LAKE SHORE BANCORP, INC. 10-K Analysis & Summary – 3/14/2025

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LAKE SHORE BANCORP, INC.

10-K

Annual report

Filing date:

03/14/2025

TLDR:

ELI5:

Lake Shore Bancorp, a local bank, had a year with slightly better profits but faced challenges with interest income. They’re also changing their structure to become a fully public company, which could bring new opportunities but also some risks.

Accession #:

0000950170-25-039548

Published on

March 16, 2025

Analyst Summary

Net interest income decreased by 13.5% due to rising interest expense outpacing interest income growth.
Net income increased slightly by 2.3%, indicating improved efficiency in managing expenses.
Total assets decreased by 5.5%, primarily due to decreases in cash, net loans, and securities.
Management emphasizes a focus on commercial loan growth and core deposit growth.
The resolution of the Consent Order and written agreement is highlighted as a key achievement.
Net Profit Margin for 2024 is 13.05%, a decrease of 1.58% from 2023, and significantly lower than the industry average of 25%.
Return on Assets (ROA) for 2024 is 0.70%, an increase of 4.48% from 2023, but still below the industry average of 1.15%.
Return on Equity (ROE) for 2024 is 5.61%, a decrease of 2.60% from 2023, and below the industry average of 9.5%.
Basic and Diluted Earnings Per Share (EPS) for 2024 is $0.88, an increase of 7.32% from 2023.
The Debt-to-Equity Ratio for 2024 is 6.63, a decrease of 10.41% from 2023, and lower than the industry average of 8.
The Interest Coverage Ratio for 2024 is 1.43, a decrease of 19.21% from 2023, and below the healthy threshold of 2.0.
Asset Turnover for 2024 is 5.5%, an increase of 10.0% from 2023, but still lower than the industry average of 0.10.
The Price-to-Earnings Ratio (P/E) is 18.16, higher than the typical range of 10-15, suggesting the stock may be overvalued.
Core deposits increased slightly from $536,491,000 in 2023 to $539,049,000 in 2024, a 0.5% increase.
Non-performing assets increased from $3,381,000 in 2023 to $3,804,000 in 2024, with the ratio of non-performing assets to total assets increasing from 0.47% to 0.55%.

Opportunities and Risks

Credit Risk: Concentration in commercial real estate and commercial business loans, which may be more sensitive to economic downturns.
Interest Rate Risk: Liability-sensitive position, which could negatively impact net interest margin in a rising rate environment.
Liquidity Risk: Dependence on core deposits and access to wholesale funding, which could be impacted by market conditions.
Cybersecurity Risk: Reliance on technology and third-party vendors, which exposes the company to potential security breaches.
Regulatory Risk: Extensive regulation and potential for changes in laws and regulations to impact operations.
Conversion Risk: The second-step conversion and charter change are subject to regulatory and shareholder approval, and may not be completed as anticipated.
Commercial Loan Growth: Focus on commercial lending provides opportunities for higher yields and diversification.
Core Deposit Growth: Emphasis on attracting and retaining core deposits can improve funding costs.
Technological Innovation: Investments in technology can enhance customer service and operational efficiency.
Mergers and Acquisitions: Potential for strategic acquisitions to expand market presence and improve profitability.
Resolution of Regulatory Issues: Termination of the Consent Order and written agreement allows management to focus on strategic initiatives.
New York-Chartered Commercial Bank: Following the conversion, the Bank will be able to attract and accept municipal deposits which can further enhance core deposits.

Potential Implications

Company Performance

Monitor Interest Rate Sensitivity: Closely track the impact of interest rate fluctuations on net interest margin and consider strategies to mitigate risk.
Assess Commercial Loan Portfolio: Regularly evaluate the credit quality of the commercial loan portfolio and adjust the allowance for credit losses as needed.
Track Deposit Mix: Focus on attracting and retaining core deposits to reduce reliance on higher-cost funding sources.
Evaluate Acquisition Opportunities: Explore potential acquisitions that align with the company’s strategic goals and financial objectives.
Monitor Conversion Progress: Closely follow the progress of the second-step conversion and charter change, and assess the potential impact on the company’s financial performance and regulatory compliance.

Stock Price

The Price-to-Earnings Ratio (P/E) is 18.16, higher than the typical range of 10-15, suggesting that the stock may be overvalued relative to its earnings.
A P/B ratio of around 1 is considered typical for banks. LSBK’s P/B ratio is in line with this average.

