Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Safe-Harbor
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections about the Company’s and the Bank’s industry, and management’s beliefs and assumptions. 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 are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, actual results may differ materially from those expressed or forecast in such forward-looking statements.
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, those described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, Part II, Item 1A of this Quarterly Report on Form 10-Q and the following:
• the strength of the United States economy in general and of the local economies in which we conduct operations;
• the effect of change in monetary and fiscal policy, including changes in interest rate policies of the Board of Governors of the Federal Reserve System;
• inflation, and market and monetary fluctuations;
• climate change;
• tariffs;
• deterioration in the credit quality of our loan portfolio and/or the value of the collateral securing repayment of loans;
• unanticipated changes in our liquidity position;
• reduction in the value of our investment securities;
• the cost and ability to attract and retain key employees;
• regulatory or legal developments, tax policy changes;
• our ability to implement and execute our business plan and strategy and expand our operations;
• the ability of our customers to make loan payments;
• the effect of competition on rates of deposit and loan growth and net interest margin;
• our ability to continue to control costs and expenses;
• any future FDIC insurance premium increases, or special assessment may adversely affect our earnings;
• risks from 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;
• the failure of financial institutions may adversely affect our business, and the market price of our common stock;
• risks relating to pandemics and other public health issues;
• risks relating to geopolitical conflicts;
• changes in accounting principles, policies, or guidelines;
• our success in managing the risks involved in our business; and
• other economic, competitive, geopolitical, governmental, regulatory and technological factors affecting our operations, pricing, products and services.
Any and all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may differ from actual outcomes. They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Except as required by law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
32
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition, results of operations and other relevant statistical data. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of June 30, 2025 compared to the consolidated financial condition as of December 31, 2024 and the consolidated results of operations for the three and six months ended June 30, 2025 and 2024.
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, and other non-interest income activities as well as non-interest expenses which include salaries and employee benefits, occupancy and equipment costs, data processing, professional services, advertising, FDIC insurance, 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 may materially impact the Company.
Recent Events
Effective July 18, 2025, Lake Shore Bancorp, Inc. (“Lake Shore Bancorp”) incorporated under the laws of the State of Maryland became the banking holding company of Lake Shore Bank, a New York commercial bank and its only wholly-owned subsidiary.
On January 27, 2025, Lake Shore, MHC, the former parent mutual holding company of Lake Shore Bancorp, Inc., a federal corporation ("Lake Shore Federal Bancorp"), adopted a Plan of Conversion and Reorganization (the "Plan") pursuant to which Lake Shore, MHC, would undertake a "second-step" conversion and Lake Shore Savings Bank, a federally chartered savings bank, the wholly-owned subsidiary of Lake Shore Bancorp Federal, would reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure.
Pursuant to the Plan, (i) Lake Shore Savings Bank became the wholly-owned subsidiary of Lake Shore Bancorp, converted its charter to a New York chartered commercial bank, and was renamed as Lake Shore Bank, (ii) the shares of common stock of Lake Shore Federal Bancorp owned by persons other than Lake Shore, MHC (the shares owned by Lake Shore, MHC were canceled) were converted into shares of common stock of Lake Shore Bancorp based on an exchange ratio designed to preserve the percentage ownership interests of such persons (excluding shares of common stock of Lake Shore Bancorp purchased in the stock offering described below and cash received in lieu of issuance of fractional shares of common stock of Lake Shore Bancorp, and as adjusted to reflect certain assets held by Lake Shore, MHC), and (iii) Lake Shore Bancorp offered and sold shares of common stock, representing the ownership interest of Lake Shore, MHC in Lake Shore Federal Bancorp, in a subscription offering. The number and price of shares of Lake Shore Bancorp common stock sold in the offering and the exchange ratio were based on Lake Shore Bancorp's pro forma market value on a fully converted basis, as determined by an independent appraisal.
The Plan was subject to regulatory approval as well as approval by the depositors of Lake Shore Savings Bank and by Lake
33
Shore Federal Bancorp stockholders (including approval by the holders of a majority of the outstanding shares of Lake Shore Federal Bancorp's common stock held by persons other than the MHC). The Plan received all required regulatory, depositor and stockholder approval, and the conversion and offering were consummated on July 18, 2025.
