapidly depreciable assets. Furthermore, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on consumer loans in the event of a default.
Loan Participations. From time to time, we may originate a commercial real estate loan or commercial business loan which may exceed our internal lending or concentration limits and sell a portion of the loan to another financial institution. The financial institution is typically a community bank located in New York State and its lending team is known by our commercial lenders. This allows us to meet the needs of our customers and comply with our internal lending limits. In some instances, we may purchase participation interests in loans where we are not the lead lender. In both of these circumstances, we follow our customary loan underwriting and approval policies. We have strong relationships with other community banks in our primary market area that may desire to purchase participations, and we may increase our sales of participations in the future, if deemed appropriate. At December 31, 2024, our sold participations in commercial real estate and commercial business loans totaled $19.5 million and $223,000, respectively, all of which were collateralized by properties or business assets within our primary market area in Western New York. We may also purchase commercial real estate loan or commercial business loan participations where we are not the lead lender in the future if deemed appropriate
and at December 31, 2024, our purchased participations where we are not the lead lender in commercial real estate and commercial business loans totaled $6.4 million and $32,000, respectively. All of our loan participations are collateralized by properties or business assets within our primary market area and governed by a loan participation agreement.
Loan Approval Procedures and Authority. Our lending policies are approved annually by our Board of Directors. Branch managers have the authority to originate home equity or consumer loans up to amounts approved by the Board of Directors. Home equity loans and consumer loans secured by real estate in excess of $25,000 and all one- to four-family residential mortgage loans up to $766,550 require approval by the Internal Residential Loan Committee; loans between $766,550 and $1.0 million, require approval of the Internal Residential Loan Committee and designated bank officers or loan committee member. Any of the above-mentioned loans with non-standard terms such as high loan-to-value ratios will require additional approval levels up to and including approval by the Board of Directors. All non-commercial loans that are in excess of $1.0 million, require approval from the Loan Committee of the Board of Directors. Director loans require approval from the Board of Directors.
Commercial Loan Officers have the authority to originate commercial real estate and commercial business loans up to amounts approved by the Board of Directors. Commercial loans with total one obligor credit in excess of $100,000 and up to $1.5 million require the approval of two members of the Internal Commercial Loan Committee, one of which must be a designated member of executive management. Commercial loans with total one obligor credit in excess of $1.5 million require majority approval by the Board Loan Committee. Loans with exceptions require a higher approval level.
Current Lending Procedures. Upon receipt of a completed loan application from a prospective borrower, we order a credit report and verify certain other information. If necessary, we obtain additional financial or credit related information. We require an appraisal for all residential and commercial real estate loans and home equity loans, including loans made to refinance existing mortgage loans. Appraisals are performed by licensed third-party appraisal firms. An appraisal management firm, approved by the Board of Directors, has been engaged to handle all requests for appraisals on residential real estate loans. We require title insurance on all one- to four-family residential and commercial real estate loans and certain other loans. We also require property and casualty insurance on all real estate loans, and if applicable, we require borrowers to obtain flood insurance prior to closing. Based on loan-to-value ratios and lending guidelines, escrow accounts may be required for such items as real estate taxes, property and casualty insurance, flood insurance, and private mortgage insurance premiums.
Asset Quality
One of our key operating objectives has been, and continues to be, maintaining a high level of asset quality. Our high proportion of commercial real estate and one- to four-family residential mortgage loans primarily collateralized by property in Western New York, which historically has had stable property values, the maintenance of sound credit standards for new loan originations, our loan review procedures, including third party loan reviews, and strong executive management focus on credit quality have been factors in monitoring and managing our levels of credit risk. These factors have contributed to our strong financial condition.
Collection Procedures. We have adopted a loan collection policy and procedures to maintain adequate control on the status of delinquent loans and to ensure compliance with the Fair Debt Collection Practices Act, the Dodd-Frank Act, the Consumer Protection Act, the New York State Real Property Actions and Proceedings Law, and other applicable regulatory guidelines. When a borrower fails to make required payments on a residential, home equity, commercial, or consumer loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status.
Prior to proceeding with any foreclosure action in the case of a secured loan, we will review the collateral to determine whether its possession would be cost-effective for us. In cases where the collateral fails to fully secure the loan, in addition to repossessing the collateral, we may also sue on the note underlying the loan.
Non-performing Loans and Non-performing Assets. Loans are periodically reviewed for performance. Management individually evaluates loans when it is probable that at least a portion of the loan will not be collected in accordance with the original loan terms due to a deterioration in the financial condition of the borrower or in the value of the underlying collateral or when a loan is modified due to a borrower experiencing financial difficulty, dependent on the
loan type. When a loan is determined to be individually evaluated, the measurement of the loan is based on the present value of the expected future cash flows, or the fair value of the collateral, if the loan is collateral-dependent. If the measurement value is less than the loan balance, the loss is recorded against the allowance for credit losses. Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal, or when a loan becomes 90 days past due, unless an evaluation by management indicates that the loan is in the process of collection and is either guaranteed or well secured. When management designates loans on which we stop accruing interest income as non-accrual loans, we reverse outstanding interest income that was previously credited. We return a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist and the borrower has performed for a period of at least six months.
Real estate acquired as a result of foreclosure is classified as foreclosed real estate until such time as it is sold. We record foreclosed real estate at its fair value less estimated selling costs at the date of acquisition. If a foreclosure action is commenced and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property could be sold at the foreclosure sale (to an outside bidder). If not, and we retain the property, then we will sell the real property securing the loan as soon thereafter as practical.
Loans modified due to borrowers experiencing financial difficulties occur when we grant borrowers loan modifications that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. A concession is made when the terms of the loan modification are more favorable than the terms the borrower would have received in the current market under similar financial difficulties. These concessions may include, but are not limited to, principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension. We identify loans for potential modifications related to borrowers experiencing financial difficulty primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. Generally, we will not return a loan modified due to a borrower experiencing financial difficulties to accrual status until the borrower has demonstrated the ability to make principal and interest payments under the restructured terms for at least six consecutive months. These loans are individually evaluated loans, dependent on loan type, and may result in specific reserves within the allowance for credit losses and subsequent charge-offs, if appropriate. We had no loan modifications with borrowers experiencing financial difficulty for the year ended December 31, 2024. We had two loan modifications with one borrower during 2023 in which a term extension concession was granted for the year ended December 31, 2023.
Refer to Part II, Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations” and Part IV, Financial Statements, Note 2 and Note 5 elsewhere in this report for additional details on nonperforming and individually evaluated loans.
Classification of Loans. Federal regulations require us to regularly review and classify our loans. In addition, our regulators have the authority to identify problem loans and, if appropriate, require them to be classified. Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of our loan portfolio. The credit quality grade helps management make a consistent assessment of each loan relationship’s credit risk. Consistent with regulatory guidelines, we classify loans and other assets considered of lesser quality. Such ratings coincide with the “Substandard”, Doubtful”, and “Loss” classifications used by federal regulators in their examination of financial institutions. A “Substandard” classification indicates that a loan has one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. A “Doubtful” classification has all the weaknesses of a “Substandard” classification with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. Loans classified as “Loss” are considered uncollectible and continuance as an asset is no longer warranted.
Regulations also provide for a “special mention” category (i.e. criticized loans), described as loans which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify loans as either substandard or doubtful, consider that classification in our allowance for credit losses described below. When we classify problem loans as loss, we typically charge-off the outstanding loan balance against the allowance for credit losses reserve. Our determination as to the classification of our loans and the amount of our loss allowances are subject to review by our regulators, which can require
that we establish additional loss allowances. For further discussion on how management determines when a loan should be classified, refer to Note 5 in the consolidated financial statements located elsewhere in this report.
Allowance for Credit Losses on Loans and Unfunded Commitments. On January 1, 2023, we adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses on loans and unfunded commitments is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio and commitments to extend credit. The process to determine expected credit losses utilizes analytic tools and judgment and is reviewed on a quarterly basis. We maintain the allowance through (credit) provisions for credit losses that we charge to income. We charge losses on loans against the allowance for credit losses when we believe the collection of the loan is unlikely, and all possible avenues of repayment have been analyzed, including the potential of future cash flow, the value of the underlying collateral, and strength of any guarantors or co-borrowers.
Our evaluation of risk in maintaining the allowance for credit losses includes the review of all loans on which the collectability of principal may not be reasonably assured. We consider the following qualitative and environmental factors as part of this evaluation: historical loan loss experience; payment status; the estimated value of the underlying collateral; changes in lending policies, procedures and loan review system; changes in the experience, ability, and depth of lending management and other relevant staff; trends in loan volume and the nature of the loan portfolio; and past, current, and future national and local economic conditions. There may be other factors that may warrant consideration in maintaining the allowance. Although we believe that we have established and maintained the allowance for credit losses to reflect losses inherent in our loan portfolio, based on our evaluation of the factors noted above, future additions may be necessary if economic and other conditions differ substantially from the current operating environment.
In addition, various regulatory agencies periodically review our allowance for credit losses as an integral part of their examination process. These agencies, including the Office of the Comptroller of the Currency, may require us to increase the allowance for credit losses or the valuation allowance for foreclosed real estate based on their evaluation of the information available to them at the time of their examination.
Refer to Note 5 in the consolidated financial statements located elsewhere in this report for more information on our allowance for credit losses.
The following table presents our allocation of the allowance for credit losses by loan category and the percentage of gross loans in each category to total gross loans at the end of the years indicated. The allowance for credit losses allocated to each category is not necessarily indicative of inherent losses in any category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31,
Amount
% of Allowance to Total Allowance
% of Loans in Category to Total Loans
Amount
% of Allowance to Total Allowance
% of Loans in Category to Total Loans
(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family(1)
$
7.5
%
29.5
%
$
8.2
%
30.8
%
Home equity
2.7
%
8.7
%
3.3
%
9.3
%
Commercial(2)
4,171
81.3
%
58.7
%
5,231
81.0
%
56.8
%
4,698
91.5
%
96.9
%
5,976
92.5
%
96.9
%
Other loans:
Commercial
8.2
%
2.9
%
7.3
%
3.0
%
Consumer
0.3
%
0.2
%
0.2
%
0.1
%
8.5
%
3.1
%
7.5
%
3.1
%
Balance at end of year
$
5,133
100.0
%
100.0
%
$
6,463
100.0
%
100.0
%
(1)Includes one- to four-family construction loans.
(2)Includes commercial construction loans.
For further discussion on how management evaluates its allowance for credit losses, refer to Note 5 in the consolidated financial statements located elsewhere in this report.
Investment Activities
General. The general objectives of the investment portfolio are to provide for the overall asset/liability management of Lake Shore Savings Bank. All of our securities carry market risk, as increases in market rates of interest may cause a decrease in the fair value of the securities. Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to provide collateral for pledging requirements on borrowings and deposit relationships, to generate a favorable return without incurring undue interest rate or credit risk, to complement our lending activities and to provide and maintain liquidity within established guidelines. Our investment policy outlines the pre-purchase analysis, credit, and interest rate risk assessment guidelines and due diligence documentation required for all permissible investments. In addition, our policy requires management to routinely monitor the investment portfolio as well as the markets for changes which may have a material, negative impact on the credit quality of our holdings. Our Board of Directors reviews and approves our investment policy on an annual basis. The Board of Directors has delegated primary responsibility for ensuring that the guidelines in the investment policy are followed to the Asset-Liability Committee. The Board of Directors designates members of executive management with the authority to purchase and sell securities within established plans and guidelines. All transactions are reviewed by the Asset/Liability Committee.
In establishing our investment strategies, we consider our interest rate sensitivity, the types of securities to be held, liquidity, and other factors. Federal savings banks have authority to invest in various types of assets, including U.S. Government obligations, securities of various federal agencies, obligations of states and municipalities, mortgage-backed and asset-backed securities, collateralized-mortgage obligations, certain time deposits of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements, loans of federal funds, and, subject to certain limits, corporate debt and commercial paper.
We have classified all of our investments in debt securities as “available for sale.” The debt securities are reported at fair value and unrealized gains and losses on debt securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity. Our current securities portfolio consists of collateralized mortgage obligations, mortgage backed securities, asset-backed securities, U.S. Government Agency bonds, and municipal bonds. Nearly all of our mortgage backed securities are directly or indirectly insured or guaranteed by FHLMC, the Government National Mortgage Association (“GNMA”) or the Federal National Mortgage Association (“FNMA”, or “Fannie Mae”). The municipal securities we invest in are fixed-rate, investment grade bonds issued primarily by municipalities in New York State, have maturities of 20 years or less, and many have private insurance guaranteeing repayment. The majority of municipal securities in our portfolio are unlimited general obligation bonds.
Fair values of available for sale securities are based on a market approach. Securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our third party data service provider.
We also have investments in equity securities, specifically Federal Home Loan Bank of New York (“FHLBNY”) stock, which must be held as a condition of membership in the Federal Home Loan Bank system. The level of investment is largely dependent on our level of borrowings from the FHLBNY. The investment in FHLBNY stock is considered restricted and is reported at cost on the consolidated statements of financial condition. The related changes in fair market value of equity securities are reported in other non-interest income on the consolidated statements of income.
Classification of Investments. Federal regulations require us to regularly review and classify our investments based on credit risk in determining credit quality of investment portfolios as well as for calculating risk based capital. A decline in the market value of a security due to interest rate fluctuations is not a basis for adverse classification. Instead, the classification is based on the likelihood of the timely and full collection of principal and interest.
In assessing the credit quality of securities in our investment portfolio, we conduct a risk analysis, which includes a review of third party research and analytics. If this analysis indicates that an issuer of a security illustrates credit deterioration that would result in the existence of a potential credit related loss, we will consider it for classification.