Lake Shore Bancorp, Inc. (LSBK) 10-K Filing Analysis – FY 2024

Executive Summary

This report analyzes Lake Shore Bancorp, Inc.’s 10-K filing for the fiscal year ended December 31, 2024. The analysis focuses on financial performance, key risk factors, and strategic initiatives. While the company demonstrates a commitment to community banking and manages a relatively stable asset quality, challenges remain in a competitive environment with rising interest rates. The upcoming second-step conversion and charter change to a New York-chartered commercial bank present both opportunities and uncertainties.

Overall Assessment: Hold. The company’s strategic initiatives and resolution of regulatory issues are positive, but the competitive landscape and interest rate environment warrant a cautious approach.

Recommendation: Monitor the progress of the second-step conversion, the impact of interest rate fluctuations on net interest margin, and the effectiveness of commercial loan growth strategies.

Company Overview

Lake Shore Bancorp, Inc. operates as the savings and loan holding company for Lake Shore Savings Bank. The Bank provides a range of banking products and services to customers in Western New York. A majority of the Company’s stock is held by Lake Shore, MHC, a mutual holding company. The company is undergoing a second-step conversion to a fully public stock holding company structure, including a charter change for the bank to a New York-chartered commercial bank.

Financial Statement Analysis

Key Financial Ratios and Trends

The following table summarizes key financial ratios and trends derived from the 10-K filing:

Metric	2024	2023	Change
Net Interest Income (in thousands)	$21,063	$24,358	-$3,295
Net Interest Margin	3.21%	3.62%	-0.41%
Return on Average Equity	5.62% (Calculated)	5.78% (Calculated)	-0.16%
Non-Performing Assets / Total Assets	0.55%	0.47%	+0.08%
Allowance for Credit Losses / Loans	0.93%	1.16%	-0.23%

Income Statement Analysis

Net interest income decreased by 13.5% due to rising interest expense outpacing interest income growth.
The net interest margin decreased from 3.62% to 3.21%, indicating a squeeze on profitability.
Non-interest income increased by 25.4%, driven by earnings on bank-owned life insurance and annuity assets.
Non-interest expense decreased by 8.4%, primarily due to reduced professional services and advertising costs.
Net income increased slightly by 2.3%, indicating improved efficiency in managing expenses.

Balance Sheet Analysis

Total assets decreased by 5.5%, primarily due to decreases in cash, net loans, and securities.
Net loans decreased by 2.0%, with a shift towards commercial real estate lending.
Total deposits decreased by 3.0%, driven by non-renewal of brokered CDs and a shift in deposit mix.
Stockholders’ equity increased by 4.2%, driven by net income, partially offset by dividends paid and unrealized losses on securities.

Cash Flow Analysis

Cash from operating activities decreased significantly.
Cash from investing activities increased due to loan repayments and maturities.
Cash used in financing activities increased due to repayment of long-term debt and cash dividends paid.

Management’s Discussion and Analysis (MD&A) Insights

Management emphasizes a focus on commercial loan growth and core deposit growth.
The resolution of the Consent Order and written agreement is highlighted as a key achievement.
The upcoming second-step conversion and charter change are discussed as strategic initiatives.

Risk Assessment

Key Risks Identified:

Credit Risk: Concentration in commercial real estate and commercial business loans, which may be more sensitive to economic downturns.
Interest Rate Risk: Liability-sensitive position, which could negatively impact net interest margin in a rising rate environment.
Liquidity Risk: Dependence on core deposits and access to wholesale funding, which could be impacted by market conditions.
Cybersecurity Risk: Reliance on technology and third-party vendors, which exposes the company to potential security breaches.
Regulatory Risk: Extensive regulation and potential for changes in laws and regulations to impact operations.
Conversion Risk: The second-step conversion and charter change are subject to regulatory and shareholder approval, and may not be completed as anticipated.

Opportunity Assessment

Key Opportunities Identified:

Commercial Loan Growth: Focus on commercial lending provides opportunities for higher yields and diversification.
Core Deposit Growth: Emphasis on attracting and retaining core deposits can improve funding costs.
Technological Innovation: Investments in technology can enhance customer service and operational efficiency.
Mergers and Acquisitions: Potential for strategic acquisitions to expand market presence and improve profitability.
Resolution of Regulatory Issues: Termination of the Consent Order and written agreement allows management to focus on strategic initiatives.
New York-Chartered Commercial Bank: Following the conversion, the Bank will be able to attract and accept municipal deposits which can further enhance core deposits.