The conversion was consummated through the merger of Lake Shore, MHC with and into Lake Shore Federal Bancorp, followed by the merger of Lake Shore Federal Bancorp with and into Lake Shore Bancorp, which occurred on July 18, 2025. In the subscription offering, Lake Shore Bancorp raised gross proceeds of $49.5 million by selling 4,950,460 shares of its common stock (approximately the midpoint of the offering range) at $10.00 per share to depositors of the Bank.
As part of the conversion transaction, each outstanding share of Lake Shore Federal Bancorp common stock owned by the public stockholders of Lake Shore Federal Bancorp (stockholders other than Lake Shore, MHC) as of the closing date were converted into shares of Lake Shore Bancorp's common stock based on an exchange ratio of 1.3549 shares of Lake Shore Bancorp's common stock for each share of Lake Shore Federal Bancorp common stock so that Lake Shore Federal Bancorp's existing public stockholders would own approximately the same percentage of Lake Shore Bancorp's common stock as they owned of Lake Shore Federal Bancorp's common stock immediately prior to the conversion. A total of 7,825,501 shares of common stock were outstanding following the completion of the stock offering. Earnings per share and other share information disclosed herein do not reflect the effect of Lake Shore Bancorp's conversion and related stock offering.
As previously reported on a Current Report on Form 8-K filed on July 24, 2025 with the SEC, the Company’s Board of Directors declared a cash dividend of $0.09 per share on its outstanding common stock on July 23, 2025. The dividend is expected to be paid on August 13, 2025 to stockholders of record as of August 4, 2025.
Management Strategy
There have been no material changes in the Company’s management strategy from what was disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.
Critical Accounting Estimates
The Company's consolidated financial statements are prepared in accordance with GAAP. As a result, the Company is required to make certain estimates, judgments, and assumptions that it believes are reasonable based upon the information available at that time. Critical accounting estimates includes the areas where the Company has made what it considers to be particularly difficult, subjective, or complex judgments concerning estimates, and where these estimates can significantly affect the Company's 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 periods presented. Actual results could be different from these estimates. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Significant accounting policies followed by the Company are presented in Note 2 - Summary of Significant Accounting Policies, to the Audited Consolidated Financial Statements included within Part II. Item 8. of its Annual Report on Form 10-K for the year ended December 31, 2024, and in Note 1: Basis of Presentation and Significant Accounting Policies and Estimates in Part I. Item 1. of this Form 10-Q.
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 its portfolios of assets exhibiting credit risk, particularly in its 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.
34
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 its portfolios. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. As of June 30, 2025 and December 31, 2024, the allowance for credit losses on loans totaled $5.2 million and $5.1 million, respectively. Due to the nature and composition of the Bank's lending activities, a significant portion of the allowance for credit losses on loans is allocated to the commercial real estate portfolio. As of June 30, 2025 and December 31, 2024, the allowance for credit losses on loans allocated to the total commercial real estate portfolio was $4.2 million, or 80.7%, and $4.2 million, or 81.3%, respectively.
The Company's methodology for maintaining its allowance for credit losses is based on historical loan-level performance experience and data, peer 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 of forecasted economic conditions may lead to further required increases to the allowance for credit losses. Conversely, improvements to 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 $288,000, or 5.6%, representing a five basis points increase in 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 June 30, 2025. 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 June 30, 2025.
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 tables set forth certain information relating to our average balance sheets for each principal category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the periods 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
35
the periods presented. Average balances are derived from daily balances over the periods 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 $100,000 and $142,000 for the three months ended June 30, 2025 and 2024, respectively. The net amortization of deferred loan fees and costs were $163,000 and $266,000 for the six months ended June 30, 2025 and 2024, respectively. Interest income on securities does not include a tax equivalent adjustment for tax exempt securities.
