Lake Shore Bancorp, Inc. (LSBK) is a community-oriented financial institution that has been serving the Western New York region for over a century. Headquartered in Dunkirk, New York, the company operates as the mid-tier holding company for Lake Shore Savings Bank, a federally chartered savings bank. With a focus on providing personalized banking services to individuals and small businesses, Lake Shore Bancorp has carved out a niche in its local market, weathering industry changes and regulatory challenges along the way.
Business Overview and History
Lake Shore Bancorp, Inc. was founded in 2006 as the mid-tier holding company for Lake Shore Savings Bank through a mutual holding company reorganization. This structure was established to provide the bank with greater flexibility in its operations and potential for growth. In its early years, the company focused on organic growth, opening new branch locations and expanding its customer base in the Western New York region. Lake Shore Bancorp worked diligently to establish itself as a trusted community bank, providing personalized service and tailored financial solutions to individuals and small businesses.
Throughout its history, Lake Shore Bancorp has maintained a strong focus on community banking, providing a range of deposit, lending, and wealth management services to customers in its primary market area of Chautauqua and Erie counties in Western New York. As of September 30, 2024, the company reported total assets of $697.60 million, with a loan portfolio of $541.05 million and total deposits of $587.56 million.
Financial Performance
Lake Shore Bancorp's financial performance has been relatively stable in recent years, with the company reporting net income of $4.82 million, or $0.82 per diluted share, for the year ended December 31, 2023. This represents a slight decrease from the $5.71 million, or $0.97 per diluted share, reported in 2022. The company's net interest income, which is a key driver of its profitability, stood at $24.36 million in 2023, compared to $24.34 million in the prior year.
For the most recent fiscal year (2023), Lake Shore Bancorp reported annual revenue of $26.99 million, annual net income of $4.82 million, annual operating cash flow of $6.21 million, and annual free cash flow of $5.81 million.
In the most recent quarter (Q3 2024), the company's quarterly revenue was $6.17 million, with a quarterly net income of $1.33 million. The increase in net income during the third quarter of 2024 was primarily driven by an increase in net interest income and a reduction in non-interest expenses when compared to the previous quarter.
Lake Shore Bancorp's net interest margin decreased from 3.72% for the nine months ended September 30, 2023 to 3.17% for the same period in 2024, primarily due to an increase in the average interest rate paid on deposits, which offset the increase in the average yield on interest-earning assets. Net income for the nine months ended September 30, 2024 was $3.46 million, down 15.0% from $4.07 million in the prior year period, largely due to the lower net interest margin.
Liquidity and Solvency
The company's balance sheet remains well-capitalized, with a Tier 1 Leverage capital ratio of 12.68% and a Total Risk-Based capital ratio of 17.77% as of December 31, 2023, exceeding the well-capitalized thresholds set by the Office of the Comptroller of the Currency (OCC). This strong capital position has allowed Lake Shore Bancorp to weather industry challenges and regulatory scrutiny in recent years.
As of September 30, 2024, Lake Shore Bancorp reported a debt-to-equity ratio of 0.11, indicating a relatively low level of leverage. The company's cash and cash equivalents stood at $49.98 million, providing a solid liquidity buffer. Additionally, Lake Shore Bancorp has a written agreement with the Federal Home Loan Bank of New York (FHLBNY) allowing it to borrow up to $35.3 million, collateralized by certain residential mortgage loans. As of September 30, 2024, the company had $10.25 million in outstanding FHLBNY advances. Lake Shore Bancorp also maintains an unsecured $20 million line of credit with a correspondent bank, which was undrawn as of the same date.
Regulatory Challenges and Operational Improvements
In 2023, Lake Shore Savings Bank, the company's wholly-owned subsidiary, consented to the issuance of a Consent Order by the OCC, the bank's primary federal regulator. The Consent Order required the bank to address deficiencies related to information technology, security, automated clearing house, audit, management, and Bank Secrecy Act/Anti-Money Laundering compliance.
To address the issues raised in the Consent Order, Lake Shore Bancorp has been working diligently to implement a comprehensive remediation plan, which has resulted in increased operating expenses. The company has also entered into a Written Agreement with the Federal Reserve Bank of Philadelphia, its holding company regulator, to ensure that the holding company serves as a source of strength to the bank.
Despite the challenges posed by the Consent Order and the Written Agreement, Lake Shore Bancorp has remained focused on improving its operational efficiency and reducing its reliance on wholesale funding sources. The company has successfully lowered its non-interest expenses, with a 11.5% decrease in non-interest expense during the nine months ended September 30, 2024 compared to the same period in the prior year.
Product Segments and Loan Portfolio
Lake Shore Bancorp operates through two main product segments: Real Estate Loans and Other Loans.
The Real Estate Loans segment comprises three primary loan types:
1. Residential one- to four-family loans: This portfolio, which includes one- to four-family construction loans, stood at $163.84 million as of September 30, 2024, down 4.7% from $172.00 million at December 31, 2023.
2. Home Equity loans: The portfolio decreased by 7.5% to $47.97 million as of September 30, 2024, from $51.87 million at the end of 2023.
3. Commercial real estate loans: Including commercial construction loans, this portfolio decreased by 1.4% to $312.57 million as of September 30, 2024, from $316.99 million at the prior year-end.
The Other Loans segment includes:
1. Commercial loans: This portfolio decreased by 5.4% to $15.64 million as of September 30, 2024, from $16.55 million at December 31, 2023.
2. Consumer loans: The portfolio decreased by 9.4% to $1.02 million at the end of the third quarter of 2024, from $1.13 million at the prior year-end.
Overall, the company's total gross loans decreased by $17.49 million, or 3.1%, from $558.54 million at December 31, 2023 to $541.05 million at September 30, 2024. This decrease was primarily due to payoffs outpacing new loan originations across the loan portfolio. The allowance for credit losses on loans decreased from $6.46 million at the end of 2023 to $5.49 million at September 30, 2024, a decline of 15.0%, driven by a decrease in the quantitative and qualitative loss factors used in the company's CECL methodology.
Outlook and Potential Risks
Looking ahead, Lake Shore Bancorp faces both opportunities and risks. The company's focus on community banking and its strong capital position provide a solid foundation for growth, particularly as it continues to optimize its operations and reduce its cost structure. However, the ongoing remediation efforts required by the Consent Order and the Written Agreement may continue to weigh on the company's financial performance in the near-term.
Additionally, the company operates in a highly competitive and regulated industry, which could present challenges in terms of maintaining market share and adapting to changing regulatory requirements. Macroeconomic conditions, such as rising interest rates and potential recessionary pressures, could also impact the company's loan portfolio and deposit growth.
Despite these risks, Lake Shore Bancorp has demonstrated its resilience and commitment to serving its local community. The company's experienced management team and focus on operational improvements suggest that it is well-positioned to navigate the challenges ahead and continue delivering value to its shareholders.
Conclusion
Lake Shore Bancorp, Inc. is a community bank with a long history of serving the Western New York region. While the company has faced regulatory challenges in recent years, it has remained focused on improving its operational efficiency and reducing its reliance on wholesale funding sources. The company's strong liquidity position, with significant cash reserves and available credit facilities, provides a buffer against potential economic headwinds. Despite the near-term headwinds, Lake Shore Bancorp's strong capital position, experienced management team, and commitment to its local community suggest that it is well-positioned to weather the industry's challenges and continue delivering value to its shareholders.