Conclusion & Actionable Insights

Lake Shore Bancorp faces a challenging operating environment with rising interest rates and intense competition. However, the company’s strategic initiatives, including commercial loan growth and core deposit growth, offer potential for improved profitability. The upcoming second-step conversion and charter change present both opportunities and uncertainties.

Actionable Insights:

Monitor Interest Rate Sensitivity: Closely track the impact of interest rate fluctuations on net interest margin and consider strategies to mitigate risk.
Assess Commercial Loan Portfolio: Regularly evaluate the credit quality of the commercial loan portfolio and adjust the allowance for credit losses as needed.
Track Deposit Mix: Focus on attracting and retaining core deposits to reduce reliance on higher-cost funding sources.
Evaluate Acquisition Opportunities: Explore potential acquisitions that align with the company’s strategic goals and financial objectives.
Monitor Conversion Progress: Closely follow the progress of the second-step conversion and charter change, and assess the potential impact on the company’s financial performance and regulatory compliance.

Commentary

Lake Shore Bancorp (LSBK) reported a mixed financial performance for the year ended December 31, 2024. Net income increased slightly, driven by growth in loan interest income, but this was offset by a decrease in net interest income. The company experienced a decrease in total assets, primarily due to a reduction in deposits and long-term debt. While asset quality metrics appear stable, the decrease in overall loan portfolio size and deposit base raises concerns about future growth and profitability.

Financial Ratio and Metric Analysis

Profitability

Gross Profit Margin

Metric: Not applicable for financial institutions.

Operating Profit Margin

Metric: Not directly calculable from the provided data. Requires separating operating expenses from total non-interest expenses.

Net Profit Margin

Metric: Net Income / Total Revenue = $4,931 / ($34,804 + $3,304) = 13.05%

Trend: Net Profit Margin for 2023 = $4,820 / ($33,755 + $2,635) = 13.26%. Percentage Change: (13.05% – 13.26%) / 13.26% = -1.58%

Industry: The average net profit margin for US banks in 2024 was approximately 25%. LSBK’s net profit margin is significantly lower than the industry average, indicating lower profitability compared to its peers.

Return on Assets (ROA)

Metric: Net Income / Average Total Assets = $4,931 / (($685,504 + $725,118) / 2) = 0.70%

Trend: ROA for 2023 = $4,820 / (($725,118 + $718,164) / 2) = 0.67%. Percentage Change: (0.70% – 0.67%) / 0.67% = 4.48%

Industry: The average ROA for US banks in 2024 was approximately 1.15%. LSBK’s ROA is below the industry average, suggesting less efficient asset utilization.

Return on Equity (ROE)

Metric: Net Income / Average Stockholders’ Equity = $4,931 / (($89,868 + $86,273) / 2) = 5.61%

Trend: ROE for 2023 = $4,820 / (($86,273 + $81,184) / 2) = 5.76%. Percentage Change: (5.61% – 5.76%) / 5.76% = -2.60%

Industry: The average ROE for US banks in 2024 was approximately 9.5%. LSBK’s ROE is below the industry average, indicating lower returns to shareholders.

Earnings Per Share (EPS) – Basic and Diluted

Metric: Basic and Diluted EPS = $4,931 / 5,621,824 = $0.88

Trend: EPS for 2023 = $4,820 / 5,855,505 = $0.82. Percentage Change: ($0.88 – $0.82) / $0.82 = 7.32%

Industry: EPS varies significantly based on the size and type of bank. Without specific competitor data, a direct comparison is difficult. However, the increase in EPS is a positive sign.

Liquidity

Current Ratio

Metric: Current Assets / Current Liabilities. Requires further breakdown of assets and liabilities into current and non-current portions. Cannot be accurately calculated with provided data.

Quick Ratio (Acid-Test Ratio)

Metric: (Current Assets – Inventory) / Current Liabilities. Inventory is not applicable for banks. Requires further breakdown of assets and liabilities into current and non-current portions. Cannot be accurately calculated with provided data.

Cash Ratio

Metric: Cash and Cash Equivalents / Current Liabilities. Requires further breakdown of liabilities into current and non-current portions. Cannot be accurately calculated with provided data.