For the Three Months Ended
For the Three Months Ended
June 30, 2025
June 30, 2024
Average
Interest Income/
Yield/
Average
Interest Income/
Yield/
Balance
Expense
Rate (2)
Balance
Expense
Rate (2)
(Unaudited)
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits
$
27,162
$
270
3.98
%
$
52,618
$
647
4.92
%
Securities (1)
56,222
368
2.62
%
58,988
414
2.81
%
Loans, including fees
553,550
8,469
6.12
%
551,091
7,693
5.58
%
Total interest-earning assets
636,934
$
9,107
5.72
%
662,697
$
8,754
5.28
%
Other assets
52,724
49,661
Total assets
$
689,658
$
712,358
Interest-bearing liabilities
Demand & NOW accounts
$
64,337
$
15
0.09
%
$
67,167
$
16
0.10
%
Money market accounts
153,547
955
2.49
%
140,759
947
2.69
%
Savings accounts (3)
58,286
9
0.06
%
60,528
10
0.07
%
Time deposits
217,101
1,969
3.63
%
228,023
2,398
4.21
%
Borrowed funds & other interest-bearing liabilities
3,869
37
3.83
%
25,313
177
2.80
%
Total interest-bearing liabilities
497,140
$
2,985
2.40
%
521,790
$
3,548
2.72
%
Other non-interest bearing liabilities
100,826
104,529
Stockholders' equity
91,692
86,039
Total liabilities & stockholders' equity
$
689,658
$
712,358
Net interest income
$
6,122
$
5,206
Interest rate spread
3.32
%
2.56
%
Net interest margin
3.84
%
3.14
%
(1) The tax equivalent adjustment for bank qualified tax exempt municipal securities, using a federal statutory rate of 21%, results in rates of 3.03% and 3.20% for the three months ended June 30, 2025 and 2024, respectively. Yields above are not presented on a tax equivalent basis.
(2) Annualized.
(3) Included within savings accounts as of June 30, 2025 is $43.7 million of funds collected and held on deposit in a segregated account in connection with the Company's stock offering. The average rate paid on these funds was 5 basis points and the collection of these funds resulted in a $3.8 million increase in the average balance of savings accounts during the three months ended June 30, 2025.
36
For the Six Months Ended
For the Six Months Ended
June 30, 2025
June 30, 2024
Average
Interest Income/
Yield/
Average
Interest Income/
Yield/
Balance
Expense
Rate (2)
Balance
Expense
Rate (2)
(Unaudited)
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits
$
25,372
$
504
3.97
%
$
48,329
$
1,246
5.16
%
Securities (1)
57,008
748
2.62
%
60,358
838
2.78
%
Loans, including fees
549,578
16,222
5.90
%
553,621
15,279
5.52
%
Total interest-earning assets
631,958
$
17,474
5.53
%
662,308
$
17,363
5.24
%
Other assets
52,193
50,263
Total assets
$
684,151
$
712,571
Interest-bearing liabilities
Demand & NOW accounts
$
63,565
$
30
0.09
%
$
68,460
$
33
0.10
%
Money market accounts
153,116
1,822
2.38
%
140,277
1,913
2.73
%
Savings accounts (3)
55,927
18
0.06
%
61,606
21
0.07
%
Time deposits
212,975
3,920
3.68
%
225,101
4,648
4.13
%
Borrowed funds & other interest-bearing liabilities
5,046
97
3.84
%
27,434
409
2.98
%
Total interest-bearing liabilities
490,629
$
5,887
2.40
%
522,878
$
7,024
2.69
%
Other non-interest bearing liabilities
102,202
103,414
Stockholders' equity
91,320
86,279
Total liabilities & stockholders' equity
$
684,151
$
712,571
Net interest income
$
11,587
$
10,339
Interest rate spread
3.13
%
2.55
%
Net interest margin
3.67
%
3.12
%
(1) The tax equivalent adjustment for bank qualified tax exempt municipal securities, using a federal statutory rate of 21%, results in rates of 3.03% and 3.16% for the six months ended June 30, 2025 and 2024, respectively. Yields above are not presented on a tax equivalent basis.
(2) Annualized.
(3) Included within savings accounts as of June 30, 2025 is $43.7 million of funds collected and held on deposit in a segregated account in connection with the Company's stock offering. The average rate paid on these funds was 5 basis points and the collection of these funds resulted in a $1.9 million increase in the average balance of savings accounts during the six months ended June 30, 2025.
Rate Volume Analysis . The following tables analyze the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The tables show 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 period to the volume change between
37
the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period.
