LSBK

Business Context and Reporting Period

Company: Lake Shore Bancorp, Inc. (LSBK)
Reporting Period: Fiscal Year Ended December 31, 2025
Business Overview: Lake Shore Bancorp is the parent holding company of Lake Shore Bank, a community bank operating ten branches in Western New York (Erie and Chautauqua Counties). The Company completed a "second-step" conversion on July 18, 2025, transitioning from a mutual holding company structure to a fully public stock holding company. This conversion included a stock offering that raised gross proceeds of approximately $49.5 million. The Bank converted its charter from a federal savings bank to a New York commercial bank.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income increased 47.4% to $7.3 million, driven by a 16.6% increase in net interest income and a 3.6% decrease in non-interest expenses.
• Capital Expansion: Stockholders' equity grew 57.6% to $141.6 million, primarily due to the $49.5 million raised in the second-step conversion offering and net income retention.
• Asset Quality Improvement: Non-performing assets decreased 55.8% to $1.7 million (0.23% of total assets), largely due to the resolution of specific non-accrual loans and foreclosures.
• Loan Portfolio Shift: While total loans grew 2.0%, the composition shifted. Commercial real estate loans increased 2.0% to $327.4 million (58.8% of portfolio), while residential one-to-four-family loans decreased 7.0%. Consumer loans saw a significant increase of 1,460.6% due to the purchase of $17.6 million in consumer loans.
• Debt Reduction: The Company paid off all $10.3 million in long-term borrowings from the Federal Home Loan Bank of New York (FHLBNY) during 2025, reducing reliance on wholesale funding.

Guidance, Outlook, and Risks

Management Commentary & Strategy: Management focuses on organic growth of loans and deposits, emphasizing commercial lending to manage interest rate risk. The Company aims to increase its share of lower-cost core deposits and reduce reliance on higher-cost certificates of deposit. A stock repurchase plan for up to 5% of outstanding shares was adopted in October 2025, with repurchases expected to commence on July 20, 2026.

Risks and Contingencies:

• Interest Rate Sensitivity: The Company is liability-sensitive; rising rates increase funding costs faster than asset yields re-price, potentially compressing margins.
• Commercial Real Estate Concentration: Commercial real estate and commercial business loans comprise 61.9% of the portfolio. Deterioration in the local Western New York economy or real estate values could significantly impact asset quality.
• Regulatory Compliance: The Company previously operated under a Consent Order with the OCC and an agreement with the Federal Reserve, both of which were terminated in late 2024 and early 2025. Continued compliance with cybersecurity and BSA/AML regulations remains critical.
• Operational Risk: Reliance on third-party vendors and technology infrastructure exposes the Company to cybersecurity threats and operational disruptions.

Investor Verification Checklist

• Conversion Impact: Verify the long-term accretive nature of the second-step conversion and the sustainability of the capital raise.
• Commercial Real Estate Exposure: Review the specific concentrations within the $327.4 million commercial real estate portfolio, particularly non-owner-occupied properties ($125.6 million), for potential stress scenarios.
• Deposit Stability: Monitor the trend of core deposits versus time deposits, noting the 12.7% decrease in time deposits over $250,000.
• Asset Quality Trends: Confirm the sustainability of the 55.8% reduction in non-performing assets and the adequacy of the allowance for credit losses (0.87% of loans).
• Stock Repurchase Execution: Track the commencement and volume of the new stock repurchase program starting July 2026.