Our determination as to the classification of our investments is subject to review by our regulators. We regularly review our investment portfolio to determine whether any investments require classification in accordance with applicable regulations. Our review of our investment portfolio at December 31, 2024 resulted in two private-label asset-backed securities being classified, which is consistent with our position taken at December 31, 2023, as the issuer may not have an
adequate capacity to meet its financial commitments over the projected life of the investment or the risk of default by the obligor was possible, resulting in an expectation that we would not receive the full and timely repayment of principal and interest as expected. These two securities had an amortized cost of $0 and an aggregate fair value of $31,000 at December 31, 2024.
We assessed whether we intended to or would be more likely than not required to sell our available-for-sale securities in an unrealized loss position before the recovery of its amortized cost basis and concluded that no securities met this criteria. Furthermore, we considered whether the decline in fair value related to credit factors and concluded that no allowance for credit losses on available-for-sale securities was required as of December 31, 2024 and December 31, 2023. During the years ended December 31, 2024 and 2023, we recaptured $6,000 and $7,000 respectively, of prior year other-than-temporary impairment charges. The recaptured amounts are reflected in the “recovery on previously impaired investment securities” line item in the consolidated statements of income.
Bank Owned Life Insurance. We own several Bank Owned Life Insurance (“BOLI”) policies totaling $29.3 million and $29.4 million at December 31, 2024 and 2023, respectively. The purpose of these policies is to offset the costs of supplemental employee retirement benefit (“SERP”) plans contractually obligated to members of management and non-employee directors. Refer to Note 11 in the notes to the consolidated financial statements beginning on page of this report for more information on the SERP plans. The lives of certain key employees and non-employee directors are insured, and the Bank is the sole beneficiary and will receive any benefits upon the employee or non-employee’s death. The policies were purchased from various life insurance companies. The design of the plan allows the cash value of the policy to be designated as an asset of the Bank. The asset’s value will increase by the crediting rate, which is a rate set by each insurance company and is subject to change on a quarterly, semi-annual or annual basis. The growth of the value of the asset will be recorded in non-interest income on the consolidated statements of income. Because this is a life insurance product, current federal tax laws exempt the income from federal income taxes.
Bank owned life insurance is not secured by any government agency nor are the policies’ asset values or death benefits secured specifically by any collateral. We have worked closely with our advisor to select insurance companies and the bond ratings and financial condition of the underlying insurance companies are monitored on a quarterly basis. The failure of one of these insurance companies could result in a significant loss. Other risks include the possibility that the favorable tax treatment of the income could change, that the crediting rate will not increase in a manner comparable to market interest rates, or that this type of plan will no longer be permitted by our regulators. This asset is considered illiquid because, although we may terminate the policies and receive the original premium plus all earnings at any time, such an action would require the payment of federal income taxes on all earnings since inception.
Sources of Funds
General. Deposits are our primary source of funds for lending and other investment purposes. We may also borrow funds, primarily from the FHLBNY, to supplement the amount of funds available for lending and daily operations. In addition, we derive funds from loan and mortgage-backed securities principal repayments and prepayments and from interest and proceeds from the maturity and call of investment securities, along with cash flows from operations. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates, pricing strategies, and economic conditions.
Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. We currently offer regular savings deposits (consisting of Christmas Club and statement savings accounts), money market savings and checking accounts, interest-bearing and non-interest bearing checking accounts (i.e., demand deposits), health savings accounts, retirement accounts, time deposits, and Interest on Lawyer Accounts (“IOLA”). In addition to accounts for individuals, we also offer commercial savings, checking, and money market accounts designed for the small to medium-sized businesses operating in our market area.
Deposit flows are influenced significantly by general and local economic conditions, changes in prevailing interest rates, pricing of deposits, and competition. Our deposits are obtained from communities surrounding our branch offices and we rely primarily on paying competitive rates, service, and long-standing relationships with customers to attract and retain these deposits. We may also rely on brokers to obtain deposits for liquidity purposes. We are a participant in the IntraFi Network Deposits program. This program offers our depositors enhanced FDIC insurance coverage. On May 24, 2018, the
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “EGRRCPA”) was signed into law and as a result reciprocal deposits obtained via the IntraFi Network Deposits program are generally not considered brokered deposits. At December 31, 2024 and 2023, we had $10.5 million and $12.9 million, respectively, of depositor funds placed in the IntraFi Network Deposits program. We had no brokered time deposits at December 31, 2024, while there were $16.0 million of brokered time deposits at December 31, 2023.
When we determine our deposit rates, we consider local competition, U.S. Treasury securities offerings, the Fed Funds rate, our liquidity needs, and the rates charged on other sources of funds. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive rates to attract funds and to focus on the acquisition of lower cost core deposits as opportunities arise.
The following table presents our time deposit accounts categorized by interest rates which mature during each of the years set forth below and the amounts of such time deposits by interest rate at December 31, 2024 and 2023.
Period to maturity at December 31, 2024
At December 31,
Less than One
More than One Year to
More than Two Years to
More than Three
Year
Two Years
Three Years
Years
(Dollars in thousands)
Interest Rate Range
0.49% and below
$
7,596
$
2,310
$
$
$
11,008
$
20,785
0.50% to 0.99%
3,168
1,417
5,988
6,697
1.00% to 1.99%
3,714
-
-
3,721
6,691
2.00% to 2.99%
12,468
-
12,472
19,967
3.00% to 3.99%
23,070
11,044
2,964
37,931
12,275
4.00% to 4.99%
93,805
-
1,773
95,687
93,738
5.00% to 5.99%
40,867
-
-
-
40,867
60,661
Total
$
181,954
$
16,525
$
5,415
$
3,780
$
207,674
$
220,814
At December 31, 2024 and 2023, time deposits with remaining terms to maturity of less than one year amounted to $182.0 million and $150.5 million, respectively.
At December 31, 2024 and 2023, we had $77.5 million, or 13.5% of total deposits, and $75.7 million, or 12.8% of total deposits, respectively, in uninsured deposits in excess of the FDIC insurance limit of $250,000. At December 31, 2024, we had $33.9 million in time deposits with balances of $250,000 or more maturing as follows:
Maturity Period
Amount
(In thousands)
Three months or less
$
12,894
Over three months through six months
10,774
Over six months to twelve months
5,049
Over twelve months
5,212
Total
$
33,929
Borrowings. We maintain borrowing arrangements in the form of lines of credit through one depository institution. We may also obtain term borrowings from the FHLBNY. Our borrowings typically consist of long-term FHLBNY advances. At December 31, 2024 and December 31, 2023 we had $10.3 million and $35.3 million, respectively, of long-term debt from the FHLBNY.
Additional information regarding our deposits and borrowings are included in Notes 7 and 8 in the notes to our consolidated financial statements beginning on page of this report. Also, refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” for additional information on sources of funds.
Subsidiary Activities
Lake Shore Savings Bank is the only subsidiary of Lake Shore Bancorp. Lake Shore Savings Bank has no subsidiaries.
Employees and Human Capital Resources
Our core values of “Putting People First and Helping our Customers, Energizing our Employees, Respecting our Stockholders and Serving our Communities” begins with our employees and their well-being. As a community bank, our employees are integral to the establishment of personal relationships with each of our customers, and as such are critical to our success.
As of December 31, 2024, Lake Shore Savings Bank employed 93 full-time employees and 7 part-time employees. Lake Shore Savings employees are not represented by a collective bargaining unit. Management believes that it has good relations with our employees.
Management encourages and supports the growth and development of all our employees by providing internal and external educational opportunities. Employees have the opportunity to participate in instructor led classroom training, third party webinars, seminars, conferences, and local leadership training groups, in an effort to increase their knowledge. Whenever possible, we seek to fill open positions through internal promotions and transfers from within the organization.
As part of our efforts to attract and retain employees, as well as support their health and well-being, we provide, in addition to competitive salaries, a comprehensive benefit package that provides health, dental, life, disability and other ancillary insurance benefits, as well as a generous paid time off policy. In addition, through our 401(k), profit sharing, and ESOP programs, we facilitate the future financial well-being of our employees. Nearly all of our employees are stockholders in the Company through their participation in our Employee Stock Ownership Plan. Employee participation helps align employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates. These benefits, when combined with incentive compensation and bonus programs, serve as rewards for performance and as retention vehicles.
Supervision and Regulation
General
Lake Shore Savings Bank, a federally chartered savings bank, is subject to regulation, examination, and supervision by the OCC, while Lake Shore Bancorp, Inc. and Lake Shore, MHC, which are federally chartered savings and loan holding companies, are subject to regulation, examination, and supervision by the Federal Reserve Board. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market interest rates. Lake Shore Savings Bank also is regulated, to a lesser extent, by the FDIC with respect to insurance of deposit accounts and the Federal Reserve Board, with respect to the payment of dividends and other matters. The regulation and supervision by these government agencies establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Lake Shore Savings Bank’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s mortgage documents.
Certain of the regulatory requirements that are applicable to Lake Shore Savings, Lake Shore Bancorp and Lake Shore, MHC are described below. This description of statutes, regulations and other documents is not intended to be a complete explanation of such statutes, regulations and other documents and their effect on Lake Shore Savings, Lake Shore Bancorp and Lake Shore, MHC and is qualified in its entirety by reference to the actual statutes, regulations and other documents.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, Lake Shore Savings may originate mortgage loans secured by residential and commercial real estate, commercial business loans and consumer loans, and it may invest in certain types of debt securities and certain other assets. Certain types of lending, such as commercial real estate, commercial business and consumer loans, are subject to an aggregate limit calculated as a specified percentage of Lake Shore Savings’ capital or assets. Specifically, Lake Shore Savings may invest in non-residential real estate loans which may not in the aggregate exceed 400% of capital, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate. Lake Shore Savings also may establish subsidiaries that may engage in activities not otherwise permissible for Lake Shore Savings, including real estate investment and securities and insurance brokerage.
Examinations and Assessments. Lake Shore Savings Bank is primarily supervised by the OCC, and as such is required to file reports with and is subject to periodic examination by the OCC. Lake Shore Savings Bank is also required to pay assessments to the OCC to fund the agency’s operations.
Capital Requirements. Federal regulations require a federal savings bank to meet certain minimum capital standards. The minimum capital standards consist of a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets, a uniform leverage ratio of 4%, a Tier 1 capital to risk-weighted assets ratio of 6% of risk-weighted assets and a total capital ratio of at least 8% of risk-weighted assets. In order to be considered well-capitalized, the Bank must have a CET1 ratio of 6.5%, a Tier 1 ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%. The regulatory standards require unrealized gains and losses on certain “available for sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Lake Shore Savings Bank has exercised this one-time opt-out and therefore excluded unrealized gains and losses on certain “available-for-sale” securities holdings for purposes of calculating regulatory capital when applying the general rule. Additional restraints are also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests.
Capital definitions include:
•Common equity Tier 1 capital is generally defined as common stockholders’ equity, including retained earnings but excluding accumulated other comprehensive income.
•Tier 1 capital is generally defined as Common Equity Tier 1 capital and Additional Tier 1 capital.
•Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.
•Total capital includes Tier 1 capital and Tier 2 capital.
•Tier 2 capital is comprised of capital instruments and related surplus meeting specific requirements, and may include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital. Lake Shore Savings has exercised this one time opt-out election and does not include AOCI in its regulatory capital when applying the general rule.
Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings bank. In assessing an institution’s capital adequacy, the federal regulators take into consideration not only these numeric factors but also qualitative factors as well and has the authority to establish higher capital requirements for individual associations where necessary.
In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor assigned by federal regulations based on the risks believed inherent in the type of asset. The capital requirements assign a higher risk weight to asset categories believed to present a great risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently
underwritten first lien one to four family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% and 600% is assigned to permissible equity interests, depending on certain specified factors.
The regulations limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
Notwithstanding the foregoing, pursuant to the EGRRCPA, the OCC that established a minimum community bank leverage ratio (tier 1 capital to average consolidated assets) of 9% for institutions under $10 billion in assets. An institution may elect to utilize the community bank leverage ratio in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized.
Effective January 1, 2020, the Bank elected to opt in and utilize the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 9% requires the institution to comply with the generally applicable capital requirements.
At December 31, 2024, Lake Shore Savings’ capital exceeded the minimum requirement of the community bank leverage ratio with a ratio of 13.83% and was considered to be well-capitalized.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized federal savings banks. For this purpose, a savings bank is placed in one of the following categories based on the savings bank’s capital:
•well-capitalized (at least 5% leverage capital, 6.5% common equity Tier 1 risk-based capital, 8% Tier 1 risk-based capital and 10% total risk-based capital or if applicable, a community bank leverage ratio of 9.0%);
•adequately capitalized (at least 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1 risk-based capital and 8% total risk-based capital);
•undercapitalized (less than 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1 risk-based capital or 8% total risk-based capital);
•significantly undercapitalized (less than 3% leverage capital, 3% common equity Tier 1 risk-based capital, 4% Tier 1 risk-based capital or 6% total risk-based capital); and
•critically undercapitalized (less than 2% tangible capital).
Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames. “Undercapitalized” institutions are subject to certain restrictions, such as on capital distributions and growth. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings bank required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of the savings bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters. The OCC has the authority to require payment and collect payment under the guarantee. The failure of a holding company to provide the required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2024, Lake Shore Savings met the criteria for being considered “well-capitalized.”
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account.
Among other requirements, every federal savings bank in the mutual holding company structure must file an application with the OCC prior to paying a dividend or making a capital distribution.