Three Months Ended June 30, 2025
Compared to
Three Months Ended June 30, 2024
Rate
Volume
Net Change
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits
$
(124
)
$
(253
)
$
(377
)
Securities
(28
)
(18
)
(46
)
Loans, including fees
738
38
776
Total interest-earning assets
586
(233
)
353
Interest-bearing liabilities:
Demand & NOW accounts
—
(1
)
(1
)
Money market accounts
(72
)
80
8
Savings accounts
(1
)
—
(1
)
Time deposits
(330
)
(99
)
(429
)
Total deposits
(403
)
(20
)
(423
)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities
65
(205
)
(140
)
Total interest-bearing liabilities
(338
)
(225
)
(563
)
Total change in net interest income
$
924
$
(8
)
$
916
Six Months Ended June 30, 2025
Compared to
Six Months Ended June 30, 2024
Rate
Volume
Net Change
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold
$
(286
)
$
(456
)
$
(742
)
Securities
(46
)
(44
)
(90
)
Loans, including fees
1,062
(119
)
943
Total interest-earning assets
730
(619
)
111
Interest-bearing liabilities:
Demand & NOW accounts
(1
)
(2
)
(3
)
Money market accounts
(244
)
153
(91
)
Savings accounts
(1
)
(2
)
(3
)
Time deposits
(505
)
(223
)
(728
)
Total deposits
(751
)
(74
)
(825
)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities
118
(430
)
(312
)
Total interest-bearing liabilities
(633
)
(504
)
(1,137
)
Total change in net interest income
$
1,363
$
(115
)
$
1,248
As shown in the above tables, the increase in net interest income for the three months ended June 30, 2025 when compared to the three months ended June 30, 2024 was primarily impacted by an increase in the average yield of interest-earning assets, a decrease in the average interest rate paid on interest-bearing liabilities, and a decrease in the average balance of interest-bearing liabilities. This increase was partially offset by a decrease in the average balance of interest-earning assets when compared to the prior year period. The average yield of interest-earning assets increased by 44 basis points to 5.72% for the three months ended June 30, 2025 as compared to 5.28% for the same period in the prior year primarily as a result of a 54 basis points increase in the average yield of the loan portfolio. The average interest rate paid on interest-bearing liabilities decreased 32 basis points from 2.72% during the three months ended June 30, 2024 to 2.40% during the three months ended June 30, 2025. The decrease in the average interest rate paid on interest-bearing liabilities during the three
38
months ended June 30, 2025 was primarily due to a 33 basis points decrease in the average interest rate paid on deposit accounts. The decrease in the average interest rate paid on deposit accounts was primarily due to the decrease in market interest rates and time deposit repricing. The average balance of interest-bearing liabilities decreased $24.7 million, from $521.8 million during the three months ended June 30, 2024 to $497.1 million during the three months ended June 30, 2025 as a result of decreases in the average balance of deposits of $3.2 million and the average balance of borrowed funds and other interest-bearing liabilities of $21.4 million. The decrease in the average balance of interest-earning assets was primarily due to a $25.5 million, or 48.4%, decrease in interest-earning deposits when compared to the prior year period. Net interest margin increased to 3.84% for the three months ended June 30, 2025 as compared to 3.14% for the same period of the prior year.
As shown in the above tables, the increase in net interest income for the six months ended June 30, 2025 was primarily impacted by an increase in the average yield of interest-earning assets, a decrease in the average interest rate paid on interest-bearing liabilities, and a decrease in the average balance of interest-bearing liabilities. This increase was partially offset by a decrease in the average balance of interest-earning assets when compared to the same period in the prior year. The average yield of interest-earning assets increased by 29 basis points to 5.53% for the six months ended June 30, 2025 as compared to the same period in the prior year primarily as a result of a 38 basis points increase in the average yield of the loan portfolio. The average interest rate paid on interest-bearing liabilities decreased 29 basis points from 2.69% during the six months ended June 30, 2024 to 2.40% during the six months ended June 30, 2025. The decrease in the average interest rate paid on interest-bearing liabilities during the six months ended June 30, 2025 was primarily due to a 29 basis points decrease in the average interest rate paid on deposit accounts. The decrease in the average interest rate paid on deposit accounts was primarily due to the decrease in market interest rates and time deposit repricing. The average balance of interest-bearing liabilities decreased $32.3 million, from $522.9 million during the six months ended June 30, 2024 to $490.6 million during the six months ended June 30, 2025 as a result of decreases in the average balance of deposits of $9.9 million and the average balance of borrowed funds and other interest-bearing liabilities of $22.4 million. The decrease in the average balance of interest-earning assets was primarily due to a $23.0 million, or 47.5%, decrease in interest-earning deposits when compared to the prior year period. Net interest margin increased to 3.67% for the six months ended June 30, 2025 as compared to 3.12% for the same period of the prior year.
Comparison of Financial Condition at June 30, 2025 and December 31, 2024
Total assets at June 30, 2025 were $734.8 million, an increase of $49.3 million, or 7.2%, as compared to $685.5 million at December 31, 2024 primarily due to increases in cash and cash equivalents and loans receivable, net.