Solvency/Leverage

Debt-to-Equity Ratio

Metric: Total Liabilities / Total Stockholders’ Equity = $595,636 / $89,868 = 6.63

Trend: Debt-to-Equity Ratio for 2023 = $638,845 / $86,273 = 7.40. Percentage Change: (6.63 – 7.40) / 7.40 = -10.41%

Industry: The average debt-to-equity ratio for US banks is around 8. LSBK’s ratio is lower than the industry average, indicating a more conservative capital structure.

Debt-to-Assets Ratio

Metric: Total Liabilities / Total Assets = $595,636 / $685,504 = 0.87

Trend: Debt-to-Assets Ratio for 2023 = $638,845 / $725,118 = 0.88. Percentage Change: (0.87 – 0.88) / 0.88 = -1.14%

Industry: The average debt-to-assets ratio for US banks is around 0.9. LSBK’s ratio is slightly lower than the industry average, suggesting a relatively lower level of leverage.

Interest Coverage Ratio (Times Interest Earned)

Metric: EBIT / Interest Expense = (Net Income + Income Tax Expense + Interest Expense) / Interest Expense = ($4,931 + $935 + $13,741) / $13,741 = 1.43

Trend: Interest Coverage Ratio for 2023 = ($4,820 + $1,399 + $9,397) / $9,397 = 1.77. Percentage Change: (1.43 – 1.77) / 1.77 = -19.21%

Industry: A healthy interest coverage ratio for banks is typically above 2.0. LSBK’s ratio is below this threshold, indicating a potential vulnerability to interest rate fluctuations.

Activity/Efficiency

Inventory Turnover

Metric: Not applicable for financial institutions.

Days Sales Outstanding (DSO)

Metric: Not directly applicable for banks. This metric is more relevant for companies with significant accounts receivable.

Days Payable Outstanding (DPO)

Metric: Not directly applicable for banks. This metric is more relevant for companies with significant accounts payable.

Asset Turnover

Metric: Total Revenue / Average Total Assets = ($34,804 + $3,304) / (($685,504 + $725,118) / 2) = 0.055 or 5.5%

Trend: Asset Turnover for 2023 = ($33,755 + $2,635) / (($725,118 + $718,164) / 2) = 0.050 or 5.0%. Percentage Change: (5.5% – 5.0%) / 5.0% = 10.0%

Industry: The average asset turnover ratio for banks is around 0.10. LSBK’s ratio is lower than the industry average, suggesting less efficient asset utilization.

Valuation

Price-to-Earnings Ratio (P/E)

Metric: Stock Price / EPS = $15.98 / $0.88 = 18.16

Industry: The average P/E ratio for banks varies, but a typical range is 10-15. LSBK’s P/E ratio is higher than this range, suggesting that the stock may be overvalued relative to its earnings.

Price-to-Book Ratio (P/B)

Metric: Market Cap / Book Value of Equity. Market Cap = Shares Outstanding * Stock Price = 5,735,226 * $15.98 = $91,659,911. Book Value of Equity = $89,868,000. P/B = $91,659,911 / $89,868,000 = 1.02

Industry: A P/B ratio of around 1 is considered typical for banks. LSBK’s P/B ratio is in line with this average.

Price-to-Sales Ratio (P/S)

Metric: Market Cap / Total Revenue = $91,659,911 / ($34,804,000 + $3,304,000) = 2.41

Enterprise Value to EBITDA (EV/EBITDA)

Metric: EV = Market Cap + Total Debt – Cash and Cash Equivalents = $91,659,911 + $10,250,000 – $33,131,000 = $68,778,911. EBITDA = Net Income + Interest Expense + Taxes + Depreciation and Amortization = $4,931 + $13,741 + $935 + $739 = $20,346. EV/EBITDA = $68,778,911 / $20,346,000 = 3.38

Growth Rates

Revenue Growth

Metric: ($34,804 + $3,304) / ($33,755 + $2,635) – 1 = 6.59%

Net Income Growth

Metric: $4,931 / $4,820 – 1 = 2.30%

EPS Growth

Metric: $0.88 / $0.82 – 1 = 7.32%

Other Relevant Metrics

Core Deposits

Metric: Total core deposits increased slightly from $536,491,000 in 2023 to $539,049,000 in 2024, a 0.5% increase. This indicates a stable base of customer deposits.

Non-Performing Assets

Metric: Non-performing assets increased from $3,381,000 in 2023 to $3,804,000 in 2024. The ratio of non-performing assets to total assets increased from 0.47% to 0.55%. This suggests a slight deterioration in asset quality.