Every federal savings bank that is a subsidiary of a holding company must file a notice with the Federal Reserve Board, at least 30 days before the board of directors declares a dividend or approves a capital distribution.
The OCC and the Federal Reserve Board may disapprove an application or notice if:
•the savings bank would be undercapitalized following the distribution;
•the proposed capital distribution raises safety and soundness concerns; or
•the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would be undercapitalized.
Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single borrower in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2024, Lake Shore Savings Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, Lake Shore Savings is subject to a qualified thrift lender, or “QTL,” requirement by meeting one of two tests: The Home Owners’ Loan Act (“HOLA”) QTL test or the Internal Revenue Service (“IRS”) Domestic Building and Loan Association (“DBLA”) test. The federal savings bank may use either test to qualify and may switch from one test to the other.
Under the HOLA QTL test, Lake Shore Savings must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.
“Qualified thrift investments” includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans.
Under the IRS DBLA test, the Bank must meet the business operations test and the 60% of assets test. The business operations test requires that the federal savings bank’s business consists primarily of acquiring the savings of the public (75% of its deposits and other obligations must be held by the general public) and investing in loans (more than 75% of its gross income consists of interest on loans and government obligations and various other specified types of operating income that federal savings bank’s ordinarily earn). For the 60% of assets test, the Bank must maintain at least 60% of its total in “qualified investments” as of the close of the taxable year or, at the option of the federal savings bank, may be computed on the basis of the average assets outstanding during the taxable year.
The Dodd-Frank Act made noncompliance with the QTL test potentially subject to agency enforcement action for violation of law. At December 31, 2024, Lake Shore Savings Bank opted to utilize the HOLA QTL test and satisfied the requirements of this test for the entire 12-month period.
Liquidity. A federal savings institution is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. We seek to maintain a ratio of liquid assets not subject to pledge as a percentage of total liabilities of 10% or greater.
Refer to Part II, Item 7 “Management Discussion and Analysis - Liquidity and Capital Resources” elsewhere in this report for additional details on liquidity.
Community Reinvestment Act and Fair Lending Laws. All savings banks have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low-and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the OCC is required to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. Lake Shore Savings Bank received an “outstanding” Community Reinvestment Act rating in its most recent federal examination.
On October 24, 2023, the OCC and the other federal banking agencies issued a final rule to strengthen and modernize the CRA regulations. Under the final rule, banks with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years will be an “intermediate bank.” The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the Bank’s option, the Community Development Financing Test. The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. The new CRA regulations are subject to ongoing litigation with current enforcement of the new regulation currently enjoined.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its “affiliates” is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act. The term “affiliate” for these purposes generally means any company that controls, is controlled by, or is under common control with an insured depository institution such as Lake Shore Savings Bank. Lake Shore Bancorp, Inc. and Lake Shore, MHC are affiliates of Lake Shore Savings Bank. In general, transactions with affiliates must be on terms that are as favorable to the savings bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings bank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings bank. In addition, OCC regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices and may not involve low-quality assets. The OCC requires savings banks to maintain detailed records of all transactions with affiliates.
Lake Shore Savings’ authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Lake Shore Savings Bank’s capital. In addition, Lake Shore Savings Bank’s Board of Directors must approve extensions of credit in excess of certain limits. Extensions of credit to executive officers are subject to additional restrictions based on the category of loan.
At December 31, 2024, Lake Shore Savings is in compliance with Regulation O.
Cybersecurity. In addition to the provisions in the Gramm-Leach-Bliley Act relating to data security, the Company and its subsidiaries are subject to many federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity. For example, federal regulatory statements regarding cybersecurity indicate that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. Additionally, the statements indicate that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery
of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. Financial institutions that fail to observe this regulatory guidance on cybersecurity may be subject to various regulatory sanctions, including financial penalties.
The federal bank regulatory agencies require banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours of determining that a “computer-security incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred. A notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The final rule also requires bank service providers to notify any affected bank to, or on behalf of, which the service provider provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for four or more hours.
Anti-Money Laundering and OFAC. Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations. The U.S. Department of the Treasury's Office of Foreign Assets Control, or "OFAC," is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities. The U.S. Treasury Department's Financial Crises Enforcement Network ("FinCEN") rules include customer due diligence requirements for banks, including a requirement to identify and verify the identity of beneficial owners of customers that are legal entities, subject to certain exclusions and exemptions.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted in January 2021. The AMLA is intended to comprehensively reform and modernize U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the U.S. Department of the Treasury to promulgate priorities for anti-money laundering and countering the financing of terrorism policy; requires the development of standards for testing technology and internal processes for BSA compliance; expands enforcement and investigation-related authority, including increasing available sanctions for certain BSA violations; and expands BSA whistleblower incentives and protections. In June 2021, FinCEN issued the priorities for anti-money laundering and countering the financing of terrorism policy required under AMLA. The national priorities include: (i) corruption, (ii) cybercrime, (iii) terrorist financing, (iv) fraud, (v) transnational crime, (vi) drug trafficking, (vii) human trafficking and (viii) proliferation financing.
Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If the OCC does not take action, the FDIC has authority to take action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
Insurance of Deposit Accounts. Lake Shore Savings Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in the Bank are insured by the FDIC. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks and savings institutions to $250,000 per depositor.
The FDIC imposes an assessment for deposit insurance on all depository institutions. The FDIC’s assessment system is based on each institution’s total assets less tangible capital and, for institutions of Lake Shore Savings’ asset size, ranges from 3.5 basis points to 32 basis points. Assessment rates are risk based and are based on a formula which uses financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three years.
The FDIC has authority to increase insurance assessments or issue special assessments.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. As of December 31, 2024, do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System. Lake Shore Savings Bank is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Lake Shore Savings is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2024, Lake Shore Savings was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Lake Shore Savings are subject to state usury laws and federal laws concerning interest rates. The Bank's operations are also subject to federal laws applicable to credit transactions, such as the:
•Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
•The TILA-RESPA Integrated Disclosure Rule, commonly known as the TRID rule. This rule amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to integrate several consumer disclosures for mortgage loans;
•Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
•Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
•Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
•Truth in Savings Act; and
•Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of Lake Shore Savings also are subject to the:
•Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
•Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
•USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies, and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
•Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. Lake Shore, MHC and Lake Shore Bancorp are savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, Lake Shore, MHC and Lake Shore Bancorp are registered with the Federal Reserve Board and are subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over Lake Shore, MHC and Lake Shore Bancorp, and their non-bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, Lake Shore, MHC and Lake Shore Bancorp are generally not subject to state business organization laws.
Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and Federal Reserve Board regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as Lake Shore Bancorp may engage in the following activities:
(i)investing in the stock of a savings institution;
(ii)acquiring a mutual savings bank through the merger of such savings institution into a savings institution subsidiary of such holding company or an interim savings bank subsidiary of such holding company;
(iii)merging with or acquiring another holding company, one of whose subsidiaries is a savings institution;
(iv)investing in a corporation, the capital stock of which is available for purchase by a savings institution under federal law or under the law of any state where the subsidiary savings institution or savings institutions share their home offices;
(v)furnishing or performing management services for a savings institution subsidiary of such company;
(vi)holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company;
(vii)holding or managing properties used or occupied by a savings institution subsidiary of such company;
(viii)acting as trustee under deeds of trust;
(ix)any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987;
(x)any activity permissible for financial holding companies (if such status is elected by the Company) under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and
(xi)purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Federal Reserve Board.
If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners’ Loan Act prohibits a savings and loan holding company, including Lake Shore Bancorp and Lake Shore, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. The Dodd-Frank Act, required the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies that are as stringent as those required for insured depository institutions. However, savings and loan holding companies of under $3.0 billion in consolidated assets are exempt from consolidated regulatory capital requirements, unless the Federal Reserve Board determines otherwise. As a result, the MHC and Lake Shore Bancorp will be exempt from the regulatory capital requirements until consolidated assets exceed $3.0 billion.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy that requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. Federal Reserve Board policies also provide that holding companies should pay dividends only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies may affect the ability of a savings and loan holding company to pay dividends or otherwise make capital distributions.
Waivers of Dividends by Lake Shore, MHC. Federal regulations require federally-chartered mutual holding companies to give the Federal Reserve Board notice before waiving the receipt of dividends, and provides that in the case of “grandfathered” mutual holding companies, like Lake Shore, MHC, the Federal Reserve Board “may not object” to a dividend waiver if the board of directors of the mutual holding company waiving dividends determines that the waiver: (i) would not be detrimental to the safe and sound operation of the subsidiary savings bank; and (ii) is consistent with the board’s fiduciary duties to members of the mutual holding company. To qualify as a grandfathered mutual holding company,
a mutual holding company must have been formed, issued stock and waived dividends prior to December 1, 2009. Lake Shore, MHC qualifies as a grandfathered mutual holding company. Federal regulations further provide that the Federal Reserve Board may not consider waived dividends in determining an appropriate exchange ratio upon the conversion of a grandfathered mutual holding company to stock form. The Federal Reserve Board has issued an interim final rule that also requires, as a condition to waiving dividends, that each mutual holding company obtain the approval of a majority of the eligible votes of its members within 12 months prior to the declaration of the dividend being waived. On February 15, 2023, the Company announced the suspension of the payment of quarterly dividends. On April 2, 2024, members voted to approve Lake Shore, MHC’s ability to waive its right to receive dividends aggregating up to $0.72 per share that were declared by the Company in the 12 months subsequent to the approval of the dividend waiver. Following the approval of the Federal Reserve Board on April 25, 2024, the Company resumed the payment of quarterly cash dividends to its public stockholders and paid four quarterly cash dividends of $0.18 per share during 2024 and the first quarter of 2025. Lake Shore, MHC waived its right to all four dividend payments. On March 11, 2025, the Company suspended future dividend payments pending the completion of the Conversion Transaction (defined below). It is expected that Lake Shore, MHC will continue to waive future dividends, if the Company declares dividends to its stockholders in the future, except to the extent dividends are needed to fund Lake Shore, MHC’s continuing operations, subject to the ability of Lake Shore, MHC to obtain regulatory approval of its requests to waive dividends and its ability to obtain future member approval of dividend waivers. For more information, see Item 1A, “Risk Factors - Our ability to pay dividends is subject to the ability of Lake Shore Savings to make capital distributions to Lake Shore Bancorp and the waiver of dividends by Lake Shore, MHC.”
Conversion of Lake Shore, MHC to Stock Form. Federal Reserve Board regulations permit Lake Shore, MHC to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). On January 27, 2024, the Board of Directors of Lake Shore, MHC, adopted a Plan of Conversion and Reorganization pursuant to which Lake Shore, MHC will undertake a "second step" conversion from the mutual holding company structure to the stock holding company structure. In connection with the second step conversion, the Bank is seeking regulatory approval to convert its charter to a New York-chartered commercial bank.
As a result of the proposed transaction, a new stock holding company for the Bank (the “New Bank Holding Company”), will succeed the Company, and will offer for sale shares of its common stock, representing Lake Shore, MHC’s ownership interest in the Company, to depositors of the Bank in a subscription offering and, if necessary, a community offering and/or a syndicated community offering. Eligible account holders of the Bank as of the close of business on December 31, 2023 have first priority non-transferable subscription rights to subscribe for shares of common stock of the New Bank Holding Company. The total number of shares of common stock of the New Bank Holding Company to be issued in the proposed stock offering will be based on the aggregate pro forma market value of the common stock of the New Bank Holding Company, as determined by an independent appraisal. In addition, each share of common stock of the Company owned by persons other than Lake Shore, MHC (the “minority shareholders”) will be converted into and become the right to receive a number of shares of common stock of the New Bank Holding Company pursuant to an exchange ratio established at the completion of the proposed transaction. The exchange ratio is designed to preserve in the New Bank Holding Company the same aggregate percentage ownership interest that the minority shareholders will have in the Company immediately before the completion of the proposed transaction, exclusive of the purchase of any additional shares of common stock of the New Bank Holding Company by minority shareholders in the stock offering and the effect of cash received in lieu of issuance of fractional shares of common stock of the New Bank Holding Company, and adjusted to reflect certain assets held by Lake Shore, MHC.
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 shareholders of the Company, including by a separate vote of approval by the Company’s minority shareholders. Detailed information regarding the proposed transaction, including the stock offering, will be sent to shareholders of the Company and members of Lake Shore, MHC following regulatory approval.
Liquidation Rights. Each depositor of the Bank has both a deposit account and a pro rata ownership interest in the net worth of Lake Shore, MHC based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This interest may only be realized in the unlikely event of a complete liquidation of Lake Shore Savings. Any depositor who opens a deposit account obtains a pro rata ownership interest in Lake Shore, MHC without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account (including reductions to pay for shares of common stock in the stock
offering) receives a portion or all, respectively, of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Lake Shore, MHC, which is lost to the extent that the balance in the account is reduced or closed.
In the unlikely event of a complete liquidation of Lake Shore Savings, all claims of creditors of Lake Shore Savings, including those of depositors of Lake Shore Savings (to the extent of their deposit balances), would be paid first. Thereafter, if there were any assets of Lake Shore Savings remaining, these assets would be distributed to Lake Shore Bancorp as Lake Shore Savings’ sole stockholder. Then, if there were any assets of Lake Shore Bancorp remaining, depositors of Lake Shore Savings would receive those remaining assets, pro rata, based upon the deposit balances in their deposit account in Lake Shore Savings immediately prior to liquidation.