Cash and cash equivalents increased by $42.2 million, or 127.5%, from $33.1 million at December 31, 2024 to $75.4 million at June 30, 2025. The increase in cash and cash equivalents was primarily due to an increase in interest earning deposits of $42.0 million, or 138.1%, as the result of $43.7 million of funds collected and held on deposit in a segregated account in connection with the Company's stock offering in the second quarter of 2025. The increase in cash and cash equivalents was partially offset by a decrease in long-term debt due to the repayment of Federal Home Loan Bank of New York ("FHLBNY") borrowings of $8.3 million.
Securities, at fair value, decreased by $1.2 million, or 2.1%, from $56.5 million at December 31, 2024 to $55.3 million at June 30, 2025, primarily due to securities paydowns of $1.5 million, partially offset by a $288,000 increase in the market value of the securities.
39
Net loans receivable increased during the six months ended June 30, 2025, as shown in the table below:
At June 30,
At December 31,
Change
2025
2024
$
%
(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family (1)
$
154,938
$
161,331
$
(6,393
)
(4.0
)
%
Home equity
46,840
47,456
(616
)
(1.3
)
%
Commercial (2)
324,321
320,984
3,337
1.0
%
Total real estate loans
526,099
529,771
(3,672
)
(0.7
)
%
Other Loans:
Commercial
16,412
15,728
684
4.3
%
Consumer
11,919
991
10,928
1102.7
%
Total gross loans
554,430
546,490
7,940
1.5
%
Allowance for credit losses on loans
(5,164
)
(5,133
)
(31
)
0.6
%
Net deferred loan costs
3,123
3,263
(140
)
(4.3
)
%
Loans receivable, net
$
552,389
$
544,620
$
7,769
1.4
%
(1) Includes one- to four-family construction loans.
(2) Includes commercial construction loans.
The loans receivable, net balance increased $7.8 million, or 1.4%, from $544.6 million at December 31, 2024 to $552.4 million at June 30, 2025. The increase was primarily due to increases in consumer loans and commercial real estate loans, partially offset by a decrease in residential, one- to four-family real estate loans. During the six months ended June 30, 2025, we remained strategically focused on originating shorter duration, adjustable-rate loans to diversify our asset mix and to manage interest rate risk while continuing to reduce our reliance on wholesale funding sources.
Asset Quality . The following tables set forth activity in our allowance for credit losses on loans and other ratios at or for the dates indicated:
At or For the Six Months Ended June 30,
2025
2024
(Dollars in thousands)
Balance at beginning of period
$
5,133
$
6,463
(Credit) provision for credit losses
39
(544
)
Charge-offs:
Other loans:
Consumer
(13
)
(13
)
Total charge-offs
(13
)
(13
)
Recoveries:
Real estate loans:
Residential, one- to four-family
4
5
Other loans:
Consumer
1
5
Total recoveries
5
10
Net (charge-offs) recoveries
(8
)
(3
)
Balance at end of period
$
5,164
$
5,916
Average loans outstanding, including fees
$
549,578
$
553,621
Allowance for credit losses as a percent of loans at amortized cost
0.93
%
1.08
%
Allowance for credit losses as a percent of non-performing loans at amortized cost
290.53
%
148.20
%
When compared to December 31, 2024, the current modeled allowance for credit losses related to the loan portfolio increased by approximately $31 thousand, or 0.60%, of which $45 thousand was due to an increase in loan balance, which was partially offset by a decrease of $14 thousand due to a decrease in reserve rate for the blended portfolio. Such allowance
40
for credit losses was calculated utilizing a discounted cash flow model as further described in Part I Item 1 - Note 1 - Basis of Presentation and Significant Accounting Policies and Estimates.
For the Six Months Ended June 30,
2025
2024
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
—
%
—
%
Other loans:
Commercial
—
%
—
%
Consumer
(0.14
)
%
(1.51
)
%
Ratio of net recoveries to average loans outstanding
—
%
—
%
For the six months ended June 30, 2025, consumer loan net charge-offs to average consumer loans outstanding, annualized, improved to (0.14)% from (1.51)% for the prior year period. This improvement was primarily driven by an increase in average consumer loans outstanding of $7.3 million for the six months ended June 30, 2025 when compared to the six months ended June 30, 2024.