Federal Securities Laws
Lake Shore Bancorp common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Lake Shore Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Shares of the common stock purchased by persons who are not affiliates of Lake Shore Bancorp may be resold without registration. Shares purchased by an affiliate (generally officers, directors and principal stockholders) of Lake Shore Bancorp will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Lake Shore Bancorp meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Lake Shore Bancorp who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three month period, the greater of 1% of the outstanding shares of Lake Shore Bancorp, or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future by Lake Shore Bancorp to permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer of Lake Shore Bancorp, Inc. are required to certify that its quarterly and annual reports filed with the Securities and Exchange Commission do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of internal control over financial reporting; they have made certain disclosures to its auditors and the audit committee of the Board of Directors about internal control over financial reporting; and they have included information in the quarterly and annual reports about their evaluation and whether there have been changes in internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. Lake Shore Bancorp, Inc. has existing policies, procedures and systems designed to comply with these regulations, and is further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
In analyzing whether to make or to continue an investment in the Company, investors should consider, among other factors, the following risk factors described below as well as all other information included in this Annual Report on Form 10-K. The risks listed here may not be the only risks we face. Additional risks that are not presently known, or that we presently deem immaterial, could also have a material effect on our financial condition, results of operations, business and prospects. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to Lending Activities
We have a substantial amount of commercial real estate and commercial business loans, and we intend to continue to increase our originations of these types of loans. These loans involve credit risks that could adversely affect our financial condition and results of operations. As of December 31, 2024, commercial real estate (including commercial
construction) and commercial business loans comprised in the aggregate 61.6% of our total gross loan portfolio. These types of loans may expose a lender to greater credit risk than residential loans secured by one- to four-family real estate because the historical losses have been higher for commercial loans. In addition, commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential loans for the following reasons:
•Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts sufficient to cover operating expenses and debt service.
•Commercial Business Loans. Repayment is generally dependent upon the successful operation of the borrower’s business.
A deterioration in economic conditions in our market areas could affect the performance of our commercial loan portfolio. Higher prices for businesses and consumers and high unemployment could negatively affect our commercial loan portfolio, if business owners or consumers are not able to make loan payments. If there was a downturn in the real estate market or our national or local economy, due to inflation, changes in interest rates or monetary policy, increased unemployment or other reasons, then this could adversely affect the value of the properties securing the loans or revenues from our borrowers’ businesses thereby increasing the risk of non-performing loans. Because commercial loans generally have a higher loan balance in comparison to residential real estate loans, the deterioration of one or a few of these loans could cause a significant increase in nonaccrual loans, which could have a material adverse effect on our financial condition and results of operations. If we foreclose on these loans, our holding period for the collateral typically is longer than for a one- to four-family residential property because there are fewer potential purchasers of the collateral, which could cause us to increase our provision for credit losses and also adversely affect our operating results and financial condition.
We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability. At December 31, 2024, approximately $529.7 million, or 96.7%, of our total gross loan portfolio was classified as real estate loans. Most of the real estate securing these loans is located in our primary lending market, Erie and Chautauqua Counties in Western New York. Future declines in the real estate values in Erie and Chautauqua Counties and surrounding markets as a result of an economic downturn could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for credit losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, construction, commercial business and consumer lending, including, the ability of borrowers to repay these loans and the value of the collateral securing these loans.
Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:
•demand for our products and services may decrease;
•loan delinquencies, problem assets and foreclosures may increase;
•collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;
•the value of our securities portfolio may decrease; and
•the net worth and liquidity of loan guarantors may decrease, thereby impairing their ability to honor commitments made to us.
Moreover, a significant decline in general economic conditions, caused by inflation, acts of terrorism, an outbreak of hostilities or other international or domestic calamities or other factors beyond our control could further impact these local economic conditions and could further negatively affect our financial performance. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Our non-residential, non-owner-occupied real estate loans may expose us to increased credit risk. At December 31, 2024, $112.6 million, or 35.1% of our total gross commercial real estate loan portfolio, consisted of loans secured by non-residential, non-owner-occupied real estate properties. At December 31, 2024, all of our non-residential, non-owner-occupied real estate loans were performing in accordance with their repayment terms. Loans secured by non-residential, non-owner-occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by non-residential, owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-residential, non-owner-occupied properties is often below that of owner-occupied properties due to lenient property maintenance standards that negatively impact the value of the collateral properties. Furthermore, some of our non-residential, non-owner-occupied real estate loan borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to a non-residential, owner-occupied or residential one- to four-family mortgage loan.
Our historical emphasis on residential mortgage loans exposes us to lending risks. As of December 31, 2024, $161.3 million, or 29.5% of our total gross loan portfolio, was secured by residential, one- to four-family real estate loans and we intend to continue to make loans of this type. Residential, one- to four-family mortgage lending is generally sensitive to regional and local economic conditions that can significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in real estate values could cause some of our residential, one- to four-family mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
Deteriorating credit quality could adversely affect our earnings. Our loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results. A downturn in the real estate market or the local economy could exacerbate this risk. We review our allowance for credit losses for loans and unfunded commitments on a quarterly basis to ensure that it sufficiently reflects management's estimate of expected losses as of the valuation date.
Our investment portfolio may experience credit deterioration, which could have a material adverse effect on our operating results. Numerous factors, including the credit quality of the counterparty, adverse changes in business climate, adverse actions by regulators, lack of liquidity for re-sales of certain investment securities, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio or other assets in future periods. The existence of credit deterioration within the investment portfolio could cause us to add to our allowance for credit losses. We review our allowance for credit losses on our investment portfolio on a quarterly basis to ensure that it sufficiently reflects management’s estimate of expected losses inherent within the investment portfolio.
Material additions to our allowance for credit losses on loans, unfunded commitments, or the investment portfolio also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance for credit losses. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for credit losses on loans. We rely on underlying credit ratings of our investment portfolio, as well as other economic characteristics, to determine if a credit loss exists within our investment portfolio and whether an allowance for credit losses on investments is required. If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan, unfunded commitment, and investment portfolios, resulting in additions to our allowance for credit losses. Our increased focus on commercial loan originations has been one of the more significant factors we have taken into account in evaluating our allowance for credit losses and provision for credit losses. If we were to further increase the amount of commercial loans in our portfolio, we may decide to make increased provisions for credit losses. In addition, bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs, which may have a material adverse effect on our financial condition and results of operations.
We have extended off-balance sheet commitments to borrowers which expose us to credit and interest rate risk. We enter into off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers.
These off-balance sheet arrangements include commitments to grant loans, unfunded commitments to fund loans and lines of credit, and commercial and standby letters of credit which would impact our liquidity and capital resources to the extent customers accept or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
Risks Related To Our Business
Low demand for real estate loans may lower our profitability. Making loans secured by real estate, including residential, one- to four-family and commercial real estate, is our primary business and primary source of revenue. If customer demand for real estate loans decreases, our profits may decrease because our alternative investments, primarily securities, generally earn less income than real estate loans. Customer demand for loans secured by real estate could be reduced due to weaker economic conditions, an increase in unemployment, a decrease in real estate values or an increase in interest rates. As interest rates rise, loan demand may slow down, and deposit expenses may increase, which could lower our net interest income and profitability.
We depend on our executive officers and key personnel to implement our business strategy and could be harmed by the loss of their services. We believe that our growth and future success will depend in large part upon the skills of our management team led by President and CEO, Kim C. Liddell, Executive Vice President Commercial Division, Jeff Werdein and Chief Financial Officer and Treasurer, Taylor Gilden. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. Although we have employment and retentions agreement with Messrs. Liddell, Werdein, and Gilden, that contain a non-compete provision, the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop our business strategy.
Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses. Our risk management framework is designed to minimize risk and loss to us and our customers. We seek to identify, measure, monitor, report and control our exposure to risk, including credit, interest rate, liquidity, price, operations, compliance, strategic, and reputation risks. We additionally segregate and assess information technology and human resource risks due to their complexity and over-arching risk profiles. While we deploy a diverse set of risk monitoring and mitigation techniques, including internal management and third-party engagement in risk processes; risk identification and mitigation processes are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
The results of our operations may be adversely affected by environmental conditions. During the course of making loans secured by real estate, we have acquired and may acquire in the future, property securing loans that are in default. There is a risk that we could be required to investigate and clean-up hazardous or toxic substances or chemical releases at such properties after acquisition in a foreclosure action, and that we may be held liable to a governmental entity or third parties for property damage, personal injury and investigation and clean-up costs incurred by such parties in connection with such contamination. In addition, the owner or former owners of contaminated sites may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from such property. An environmental assessment of real estate securing commercial loans is completed prior to loan closing. This initial assessment may indicate a higher level of testing is needed. The borrower is then required to have further testing and complete any remedial action recommended. To date, we have not been subject to any environmental claims. There can be no assurance, however, that this will remain the case in the future.
Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues. Our business strategy primarily focuses on loan growth, funded by deposits. Achieving such growth may require us to attract customers that currently bank at other financial institutions in
our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the level of competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Furthermore, there can be considerable costs involved in opening branches or loan production offices and expanding lending capacity, and generally a period of time is required to generate the necessary revenues to offset these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of new branches or loan production offices.
Acquisitions may disrupt our business and dilute stockholder value. We continually evaluate merger and acquisition opportunities of other financial institutions. As a result, negotiations may take place and future mergers or acquisitions with consideration consistent of cash and/or equity securities may occur. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services. Acquired other banks or businesses may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:
•Payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short- and long-term;
•Potential exposure to unknown or contingent liabilities of the target company, as well as potential asset quality problems of the target company;
•Potential volatility in reported income associated with goodwill impairment losses;
•Difficulty and expense of integrating the operations and personnel of the target company;
•Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of acquisition;
•Potential disruption to our business and diversion of our management’s time and attention;
•The possible loss of key employees and customers of the target company; and
•Potential changes in banking or tax laws or regulations that may affect the target company.
Competition in our primary market area may reduce our ability to attract and retain deposits and originate loans. We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Our most direct competition for savings deposits has come from commercial banks, credit unions, savings banks and online banks. Competition has increased in our market areas as a result of new entrants to the Erie County market area. We face additional competition for depositors from non-depository competitors such as the mutual fund industry, securities and brokerage firms, insurance companies, and the U.S. Department of the Treasury. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, online retail mortgage lenders and other financial service companies. Competition for loan originations and deposits may limit our future growth and earnings prospects. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability to compete successfully in our market areas.
Our asset size may make it more difficult for us to compete. Our asset size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from non-traditional banking activities. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.
Risks Related to Interest Rates and Liquidity
Changes in interest rates could adversely affect our results of operations and financial condition. Our results of operations and financial condition are significantly affected by changes in interest rates. We derive our income primarily from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market interest rates change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income.
From an interest rate risk perspective, we have generally been liability sensitive, which indicates that our liabilities generally re-price faster than assets. Our earnings have been adversely impacted by an increase in interest rates which occurred in 2022 and 2023 and remained elevated in 2024, because the majority of our interest-earning assets are long-term, fixed rate mortgage-related assets that did not re-price as long-term interest rates increase. If rates continue to rise, we would expect loan applications to decrease, prepayment speeds to slow down and the interest rate on our loan portfolio to remain static. Conversely, a majority of our interest-bearing liabilities have much shorter contractual maturities and are expected to re-price, resulting in increased interest expense. A significant portion of our deposits have no contractual maturities and are likely to re-price quickly as short-term interest rates increase. Therefore, in an increasing rate environment, our cost of funds is expected to increase more rapidly than the yields earned on our loan and securities portfolios. The impact on earnings is more adverse when the slope of the yield curve flattens or inverts, i.e. when short-term interest rates increase more than corresponding changes in long-term rates or when long-term rates decrease more than corresponding changes in short-term rates.
Changes in market interest rates could also reduce the value of our interest-earning assets including, but not limited to, our securities portfolio. In particular, the unrealized gains and losses on securities available for sale are reported, net of tax, in accumulated other comprehensive income which is a component of stockholders’ equity. As such, declines in the fair value of such securities resulting from increases in market interest rates may adversely affect stockholders’ equity.
In a decreasing interest rate environment, our earnings may increase or decrease. If long-term interest-earning assets do not re-price and interest rates on short-term deposits begin to decrease, earnings may rise. However, low interest rates on loan products may result in an increase in prepayments as borrowers would be incented to refinance their loans. If we cannot re-invest the funds received from prepayments at a comparable spread, net interest income could be reduced. Also, in a falling interest rate environment, certain categories of deposits may reach a point where market forces prevent further reduction in interest paid on those products. The net effect of these circumstances is reduced net interest income and possibly net interest rate spread.
We are subject to certain risks with respect to liquidity. “Liquidity” refers to our ability to generate sufficient cash flows to support our operations and to fulfill our obligations, including commitments to originate and fund loans, to repay our wholesale borrowings and other liabilities and to satisfy the withdrawal of deposits by our customers. Our primary source of liquidity is our core deposit base, which is raised through our retail branch network. Our core deposits, which is defined as our deposits other than certificates of deposit greater than $250,000 and brokered certificates of deposit, represented 94.1% of total deposits at December 31, 2024. Additional available unused sources of liquidity include borrowings from the Federal Reserve of New York discount window, FHLBNY borrowings, brokered deposits, and a line of credit with a correspondent bank. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled a fair value of $51.8 million at December 31, 2024. The availability of our line of credit with our correspondent bank may also be reduced or eliminated. Lastly, on February 27, 2025, the Federal Reserve Bank approved the Bank's application for uncollateralized intraday credit with an effective date of March 6, 2025. With this uncollateralized intraday credit, certain transactions will not be rejected for which there are insufficient funds in our Federal Reserve Master Account during normal hours of operation.
An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low-cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.
Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the banking industry in general. Factors that could detrimentally impact our access to liquidity sources include regulatory restrictions, disruptions in the financial markets or negative views and expectations about the prospects for the banking industry.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
Adverse developments affecting the financial services industry, such as bank failures or concerns involving liquidity, may have a material effect on our operations. Events relating to the failures of certain banking entities in March 2023, i.e. Silicon Valley Bank and Signature Bank, have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. Uncertainty may be compounded by the reach and depth of media attention, including social media, and its ability to disseminate concerns or rumors about any events of these kinds or other similar risks, and have in the past and may in the future lead to market-wide liquidity problems. These failures underscore the importance of maintaining diversified sources of funding as key measures to ensure the safety and soundness of a financial institution. As a result, market conditions and other external factors may impact the competitive landscape for deposits in the banking industry in an unpredictable manner. The current interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs.
Risks Related to Economic Conditions
High inflation levels could adversely impact our business and results of operations. The national economy continues to experience elevated levels of inflation. As of December 31, 2024, the year over year consumer price index (“CPI”) increase was 2.9% primarily driven by increases in food, transportation, and shelter prices. High inflation, if sustained, could have an adverse effect on our business. The movement in interest rates in response to elevated levels of inflation has decreased the value of our securities portfolio since 2021, resulting in an increase in unrealized losses recorded in accumulated other comprehensive loss on the stockholders’ equity section of our balance sheet. In addition, inflation-driven increases in our levels of non-interest expense could negatively impact our results of operations. High inflation and increasing interest rates could also cause increased volatility in the business environment, which could adversely affect loan demand and borrowers’ ability to repay loans.
Changes in the Federal Reserve Board’s monetary or fiscal policies could adversely affect our results of operations and financial condition. Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board has, and is likely to continue to have, an important impact on the operating results of banks through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve Board’s actions affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence on other monetary and fiscal policies. The monetary policies of the Federal Reserve Board may be affected by certain policy initiatives of the new Administration, which has announced tariffs on certain U.S. trading partners (and has indicated additional tariffs and retaliatory tariffs against U.S. trading partners may be announced in the future) and has implemented stricter immigration policies. Although forecasts have varied, many economists are projecting that such policy initiatives may halt productivity growth and reduce available labor, creating inflationary pressures. Under such a scenario, the Federal Reserve Board may decide to maintain the federal funds rate at a relatively elevated level for a prolonged period of time. The extent and timing of the new Administration’s policy changes and their impact on the policies of the Federal Reserve Board, as well as our business and financial results, are uncertain at this time.
Risks Related to Operations
We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches. The computer systems and network infrastructure we use could be vulnerable to hardware, software, and cybersecurity issues. Our operations are dependent on our ability to protect our computer equipment from fire, power loss, telecommunications failure or other similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources,
including our third parties, unknown third parties or through cyber-attacks. The risk of a breach can exist whether information systems and services are in our hosted data centers or in our third party's data centers, including cloud-based computing services. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Breaches have occurred, and may occur again, in our systems and in the systems of our third party vendors. The risks of cyber-threats continue to evolve and are substantially escalating, and we may be required to expend significant additional resources to continue to modify or enhance our protection measures to mitigate information security vulnerabilities or incidents. Cybersecurity, and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage, remains a priority. The occurrence of any failures, interruptions or security breaches of information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations, and cash flows.
We rely on third party vendors, which could expose us to and have exposed us to additional cybersecurity risks. Third party vendors provide key components of our business infrastructure, including certain data processing and information services. Accordingly, our operations are exposed to the risks that these vendors will not perform in accordance with our contractual agreements with them, or if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. To our knowledge, the services and programs provided to us by third parties have not experienced any material security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.
We continually encounter technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Our largest competitors have substantially greater resources to invest in technological improvements. Furthermore, new payment services developed and offered by non-financial institution competitors pose an increasing threat to the traditional payment services offered by financial institutions. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers and we may not be able to effectively deploy new technologies such as Artificial Intelligence to improve our operational efficiency. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on us.
We may be subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations. As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals. We maintain a system of internal controls and insurance coverage to mitigate against such risks, including data processing system failures and errors, and customer fraud. If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
Risks Related To Laws and Regulations
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations. Lake Shore Savings Bank, Lake Shore Bancorp and Lake Shore, MHC are subject to extensive regulation, supervision and examination by the OCC and the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding companies may engage and are intended primarily for the protection of federal deposit insurance funds and the depositors and borrowers of Lake Shore Savings Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for credit losses. Lake Shore Savings Bank and Lake Shore Bancorp, Inc. were all subject to enforcement actions with their regulators which were all lifted in late 2024 and 2025. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations, and our interpretation of those changes.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act and related regulations may subject us to fines or sanctions. The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Once such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers that open new financial accounts. Failure to comply with these regulations could result in fines or sanctions.
Our ability to pay dividends is subject to the ability of Lake Shore Savings to make capital distributions to Lake Shore Bancorp and the waiver of dividends by Lake Shore, MHC. The value of Lake Shore Bancorp’s common stock is significantly affected by our ability to pay dividends to our public stockholders. Our long-term ability to pay dividends to our stockholders is based primarily upon the ability of the Bank to make capital distributions to Lake Shore Bancorp, and also the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends. The Bank may distribute capital to Lake Shore Bancorp in an amount not exceeding net income for the current calendar period and the prior two calendar years under OCC safe harbor regulations. Our ability to pay dividends and the amount of such dividends is also affected by the ability of Lake Shore, MHC, our mutual holding company and majority stockholder of Lake Shore Bancorp, to waive the receipt of dividends declared by Lake Shore Bancorp. Lake Shore, MHC waived its right to receive most of its dividends on its shares of Lake Shore Bancorp since its inception in 2006. The ability to waive dividends meant that Lake Shore Bancorp had more cash resources to pay dividends to its public stockholders than if Lake Shore, MHC accepted such dividends. Lake Shore, MHC is now required to obtain a waiver from the Federal Reserve Board allowing it to waive its right to dividends.
Under Section 239.8(d) of the Federal Reserve Board’s Regulation MM governing dividend waivers, a mutual holding company may waive its right to dividends on shares of its subsidiary if the mutual holding company gives written notice of the waiver to the Federal Reserve Board and the Federal Reserve Board does not object. For a company such as Lake Shore, MHC, that was formed, issued stock and waived dividends prior to December 1, 2009, the Federal Reserve Board may not object to a dividend waiver if such waiver would not be detrimental to the safety and soundness of the savings bank subsidiary and the board of directors of the mutual holding company expressly determines that such dividend waiver is consistent with the board’s fiduciary duties to the members of the mutual holding company. Regulation MM also requires as a condition to waiving dividends, that a mutual holding company obtain the approval of a majority of the eligible votes of its members within 12 months prior to the declaration of the dividend being waived.
While Lake Shore, MHC is grandfathered for purposes of the dividend waiver provisions of Regulation MM and has complied with all additional requirements imposed, we cannot predict whether the Federal Reserve Board will grant a dividend waiver request and, if granted, there can be no assurance as to the conditions, if any, the Federal Reserve Board will place on future dividend waiver requests by grandfathered mutual holding companies such as Lake Shore, MHC. If
Lake Shore, MHC is unable to waive the receipt of dividends, our ability to pay dividends to our stockholders may be substantially impaired and the amounts of any such dividends may be significantly reduced.
We are subject to the Community Reinvestment Act (“CRA”) and fair lending laws, and failure to comply with these laws could lead to material penalties. The CRA, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the United States Department of Justice, and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including paying damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it may only be available on unacceptable terms, which could adversely affect our financial condition and results of operations. We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and pursue our growth strategy could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
The Federal Reserve Board may require us to commit capital resources to support Lake Shore Savings Bank, and we may not have sufficient access to such capital resources. Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by Lake Shore Bancorp to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so.
We qualify as a smaller reporting company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to smaller reporting companies could make our common stock less attractive to investors. We are a smaller reporting company, and, for as long as we continue to qualify as a smaller reporting company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to smaller reporting companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and two years of audited financial statements in our annual report instead of three years. As long as we are a smaller reporting company that is also not an accelerated filer, we will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm review and attest as to the effectiveness of our internal control over financial reporting. In addition, as a non-accelerated filer, we will have longer deadlines to file our periodic reports with the Securities and Exchange Commission.
We would remain a smaller reporting company and a non-accelerated filer for so long as our voting and non-voting equity held by non-affiliates (“public float”) is less than $250 million or our annual revenues are less than $100 million and our public float is less than $700 million. Public float is determined each year as of the end of a company’s second fiscal quarter applicable at the end of the fiscal year involved.
As a result of our smaller reporting company status and non-accelerated filer status, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.
Other Risks Related to Our Business
We are a community bank and our ability to maintain our reputation, which is critical to the success of our business, may materially adversely affect our performance. We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, cybersecurity incidents and questionable or fraudulent activities of our customers. Lake Shore Savings Bank and Lake Shore Bancorp, Inc. were all subject to enforcement actions with their regulators which were all lifted in late 2024 and 2025. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, any or all of which could adversely affect our business and operating results.
Legal and regulatory proceedings and related matters could adversely affect us. We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.
Severe weather, acts of terrorism, geopolitical and other external events could impact our ability to conduct business. Weather-related events have adversely impacted our market area in recent years, especially areas located near flood prone areas. Such events that may cause significant flooding and other storm-related damage may become more common events in the future. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition. Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including wars in Russia and Ukraine, and the Middle East, terrorism or other geopolitical events.
Risks Related to Investment in the Company’s Stock
We expect that our return on equity will be low compared to other financial institutions as a result of our high level of capital. Return on average equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. Our return on equity may be low while we continue to leverage capital levels via organic growth of loans and deposits. As we implement our strategic plan to increase net interest income and non-interest income via organic growth, we expect our return on equity ratio to improve. Failure to achieve a competitive return on average equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable financial institutions with higher returns on average equity.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, stockholders and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to attract additional deposits. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), requires us to evaluate our internal control
over financial reporting and provide an annual management report on our internal control over financial reporting, including, among other matters, management’s assessment of the effectiveness of internal control over financial reporting. We have established a process to document and evaluate its internal controls over financial reporting in order to satisfy the Sarbanes-Oxley Act and related regulations, which require management consideration of our internal controls over financial reporting on an annual basis. In this regard, management has dedicated internal resources and adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) maintain a continuous internal reporting and improvement process for internal control over financial reporting. Our management and Audit Committee have made compliance with Section 404 a high priority. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement appropriate new or improved controls in response to changes in financial processes or reporting, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to correct any significant deficiencies in the design or operating effectiveness of internal controls over financial reporting or fails to prevent fraud, current and potential stockholders and depositors could lose confidence in our financial reporting, which could harm our business and the trading price of our stock
Public stockholders do not exercise voting control over us. A majority of our voting stock is owned by Lake Shore, MHC. Lake Shore, MHC is controlled by its Board of Directors, which consist of those persons who are members of the Board of Directors of Lake Shore Bancorp and Lake Shore Savings Bank. Lake Shore, MHC will determine the outcome of the election of the Board of Directors of Lake Shore Bancorp, and, as a general matter, controls the outcome of most matters presented to the stockholders of Lake Shore Bancorp for resolution by vote. Consequently, Lake Shore, MHC, acting through its Board of Directors, is able to control the business and operations of Lake Shore Bancorp and may be able to prevent any challenge to the ownership or control of Lake Shore Bancorp by stockholders other than Lake Shore, MHC. There is no assurance that Lake Shore, MHC will not take actions that the public stockholders believe are against their interests.
Our stock price may be volatile due to limited trading volume. Our common stock is traded on the NASDAQ Global Market. However, the average daily trading volume in Lake Shore Bancorp’s common stock has been relatively small, averaging less than 3,000 shares per day during 2024. As a result, trades involving a relatively small number of shares may have a significant effect on the market price of the common stock, and it may be difficult for investors to acquire or dispose of large blocks of stock without significantly affecting the market price.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
We conduct our business through our corporate headquarters, administrative offices, and ten branch offices. At December 31, 2024, the net book value of our buildings and premises was $6.6 million and the net book value of the computer equipment and other furniture and fixtures, and equipment at our offices totaled $608,000. For more information, see Note 6 and Note 9 in the notes to our audited consolidated financial statements beginning on page F -1 of this report.
Leased or
Original
Location
Owned
Date Acquired
Corporate Headquarters
31 East Fourth Street
Dunkirk, NY 14048
Owned
Branch Offices:
Chautauqua County branches
128 East Fourth Street
Dunkirk, NY 14048
Owned/Leased(1)
30 East Main Street
Fredonia, NY 14063
Owned
1 Green Avenue, WE
Jamestown, NY 14701
Owned/Leased(2)
106 East Main Street
Westfield, NY 14787
Owned
Erie County branches
5751 Transit Road
East Amherst, NY 14051
Owned
3111 Union Road
Orchard Park, NY 14127
Owned
59 Main Street
Hamburg, NY 14075
Leased(3)
3438 Delaware Avenue
Kenmore, NY 14217
Owned
570 Dick Road
Depew, NY 14043
Leased(4)
4950 Main Street
Snyder, NY 14226
Owned
Administrative Offices:
125 East Fourth Street
Dunkirk, NY 14048
Owned
123 East Fourth Street
Dunkirk, NY 14048
Owned
115 East Fourth Street
Jamestown, NY 14701
Owned
(1)The building is owned. Additional parking lot is leased on a month-to-month basis.
(2)The building is owned. The land is leased. The lease expires in 2030, and has two, five-year extension terms that can be executed at our option.
(3)The lease expires in 2028 and has two, five-year extension terms that can be executed at our option.
(4)The lease expires in 2029.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
At December 31, 2024, we are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Lake Shore Bancorp, Inc. common stock trades on the Nasdaq Global Market under the symbol “LSBK”.
On February 15, 2023, the Company announced the suspension of the payment of quarterly dividends to its stockholders for the preservation of capital to support the Bank while the Bank began operating under a consent order with the OCC and the Company began operating pursuant to a written agreement with the Federal Reserve Bank of Philadelphia (the "Reserve Bank"). Following the approval of the Reserve Bank on April 25, 2024, the Company resumed the payment of quarterly cash dividends to its public stockholders and paid four quarterly cash dividends of $0.18 per share during 2024 and the first quarter of 2025. Lake Shore, MHC waived its right to all four dividend payments. On March 11, 2025, the Company suspended the payment of dividends pending the completion of the Conversion Transaction. The Board of Directors evaluates the payment of dividends and makes a dividend payment decision based on its review of certain factors such as our earnings, financial condition, capital requirements, regulatory limitations on the payment of dividends, and other relevant factors. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. Refer to Part I, Item 1. “Business - Supervision and Regulation - Federal Banking Regulations - Capital Distributions”, “Business - Supervision and Regulation - Holding Company Regulation - Source of Strength and Waivers of Dividends by Lake Shore, MHC” and Part I, Item 1a. “Risk Factors - Risks Related to Regulatory Compliance” above for information on the current and possible future restriction of dividend payments and MHC dividend waivers.
As of February 26, 2025, there were 642 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) of Lake Shore Bancorp, Inc. common stock.
The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each month of the quarter ended December 31, 2024. The Company has suspended its stock repurchase program.
Period
Total Number
of Shares
Purchased(1)
Average Price
Paid per Share(1)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans
or Programs (2)
October 1 through October 31, 2024
-
$
-
-
30,626
November 1 through November 30, 2024
$
13.75
-
30,626
December 1 through December 31, 2024
$
13.46
-
30,626
Total
$
13.61
-
30,626
(1)Shares purchased represent shares that were elected to be withheld from the vesting of restricted stock awards to cover income tax withholdings for the individuals upon vesting.
(2)On August 13, 2021, the Board of Directors of the Company adopted a new stock repurchase program. The stock repurchase program authorizes the Company to repurchase up to an aggregate of 106,327 shares, or approximately 5% of its outstanding shares, excluding the shares held by Lake Shore, MHC. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase plan does not have an expiration date and superseded all prior stock repurchase programs.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our consolidated financial condition and results of operations. You should read the information in this section in conjunction with our audited consolidated financial statements and accompanying notes to the audited consolidated financial statements beginning on page of this Form 10-K, and the other statistical data provided in this Form 10-K.
Overview
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, gains and losses on interest rate swaps and the sales of securities and loans, our provision for credit losses and non-interest expenses which include salaries and employee benefits, occupancy and equipment costs, data processing, professional services, advertising 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, as well as regulatory actions, may materially impact our financial performance.
Recent Events
On January 27, 2025, the Boards of Directors of Lake Shore, MHC, Lake Shore Bancorp and Lake Shore Savings 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. Lake Shore, MHC currently owns approximately 63.4% 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, the Company suspended the payment of dividends pending the completion of the second-step conversion.
Business Strategy
In April 2023, Kim C. Liddell was appointed President and Chief Executive Officer of Lake Shore Savings Bank and its holding companies, Lake Shore Bancorp and Lake Shore, MHC, in order to lead a new management team to expeditiously resolve the Consent Order which Lake Shore Savings Bank entered into with the OCC in February 2023, as well as position the Bank for future market opportunities. The Consent Order required Lake Shore Savings Bank to correct certain deficiencies relating to information technology, security, automated clearing house program, audit, management and BSA/AML. In addition, Lake Shore Bancorp and Lake Shore, MHC entered into a written agreement with the Federal Reserve Bank of Philadelphia in June 2023 to support the remediation activities at Lake Shore Savings Bank. As a result of
the new management team’s efforts, the Consent Order was terminated by the OCC on December 3, 2024 followed by the termination of the written agreement with the Federal Reserve Bank of Philadelphia on March 4, 2025. With the resolution of the Consent Order and the written agreement, we can focus on our core strategy of positioning ourselves as a leading community bank, locally headquartered in Western New York, with more than 133 years of service to our community. We strive to accomplish our goals by continuing to emphasize our exceptional individualized customer service and financial strength, continued community involvement, strong capital levels, multi-channel banking services, and penetration in our market areas via organic growth of loans and deposits. Highlights of our current business strategy include the following:
Provide high-quality, personalized service as a leading community bank to our local and loyal customers. We currently operate ten full-service branch offices throughout Western New York, where our branch teams initiate and develop both consumer and commercial customer relationships in and around the surrounding market areas. We offer concierge banking services, together with our online and mobile customer conveniences, creating a truly individualized approach for customers to manage their finances whenever, wherever and however they wish. As a true local bank, we pride ourselves on offering competitive products delivered with the individualized service our customers have come to expect. Our experienced team of commercial bankers can meet the needs of nearly any type of business through a variety of checking and credit products, and banking services. The retail banking team located in our branch offices focuses on meeting the deposit and lending needs of consumer customers throughout various life stages as well as small business customers.
From local decision-making, responding quickly and efficiently to customer needs, and utilizing technology to level the playing field with our competitors, we are committed to developing long-term relationships with our customers. Staying true to our local roots and mission of “Putting People First” continues to uniquely position us as a bank of choice in Western New York.
Grow our loan portfolio with an emphasis on commercial lending while maintaining our historical residential mortgage program. We have been strategically focused on increasing the originations of commercial real estate loans to finance the purchase of real property, which generally consists of developed real estate, particularly due to the interest rate risk inherent in holding long-term, fixed rate, residential, one- to four-family real estate loans in our portfolio. We have also focused on commercial business lending to small businesses, including business installment loans, lines of credit and other commercial loans. These types of commercial loans are generally made at higher interest rates and for shorter terms than one- to four-family real estate loans, which mitigates interest rate risk. At December 31, 2024 and 2023, our commercial real estate loan portfolio (including loans to finance the construction of commercial real estate) represented the largest holdings in our loan portfolio at 58.7% and 56.8%, respectively, of total gross loans. At December 31, 2024, the Bank's commercial real estate portfolio as a percentage of its total capital as defined under the federal interagency guidance was 239%.
At December 31, 2024 and 2023, residential one- to four-family mortgage loans (including loans to finance the construction of one- to four-family homes) represented the second largest holding in our loan portfolio at 29.5% and 30.8%, respectively, of total gross loans. Residential mortgage lending has historically been a significant part of our business, and we recognize that continuing to originate residential one- to four-family mortgage loans is essential to our status as a community-oriented bank. We may sell long-term conforming fixed rate one- to four-family residential loans that we originate on the secondary market, as part of our interest rate and liquidity risk strategy and asset/liability management, if it is deemed appropriate. We typically retain servicing rights when we sell one- to four-family residential mortgage loans. We did not sell any one- to four-family residential loans in the secondary market during the years ended December 31, 2024 or 2023.
Manage credit risk to maintain a low level of non-performing assets. We remain committed to maintaining prudent underwriting standards and aggressively monitoring our loan portfolio to maintain asset quality. We have established an experienced commercial credit and lending team and we have implemented well-defined policies, a thorough and efficient loan underwriting process, and active credit monitoring. Furthermore, management and our Board of Directors review robust loan portfolio analytics on a monthly basis to identify trends that could represent heightened credit risk for the organization. As a result of our continued focus on credit risk management, we had non-performing assets of $3.8 million, or 0.55% of total assets, at December 31, 2024. Our goal is to continue to improve our asset quality through prudent underwriting standards and the diligence of our loan collection personnel.
Increase our share of lower-cost core deposit growth. As a community-based bank, we are focused on growing core deposits within our local communities. As interest rates increased in recent years, customers migrated to higher cost certificates of deposit and we have made a concerted effort in recent periods to begin to reduce our reliance on higher cost certificates of deposit in favor of obtaining lower cost retail and commercial deposit accounts. We also continue to enhance our technology-based deposit products such as remote deposit capture, commercial cash management, and mobile deposits in order to accommodate business customers. Our core deposits (which is defined as our deposits other than certificates of deposit with a balance greater than $250,000 and brokered certificates of deposit), represented 94.1% of total deposits at December 31, 2024. Following our conversion to a New York-chartered commercial bank, we will be able to attract and accept municipal deposits which we believe can further enhance core deposits. We intend to continue our focus on core deposit growth by offering our retail and commercial customers a full selection of deposit-related services, and making further investments in technology so that we can enhance our value proposition and deliver high-quality, innovative products and services to our customers.
Pursue opportunistic mergers and acquisitions. In addition to organic growth, we intend to pursue opportunities to acquire banks that offer opportunities for strong financial returns. We recognize the importance of scale and technological innovation in banking. Our primary focus will be on franchises that have strong core deposit and lending relationships, new product capabilities and contiguous market footprints, while maintaining an acceptable risk profile. In addition, we believe that the accelerated rate of consolidation in the banking industry will continue over the next several years providing us with the ability to prudently evaluate and acquire other financial institutions. However, we currently have no understandings or agreements with respect to acquiring any specific financial institution.
Utilize technology to adapt to evolving customer needs. As the banking industry continues to rapidly evolve in terms of technological conveniences, we remain proactive in our efforts to provide e-banking services that our customers expect. We are committed to making investments in technology to make our organization more efficient and to meet customer needs. To this end, we have enhanced the security, monitoring, and updating of our customer systems via the deployment of a cloud-based computing system, in addition to the supporting hardware and software. During 2025, we continue to leverage the use of our core banking system to efficiently serve our customers and provide them with cutting-edge banking services for their convenience.
Leverage management expertise. We intend to rely on management’s extensive experience to execute our business strategy. Our new management team, led by Mr. Liddell, has a track record of profitably, growing financial institutions and creating value and providing liquidity for stockholders. With the enhancements to our management team over the last two years, we have positioned ourselves to capitalize on market opportunities and enhance our profitability.
Attract and retain key talent. Key to our strategy is our ability to attract and retain exceptional talent. As a community-based bank, we are focused on recruiting experienced lenders with knowledge of our markets who have either been displaced or are dissatisfied due to consolidation. We will seek to attract lenders with local relationships that can have a near-term impact on growing our loan portfolio.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. As a result, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available at that time. Critical accounting estimates include the areas where we have made what we consider to be particularly difficult, subjective, or complex judgments concerning estimates, and where these estimates can significantly affect our 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 years presented. Actual results could be different from these estimates. We evaluate our critical accounting estimates and assumptions on an ongoing basis and update them as needed. Our significant accounting policies are presented in Note 2 - Summary of Significant Accounting Policies, to the Audited Consolidated Financial Statements included within Part II. Item 8. of this Annual Report on Form 10-K for the year ended December 31, 2024.
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 our portfolios of assets exhibiting credit risk, particularly in our 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 our portfolios. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses. As of December 31, 2024 and December 31, 2023, the allowance for credit losses on loans totaled $5.1 million and $6.5 million, respectively. Due to the nature and composition of our lending activities, a significant portion of the allowance for credit losses on loans is allocated to the commercial real estate portfolio. As of December 31, 2024 and December 31, 2023, the allowance for credit losses on loans allocated to the total commercial real estate portfolio was $4.2 million, or 81.3%, and $5.2 million, or 81.0%, respectively.
Our methodology for maintaining our allowance for credit losses is based on historical experience and 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 in forecasted economic conditions may lead to further required increases to the allowance for credit losses. Conversely, improvements in 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 $507,000, or 9.9%, representing a ten basis points increase to the coverage ratio of the allowance for credit losses as a percentage of loans at amortized cost, assuming all other quantitative and qualitative factors are kept at current levels, as of December 31, 2024. 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 December 31, 2024.
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 years 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 years presented. Average balances are derived from daily balances over the years 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 $496,000 and $552,000 for the years ended December 31, 2024 and 2023, respectively. Interest income on securities does not include a tax equivalent adjustment for bank qualified municipal bonds.
For the Year Ended
For the Year Ended
December 31, 2024
December 31, 2023
Average
Interest Income/
Yield/
Average
Interest Income/
Yield/
Balance
Expense
Rate
Balance
Expense
Rate
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold
$
48,639
$
2,460
5.06
%
$
36,948
$
1,805
4.89
%
Securities(1)
60,347
1,631
2.70
%
67,840
1,941
2.86
%
Loans, including fees
547,525
30,713
5.61
%
567,319
30,009
5.29
%
Total interest-earning assets
656,511
34,804
5.30
%
672,107
33,755
5.02
%
Other assets
49,629
46,057
Total assets
$
706,140
$
718,164
Interest-bearing liabilities
Demand & NOW accounts
$
67,023
$
0.10
%
$
76,495
$
0.10
%
Money market accounts
144,926
3,811
2.63
%
132,816
1,914
1.44
%
Savings accounts
59,095
0.07
%
70,600
0.07
%
Time deposits
220,856
9,162
4.15
%
206,218
6,033
2.93
%
Borrowed funds & other interest-bearing liabilities
21,465
3.09
%
38,701
1,328
3.43
%
Total interest-bearing liabilities
513,365
13,741
2.68
%
524,830
9,397
1.79
%
Other non-interest bearing liabilities
105,018
109,907
Stockholders' equity
87,757
83,427
Total liabilities & stockholders' equity
$
706,140
$
718,164
Net interest income
$
21,063
$
24,358
Interest rate spread
2.62
%
3.23
%
Net interest margin
3.21
%
3.62
%
(1)The tax equivalent adjustment for bank qualified tax exempt municipal securities, using a federal statutory rate of 21%, results in rates of 3.08% and 3.27% for the years ended December 31, 2024 and 2023, respectively.