At June 30,
At December 31,
2025
2024
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential, one- to four-family (1)
$
1,567
$
1,891
Home equity
114
683
Commercial (2)
94
1,226
Other loans:
Consumer
2
4
Total non-accrual loans
1,777
3,804
Total non-performing loans
1,777
3,804
Foreclosed real estate
—
—
Total non-performing assets
$
1,777
$
3,804
Ratios:
Non-performing loans as a percent of total loans at amortized cost:
0.32
%
0.69
%
Non-performing assets as a percent of total assets:
0.24
%
0.55
%
(1) Includes one- to four- family construction loans.
(2) Includes Commercial construction loans.
Total non-performing assets decreased by $2.0 million, or 53.3%, to $1.8 million at June 30, 2025 from $3.8 million at December 31, 2024, due to a decrease in non-accrual loans of $2.0 million. Contributing to this decrease was one commercial relationship representing two loans with a total amortized cost of $1.2 million being sold at foreclosure and one nonaccrual home equity loan with an amortized cost of $545,000 being paid in full during the second quarter of 2025. The Company had no loans past due 90 days or more but still accruing at June 30, 2025 or December 31, 2024.
Other assets increased $291,000, or 2.7%, to $11.0 million at June 30, 2025 from $10.7 million at December 31, 2024 as a result of normal operations.
41
The table below shows changes in deposit balances by type of deposit account between June 30, 2025 and December 31, 2024:
At June 30,
At December 31,
Change
2025
2024
$
%
(Dollars in thousands)
Core deposits
Demand deposits and NOW accounts:
Non-interest bearing
$
91,459
$
96,412
$
(4,953
)
(5.1
)
%
Interest bearing
66,284
65,020
1,264
1.9
%
Time deposits less than or equal to $250,000
181,110
173,745
7,365
4.2
%
Money market
158,628
149,550
9,078
6.1
%
Savings
97,655
54,322
43,333
79.8
%
Total core deposits
595,136
539,049
56,087
10.4
%
Non-core deposits
Time deposits greater than $250,000
32,363
33,929
(1,566
)
(4.6
)
%
Total non-core deposits
32,363
33,929
(1,566
)
(4.6
)
%
Total deposits
$
627,499
$
572,978
$
54,521
9.5
%
The increase in total deposits was primarily due to the collection of $43.7 million of funds held on deposit in connection with the Company's stock offering in the second quarter of 2025, which was included in the savings deposit account category above. In addition, the Company also had a 6.1% increase in money market accounts, a 4.2% increase in time deposits less than or equal to $250,000, and a 1.9% increase in interest bearing transaction accounts. These increases were partially offset by a 5.1% decrease in non-interest bearing transaction accounts and a 4.6% decrease in time deposits greater than $250,000. The increase in core time deposits and money market deposits was primarily due to an increase in customer demand for these types of deposit products as the result of the competitive interest rate environment. Our strategic focus remains centered on organic growth of deposits among our retail and commercial customers to reduce our reliance on wholesale funding and to strengthen customer relationships. At June 30, 2025 and December 31, 2024, our percentage of uninsured deposits to total deposits was 18.1% and 13.5%, respectively. Excluding the $43.7 million of funds collected and held on deposit in a segregated account in connection with the Company's stock offering in the second quarter of 2025, the Company's uninsured deposits to total deposits totaled 12.0% at June 30, 2025.
During the six months ended June 30, 2025, long-term borrowings decreased by $8.3 million, or 80.5%, to $2.0 million at June 30, 2025 from $10.3 million at December 31, 2024 in connection with the repayment of $8.3 million of long-term debt with the FHLBNY. 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 $3.0 million, or 3.4%, to $92.9 million at June 30, 2025 from $89.9 million at December 31, 2024. The increase in stockholders’ equity was primarily attributed to $3.0 million in net income earned during the six months ended June 30, 2025.
Comparison of Results of Operations for the Three Months Ended June 30, 2025 and 2024
General. Net income increased to $1.9 million during the three months ended June 30, 2025, or $0.34 per diluted share, an increase of $803,000, or 72.0%, compared to net income of $1.1 million, or $0.19 per diluted share, for the three months ended June 30, 2024. Our financial performance for the three months ended June 30, 2025 was positively impacted by an increase in net interest income along with a decrease in non-interest expenses.