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 year to the volume change between the two years. The effect of changes in rate is measured by applying the change in rate between the two years to the average volume during the first year.
Year Ended December 31, 2024
Compared to
Year Ended December 31, 2023
Rate
Volume
Net Change
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold
$
$
$
Securities
(107
)
(203
)
(310
)
Loans, including fees
1,814
(1,110
)
Total interest-earning assets
1,771
(722
)
1,049
Interest-bearing liabilities:
Demand & NOW accounts
(2
)
(9
)
(11
)
Money market accounts
1,579
1,897
Savings accounts
(8
)
(7
)
Time deposits
2,522
3,129
Total deposits
4,100
5,008
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities
(131
)
(533
)
(664
)
Total interest-bearing liabilities
3,969
4,344
Total change in net interest income
$
(2,198
)
$
(1,097
)
$
(3,295
)
As shown in the above tables, the decrease in net interest income for the year ended December 31, 2024 as compared to the prior year was primarily due to an increase in the average rate paid on interest-bearing liabilities and an increase in the average balance of interest-bearing liabilities. Interest rate spread decreased by 61 basis points to 2.62% for the year ended December 31, 2024 as compared to 3.23% for the year ended December 31, 2023. Net interest margin decreased by 41 basis points to 3.21% for the year ended December 31, 2024 as compared to 3.62% for the year ended December 31, 2023.
Comparison of Financial Condition at December 31, 2024 and December 31, 2023
Total assets at December 31, 2024 were $685.5 million, a decrease of $39.6 million, or 5.5%, as compared to $725.1 million at December 31, 2023 primarily due to decreases in cash and cash equivalents, net loans, and securities. Cash and cash equivalents decreased by $20.6 million, or 38.3%, from $53.7 million at December 31, 2023 to $33.1 million at December 31, 2024. The decrease was primarily due to a decrease in long-term debt due to the repayment of Federal Home Loan Bank of New York ("FHLBNY") borrowings of $25.0 million in 2024 and a decrease in total deposits of $17.9 million due to the non-renewal of $16.0 million of brokered certificate of deposits in 2024. The year-over-year decrease in cash and cash equivalents was partially offset by a decrease in net loans of $11.2 million, or 2.0%.
Securities decreased by $3.9 million, or 6.5%, from $60.4 million at December 31, 2023 to $56.5 million at December 31, 2024. The decrease was primarily the result of $3.2 million in repayments and maturities during 2024 and a decrease of $732,000 in the market value of the securities.
Net loans receivable decreased during the year ended December 31, 2024, as shown in the table below:
At December 31,
At December 31,
Change
$
%
(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family(1)
$
161,331
$
172,005
$
(10,674
)
(6.2
)
%
Home equity
47,456
51,869
(4,413
)
(8.5
)
%
Commercial(2)
320,984
316,986
3,998
1.3
%
Total real estate loans
529,771
540,860
(11,089
)
(2.1
)
%
Other Loans:
Commercial
15,728
16,546
(818
)
(4.9
)
%
Consumer
1,130
(139
)
(12.3
)
%
Total gross loans
546,490
558,536
(12,046
)
(2.2
)
%
Allowance for credit losses
(5,133
)
(6,463
)
1,330
(20.6
)
%
Net deferred loan costs
3,263
3,755
(492
)
(13.1
)
%
Loans receivable, net
$
544,620
$
555,828
$
(11,208
)
(2.0
)
%
(1)Includes one- to four-family construction loans.
(2)Includes commercial construction loans.
The loans receivable, net balance decreased $11.2 million, or 2.0%, from $555.8 million at December 31, 2023 to $544.6 million at December 31, 2024. The decrease was primarily due to decreases in residential, one- to four-family and home equity loans. During the year ended December 31, 2024, we remained strategically focused on originating shorter duration, adjustable-rate commercial loans to diversify our asset mix and to manage interest rate risk while reducing our reliance on wholesale funding sources.
Asset Quality. The following table presents information regarding activity in our allowance for credit losses and our asset quality ratios at or for the dates indicated, including non-performing loan and non-performing asset ratios.
At or for the Year Ended December 31,
(Dollars in thousands)
Balance at beginning of period
$
6,463
$
7,065
Impact of adopting ASC 326
-
(Credit) provision for credit losses
(1,308
)
(897
)
Charge-offs:
Real estate loans:
Residential, one- to four-family
-
(3
)
Other loans:
Consumer
(41
)
(58
)
Total charge-offs
(41
)
(61
)
Recoveries:
Real estate loans:
Residential, one- to four-family
Commercial
-
Other loans:
Commercial
-
Consumer
Total recoveries
Net (charge-offs) recoveries
(22
)
Balance at end of period
$
5,133
$
6,463
Average loans outstanding, including fees
$
547,525
$
567,319
Allowance for credit losses as a percent of loans at amortized cost
0.93
%
1.16
%
Allowance for credit losses as a percent of non-performing loans
134.91
%
193.09
%
When compared to December 31, 2023, the current modeled allowance for credit losses related to the loan portfolio decreased by approximately $1.3 million, or 20.6%, of which a majority of the decrease was attributable to the commercial mortgage loan portfolio ($1.1 million). Of the total decrease in the allowance for credit losses on loans from December 31, 2023 to December 31, 2024, 99.2% of the attribution was due to a decrease in reserve rate, while 0.8% was due to a decrease in the size of the loan portfolio. The decrease in the ACL reserve rate was primarily due to the decrease in the quantitative loss factors derived from historical loss rates calculated in the vintage model as well as a decrease in the qualitative loss factors derived from trends in current economic conditions and forecasted economic trends which includes the FOMC's projected rate of U.S. civilian unemployment and U.S. year-over-year growth of GDP.
At or for the Year Ended December 31,
Ratio of net recoveries (charge-offs) to average loans outstanding by loan type, annualized:
Real estate loans:
Residential, one- to four-family
0.01
%
-
%
Home equity
-
%
-
%
Commercial
-
%
0.01
%
Other loans:
Commercial
-
%
0.15
%
Consumer
(3.10
)
%
(4.41
)
%
Ratio of net recoveries to average loans outstanding
-
%
-
%
For the year ended December 31, 2024, consumer loan net charge-offs to average consumer loans outstanding improved to 3.10% from 4.41% for the prior year. This improvement was primarily driven by a decrease in consumer loan net charge-offs of $18,000, partially offset by a decrease in average consumer loans outstanding of $122,000.
At December 31,
At December 31,
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential, one- to four-family(1)
$
1,891
$
1,904
Home equity
Commercial(2)
1,226
1,242
Other loans:
Commercial
-
-
Consumer
Total non-accrual loans
3,804
3,347
Total non-performing loans
3,804
3,347
Foreclosed real estate
-
Total non-performing assets
$
3,804
$
3,381
Ratios:
Non-performing loans as a percent of total net loans:
0.69
%
0.60
%
Non-performing assets as a percent of total assets:
0.55
%
0.47
%
(1) Includes one- to four-family construction loans.
(2) Includes commercial construction loans.
Total non-performing assets increased by $423,000, or 12.5%, to $3.8 million at December 31, 2024 as compared to $3.4 million at December 31, 2023, primarily due to an increase in non-accrual loans, including one home equity loan totaling $539,000 which was moved to non-accrual status during the first quarter of 2024. Non-performing loans were $3.8 million at December 31, 2024 compared to $3.3 million at December 31, 2023. We had no loans past due 90 days or more
but still accruing at December 31, 2024 or December 31, 2023. The Company had no foreclosed real estate at December 31, 2024 as compared to $34,000 at December 31, 2023.
Other assets decreased $2.1 million, or 16.0%, to $10.7 million at December 31, 2024 from $12.8 million at December 31, 2023. The decrease was primarily due to the $6.6 million of proceeds received from the surrender of bank-owned life insurance policies which was in process at the end of 2023, partially offset by a $3.1 million increase in annuity assets and a $707,000 increase in right of use lease assets.
The table below shows changes in deposit balances by type of deposit account between December 31, 2024 and December 31, 2023:
At December 31,
At December 31,
Change
$
%
(Dollars in thousands)
Core deposits
Demand deposits and NOW accounts:
Non-interest bearing
$
96,412
$
95,186
$
1,226
1.3
%
Interest bearing
65,020
72,966
(7,946
)
(10.9
)
%
Time deposits less than $250,000
173,745
166,381
7,364
4.4
%
Money market
149,550
137,374
12,176
8.9
%
Savings
54,322
64,584
(10,262
)
(15.9
)
%
Total core deposits
539,049
536,491
2,558
0.5
%
Non-core deposits
Time deposits greater than $250,000
33,929
38,433
(4,504
)
(11.7
)
%
Brokered certificates of deposit
-
16,000
(16,000
)
(100.0
)
%
Total non-core deposits
33,929
54,433
(20,504
)
(37.7
)
%
Total deposits
$
572,978
$
590,924
$
(17,946
)
(3.0
)
%
The year-over-year decrease in total deposits was primarily due to the non-renewal of $16.0 million of brokered certificates of deposit, an 11.7% decrease in time deposits greater than $250,000, a 15.9% decrease in savings accounts, and a 10.9% decrease in interest bearing checking accounts. The decreases were partially offset by an increase in money market accounts of 8.9%, a 4.4% increase in time deposits less than or equal to $250,000, and an increase in non-interest bearing transaction accounts of 1.3%. The increase in money market deposits and time deposits less than or equal to $250,000 was primarily due to an increase in customer demand for these types of deposit products due to the high and competitive interest rate environment. Our strategic focus is centered on organic growth of deposits among its retail and commercial customers to reduce the reliance on wholesale funding and to strengthen customer relationships. At December 31, 2024 and December 31, 2023, our percentage of uninsured deposits to total deposits was 13.5% and 12.8%, respectively.
There were no short-term borrowings from the FHLBNY at December 31, 2024 or December 31, 2023. Long-term debt consisting of advances from the FHLBNY decreased by $25.0 million, or 70.9%, from $35.3 million at December 31, 2023 to $10.3 million at December 31, 2024. 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 $3.6 million, or 4.2%, to $89.9 million at December 31, 2024 from $86.3 million at December 31, 2023. The increase in stockholders’ equity during 2024 was primarily attributed to $4.9 million in net income earned, partially offset by dividends paid of $1.1 million and a $579,000 unrealized mark-to-market loss on the available-for-sale securities portfolio recognized in accumulated other comprehensive loss.
Comparison of Results of Operations for the Year Ended December 31, 2024 and 2023	
General. Net income was $4.9 million for the year ended December 31, 2024, or $0.88 per diluted share, an increase of $111,000, or 2.3%, compared to net income of $4.8 million, or $0.82 per diluted share, for the year ended December 31, 2023. Our 2024 financial performance was positively impacted by a decrease in non-interest expenses as a result of efforts to optimize operating expenses while reducing our reliance on wholesale funding by $41.0 million.
Net Interest Income. Net interest income decreased by $3.3 million, or 13.5%, to $21.1 million for the year ended December 31, 2024 as compared to $24.4 million for the year ended December 31, 2023. Interest income increased by 3.1% while interest expense increased by 46.2% for the year ended December 31, 2024 when compared to the year ended December 31, 2023. Interest rate spread and net interest margin were 2.62% and 3.21%, respectively, for the year ended December 31, 2024 as compared to 3.23% and 3.62%, respectively, for the year ended December 31, 2023.
Interest Income. Interest income for the year ended December 31, 2024 was $34.8 million, an increase of $1.0 million, or 3.1%, compared to $33.8 million for the year ended December 31, 2023. The increase was due to a 28 basis points increase in the average yield on interest-earning assets primarily due to an increase in the average yield earned on loans. During the year ended December 31, 2024 as compared to the prior year, there was a $704,000 increase in interest income on loans due to a 32 basis points increase in the average yield on loans, partially offset by a decrease in the average balance of loans of $19.8 million, or 3.5%. The average yield on loans increased due to the higher interest rate environment while the average balance of loans decreased due to loan paydowns outpacing originations, primarily in one- to four- family real estate loans and home equity loans.
Interest-earning deposit income increased by $655,000, or 36.3%, to $2.5 million for the year ended December 31, 2024, as compared to $1.8 million for the year ended December 31, 2023. The increase in income during the most recent year was positively impacted by an increase in the average balance of interest-earning deposits of $11.7 million, or 31.6%, as well as a 17 basis points increase in the average yield earned on interest earning deposits. The average balance of interest-earning deposits increased due to loan and securities repayments received during the year that were not immediately redeployed into like-kind assets as well as the attribution of customer deposit balances throughout 2024. The average yield of interest-earning deposits for the year ended December 31, 2024 increased as the result of prudent treasury management.
Investment interest income decreased by $310,000, or 16.0%, to $1.6 million for the year ended December 31, 2024 compared to $1.9 million for the year ended December 31, 2023, due to a decrease in the average balance of securities of $7.5 million, or 11.0%, and a 16 basis points decrease in the average yield of the investment portfolio due to the repayment and maturities of higher yielding securities.
Interest Expense. Interest expense for the year ended December 31, 2024 was $13.7 million, an increase of $4.3 million, or 46.2%, from $9.4 million for the year ended December 31, 2023. The increase in interest expense was primarily due to an 89 basis points increase in the average interest rate paid on interest-bearing liabilities. During the year ended December 31, 2024 as compared to the prior year, there was a $3.1 million increase in interest paid on time deposit accounts due to a 122 basis points increase in the average interest rate paid on time deposits along with an increase in average time deposit balances of $14.6 million, or 7.1%. The increase in the average rate paid on time deposit accounts was primarily due to the increase in market interest rates and deposit competition over the course of 2023 and into 2024. Average interest-bearing deposit balances were $491.9 million, a 1.2% increase during the year ended December 31, 2024 as compared to $486.1 million for the prior year, resulting from an increase in average time deposits and average money market accounts since December 31, 2023.
During the year ended December 31, 2024, interest expense on borrowed funds and other interest-bearing liabilities decreased by $664,000, or 50.0%, compared to the year ended December 31, 2023, primarily due to a $17.2 million decrease in average borrowed funds and other interest-bearing liabilities outstanding along with a 34 basis points decrease in the average rate paid on borrowed funds and other interest-bearing liabilities resulting from the repayment of higher-cost, short-term FHLBNY borrowings during 2024.
(Credit) Provision for Credit Losses. We recorded a credit to the provision for credit losses of $1.5 million for the year ended December 31, 2024 as compared to a credit to the provision for credit losses of $1.0 million for the year ended December 31, 2023. For the year ended December 31, 2024, $1.3 million of the credit to the provision for credit losses related to the held-for-investment loan portfolio and $171,000 related to the reserve for unfunded commitments.
The decrease in the allowance for credit losses on loans and the corresponding credit to the provision for credit losses recognized during the year ended December 31, 2024 was the result of a decrease in the quantitative loss factors derived from historical loss rates calculated in the vintage model as well as a decrease in the qualitative loss factors derived from both current and forecasted economic trends.
Our allowance for credit losses on loans was $5.1 million as of December 31, 2024 as compared to $6.5 million as of December 31, 2023. Our allowance for credit losses on unfunded commitments was $314,000 as of December 31, 2024 as compared to $485,000 as of December 31, 2023. Non-performing assets as a percent of total assets increased to 0.55% at December 31, 2024 as compared to 0.47% at December 31, 2023, due to a decrease in total assets of $39.6 million, or 5.5%, and an increase in non-performing assets of $423,000, or 12.5%. Our allowance for credit losses on loans as a percent of loans at amortized cost was 0.93% at December 31, 2024 and 1.16% at December 31, 2023.
Refer to Note 5 of the Notes to the Audited Consolidated Financial Statements for additional details on our allowance for credit losses and corresponding credit to the provision for credit losses.
Non-Interest Income. Non-interest income was $3.3 million for the year ended December 31, 2024, an increase of $669,000, or 25.4%, as compared to the year ended December 31, 2023. The increase was primarily due to a $313,000 increase in earnings on bank-owned life insurance in connection with the restructuring of bank-owned life insurance during the fourth quarter of 2023 and the recognition of death benefits during the second half of 2024, as well as a $161,000 increase in earnings on annuities purchased in the fourth quarter of 2024. The increases were partially offset by a decrease in debit card fees of $30,000, or 3.5% during the year ended December 31, 2024 when compared to the year ended December 31, 2023.
Non-Interest Expense. Non-interest expense was $20.0 million for the year ended December 31, 2024, a decrease of $1.8 million, or 8.4%, as compared to $21.8 million for the year ended December 31, 2023. The decrease primarily related to a decline in professional services expenses of $1.0 million, or 41.8%, as a result of a decrease in the use of external consultants who assisted with regulatory compliance in connection with the former consent order. Advertising costs decreased by $484,000, or 83.7%, due to a decrease in marketing spending, and FDIC insurance expense decreased by $317,000, or 28.5%, during the year ended December 31, 2024 due to a decrease in premium assessments. Additionally, occupancy and equipment costs decreased by $194,000, or 6.7%, as the result of efforts to optimize operating expenses. These decreases were partially offset by an increase in salaries and employee benefits expense of $198,000, or 1.8%, in an effort to attract and retain personnel as well as an increase in data processing costs of $41,000, or 2.3%, primarily related to our core provider for the year ended December 31, 2024 when compared to the year ended December 31, 2023.
Income Taxes Expense. Income tax expense was $935,000 for the year ended December 31, 2024, a decrease of $464,000, or 33.2%, as compared to $1.4 million for the year ended December 31, 2023. The decrease in income tax expense was primarily due to the restructuring of bank-owned life insurance in 2023, which resulted in additional taxable income in 2023 and an increase in non-taxable income in 2024 as the result of higher earnings on policies owned. The effective tax rate for the years ended December 31, 2024 and 2023 was 16.0% and 22.4%, respectively. The decrease in the effective tax rate in 2024 was due to the aforementioned restructuring of bank-owned life insurance.
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 December 31, 2024, the maximum amount that we could borrow from the FHLBNY, based on the market value of certain fixed-rate residential, one- to four-family loans pledged to FHLBNY, was $26.7 million, which was collateralized by certain fixed-rate residential, one- to four-family loans in delivery. Under this arrangement, we could significantly increase our maximum borrowing capacity by providing additional eligible collateral in delivery. At December 31, 2024 and December 31, 2023, we had outstanding advances under this agreement of $10.3 million and $35.3 million, respectively. 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 December 31, 2024 and December 31, 2023, there were no securities pledged to the Federal Reserve Bank and we had no balances outstanding. We have also established an unsecured line of credit with a correspondent bank for $20.0 million. There were no borrowings outstanding on this line as of December 31, 2024 and December 31, 2023.
As a result of our previous Consent Order, our ability to access available sources of funds from the FHLBNY had been curtailed to short-term advances (i.e., 30 days or less) and the residential loans pledged as collateral for these
borrowings were subject to reductions in value as of December 31, 2024. On January 8, 2025, the FHLBNY communicated that the Bank was no longer restricted and therefore would be able to access additional borrowing capacity based on the total eligible population of fixed-rate residential, one- to four-family loans pledged as collateral and would no longer be curtailed to short-term advances. As of January 31, 2025, we had available borrowing capacity of $86.9 million based on the eligible collateral pledged. Lastly, on February 27, 2025, the Federal Reserve Bank approved the Bank's application for uncollateralized intraday credit with an effective date of March 6, 2025. With this uncollateralized intraday credit, certain transactions will not be rejected for which there are insufficient funds in our Federal Reserve Master Account during normal hours of operation.
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 year ended December 31, 2024, we originated loans of approximately $53.3 million as compared to approximately $56.3 million of loans originated during the year ended December 31, 2023. Principal repayments and other deductions exceeded loan originations in 2024 by $12.0 million. There were no purchases of investment securities during the years ended December 31, 2024 or December 31, 2023. We did not sell any investment securities during the year ended December 31, 2024 and sold investment securities with an amortized cost of $9.8 million during the year ended December 31, 2023. Additionally, during 2024, we purchased $3.0 million in annuity assets in connection with the implementation of a supplemental executive retirement plan. These activities for 2023 and 2024 were funded primarily through a combination of organic deposit growth, principal payments received on loans and securities, securities sales, borrowings, and cash reserves.
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 $573.0 million at December 31, 2024 as compared to $590.9 million at December 31, 2023. Approximately $182.0 million of time deposit accounts are scheduled to mature within one year as of December 31, 2024. 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 December 31, 2024, the Bank exceeded all of its regulatory capital requirements.
Off-Balance Sheet Arrangements
Our off-balance sheet items include loan commitments as described in Note 16 in the Notes to our Audited Consolidated Financial Statements. At December 31, 2024, we had loan commitments to borrowers of approximately $3.1 million and overdraft lines of credit, unused home equity lines of credit, unused commercial lines of credit, and commercial and standby letters of credit of approximately $97.5 million. We recorded an allowance for credit losses associated with these commitments of $314,000 as of December 31, 2024. We do not have any other 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.
Accounting Polices, Standards, and Pronouncements
Refer to Note 2 in the notes to our consolidated financial statements for a discussion of significant accounting policies, the impact of the adoption of new accounting standards and recent accounting pronouncements that may affect our financial condition and results of operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosure not required for smaller reporting companies.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
See pages F - 1 through F - 49 following the signature page of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of its Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management has made a comprehensive review, evaluation, and assessment of our internal control over financial reporting as of December 31, 2024. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2024, our internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting pursuant to rules of the SEC that exempts the Company from such attestation and requires only management’s report.
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 December 31, 2024 to which this report relates that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
During the fourth quarter of 2024, 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.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2025 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our December 31, 2024 fiscal year end.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2025 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our December 31, 2024 fiscal year end.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2025 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our December 31, 2024 fiscal year end.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2025 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our December 31, 2024 fiscal year end.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2025 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of our December 31, 2024 fiscal year end.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
15(a)(1) Financial Statements. The following are included in Item 8 of Part II of this Annual Report on Form 10-K.
•Report of Independent Registered Public Accounting Firm
•Report of Predecessor Auditor
•Consolidated Statements of Financial Condition as of December 31, 2024 and 2023
•Consolidated Statements of Income for the years ended December 31, 2024 and 2023
•Consolidated Statements of Comprehensive Income for the years ended December 31, 2024 and 2023
•Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2024 and 2023
•Consolidated Statements of Cash Flows for the years ended December 31, 2024 and 2023
•Notes to Consolidated Financial Statements
15(a)(2) Financial Statement Schedules. Schedules are omitted because they are not required or the information is provided elsewhere in the Consolidated Financial Statements or Notes thereto included in Item 8 of Part II of this Annual Report on Form 10-K.
15(a)(3) Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference.
3.1
Charter of Lake Shore Bancorp, Inc.1
3.2
Amended and Restated Bylaws of Lake Shore Bancorp, Inc.2
4.1
Form of Stock Certificate of Lake Shore Bancorp, Inc.3
4.2
Form of Stock Option Certificate4
4.3
Description of Common Stock5
10.1
Amended and Restated Severance Pay Plan of Lake Shore Savings Bank6
10.2
2015 Executives Supplemental Benefit Plan I7
10.3
Amended and Restated 2015 Executives Supplemental Benefit Plan II8
10.4
Lake Shore Bancorp, Inc. 2025 Equity Incentive Plan9
10.5
Amended and Restated 2015 Directors Supplemental Benefit Plan II10
10.6
Lake Shore Bancorp, Inc. 2006 Stock Option Plan11
10.7
Employment Agreement, dated as of December 16, 2024, by and between Lake Shore Savings Bank and Kim C. Liddell12
10.8
Supplemental Executive Retirement Plan Agreement, dated as of December 16, 2024, between Lake Shore Savings Bank and Kim C. Liddell13
10.9
2015 Executives Supplemental Benefit Plan II joinder agreement for Jeffery M. Werdein14
10.10
Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan15
10.11
Retention Agreement between Lake Shore Savings Bank and Jeffrey Werdein16
10.12
Employment Agreement, dated as of March 11, 2025, by and between Lake Shore Savings Bank and Taylor M. Gilden17
10.13
Amended and Restated Plan of Conversion and Reorganization of Lake Shore, MHC18
10.14
Lake Shore Savings Bank Annual Incentive Plan*
19.1
Lake Shore Bancorp, Inc. Lake Shore Savings Bank Statement of Company Policy Regarding Confidential Information and Stock and Securities Trading By Directors, Officers and Employees*
21.1
Subsidiaries of Lake Shore Bancorp, Inc.*
23.1
Consent of Yount, Hyde & Barbour, P.C.*
23.2
Consent of Baker Tilly US, LLP*
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*
Policy Relating to Recovery of Erroneously Awarded Compensation*
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Label Linkbase Document*
* Filed herewith.
1Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-1, filed with the Securities and Exchange Commission on November 4, 2005 (Registration No. 333-129439).
2Incorporated herein by reference to Exhibit 3.2 to Form 8-K, filed with the Securities and Exchange Commission on November 1, 2023.
3Incorporated herein by reference to the Exhibits to Amendment No. 2 to the Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on February 8, 2006 (Registration No. 333-129439).
4Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8, filed with the Securities and Exchange Commission on April 3, 2007 (Registration No. 333-141829).
5Incorporated herein by reference to Exhibit 4.4 to Form 10-K, filed with the Securities and Exchange Commission on March 27, 2020.
6Incorporated herein by reference to the Exhibits to Form 8-K, filed with the Securities and Exchange Commission on November 16, 2007.
7Incorporated herein by reference to Exhibit 10.5 to Form 10-K, filed with the Securities and Exchange Commission on March 25, 2016.
8Incorporated herein by reference to Exhibit 10.6 to Form 10-K, filed with the Securities and Exchange Commission on March 25, 2016.
9Incorporated herein by reference to Appendix A to the Proxy Statement for our February 4, 2025 special meeting of stockholders filed with the Securities and Exchange Commission on December 20, 2024.
10Incorporated herein by reference to Exhibit 10.8 to Form 10-K, filed with the Securities and Exchange Commission on March 25, 2016
11Incorporated herein by reference to the Proxy Statement for our October 24, 2006 special meeting of stockholders filed with the Securities and Exchange Commission on September 7, 2006.
12Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on December 20, 2024.
13Incorporated herein by reference to Exhibit 10.2 to Form 8-K, filed with the Securities and Exchange Commission on December 20, 2024.
14Incorporated herein by reference to Exhibit 10.2 to Form 8-K, filed with the Securities and Exchange Commission on May 23, 2016.
15Incorporated herein by reference to Appendix A to the Proxy Statement for our May 23, 2012 annual meeting of stockholders filed with the Securities and Exchange Commission on April 11, 2012.
16Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on April 4, 2018.
17Incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with the Securities and Exchange Commission on March 14, 2025.
18Incorporated herein by reference to Exhibit 2.1 to Form 8-K, filed with the Securities and Exchange Commission on March 14, 2025.