Net Interest Income. Net interest income for the second quarter of 2025 increased by $916,000, or 17.6%, to $6.1 million as compared to $5.2 million for the second quarter of 2024. Net interest margin and interest rate spread were 3.84% and 3.32%, respectively, for the three months ended June 30, 2025 as compared to 3.14% and 2.56%, respectively, for the three months ended June 30, 2024.
42
Interest Income. Interest income for the three months ended June 30, 2025 was $9.1 million, an increase of $353,000, or 4.0%, compared to $8.8 million for the three months ended June 30, 2024. The increase in interest income from the prior year quarter was primarily due to an increase in interest earned on loans of $776,000, or 10.1%, as a result of an increase in the average yield on loans of 54 basis points. The increase in the average yield on loans was positively impacted by the recognition of $461,000 of interest income associated with the payoff of three loans on nonaccrual status during the second quarter of 2025. The increase was partially offset by a $377,000, or 58.3%, decrease in interest earned on interest-earning deposits resulting primarily from a decrease in the average balance of interest earning deposits of $25.5 million, or 48.4%. The decrease in the average balance of interest earning deposits from the prior year was primarily due to the repayment of FHLBNY borrowings during the period. Additionally, during the second quarter of 2025 as compared to the same period in 2024, there was a $46,000 decrease in interest earned on securities due to decreases in the average balance and average yield of securities of $2.8 million, or 4.7%, and 19 basis points, respectively.
Interest Expense. Interest expense for the three months ended June 30, 2025 was $3.0 million, a decrease of $563,000, or 15.9%, from $3.5 million for the three months ended June 30, 2024. The decrease in interest expense when compared to the prior year quarter was primarily due to a 32 basis points decrease in average interest rate paid on interest-bearing liabilities and a $24.7 million, or 4.7%, decrease in the average balance of interest-bearing liabilities. During the second quarter of 2025 as compared to the same period in 2024, interest expense on deposits decreased by $423,000, or 12.5%, due to a 33 basis points decrease in the average interest rate paid on deposit accounts and a $3.2 million, or 0.6%, decrease in the average balance of deposits. The decrease in the average interest rate paid on deposit accounts was primarily due to the decrease in market interest rates, time deposit repricing, and a marginal shift in deposit composition. Average interest-bearing deposit balances decreased 0.6% during the second quarter of 2025 when compared to the second quarter of 2024 due to a decrease in all deposit categories except money market accounts. During the second quarter of 2025, interest expense on borrowed funds and other interest-bearing liabilities decreased by $140,000, or 79.1%, compared to the second quarter of 2024, primarily due to a $21.4 million, or 84.7%, decrease in average borrowed funds and other interest-bearing liabilities outstanding due to the repayment of $25.0 million of FHLBNY borrowings during 2024 and $8.3 million during the first half of 2025.
Provision (Credit) for Credit Losses. We recorded no provision for credit losses for the three months ended June 30, 2025, as compared to a credit to the provision of $285,000 for the three months ended June 30, 2024. The provision for credit losses of $0 for the three months ended June 30, 2025 was attributable to the modeled allowance for credit losses estimate derived as of June 30, 2025. The allowance for credit losses on loans and unfunded commitments and the corresponding provision for credit losses of $0 recognized during the second quarter of 2025 was the result of an increase in the calculation of expected quantitative losses inclusive of forecasted economic trends, primarily related to the residential mortgage loan pool, along with the impact of net charge offs during the period, offset by a decrease in the calculation of expected losses for the commercial loan pool.
Non-Interest Income. Non-interest income was $800,000 for the three months ended June 30, 2025, an increase of $62,000, or 8.4%, as compared to $738,000 for the three months ended June 30, 2024. The increase was primarily due to a $65,000 increase in unrealized gain on equity securities and a $23,000 increase in earnings on annuity assets in connection with the purchase of annuities during the fourth quarter of 2024, partially offset by a $14,000 decrease in service charges and fees.
Non-Interest Expense. Non-interest expense was $4.6 million for the three months ended June 30, 2025, a decrease of $272,000, or 5.6%, as compared to $4.9 million for the three months ended June 30, 2024. The decrease from the prior year quarter was primarily related to a decrease in FDIC insurance of $210,000, or 73.9%, as the result of a decrease in premium assessments related to remediating regulatory matters, and a decrease in professional services expense of $146,000, or 36.8%, as a result of management's efforts to decrease the use of external consultants and optimize operating expenses, partially offset by an increase in salaries and employee benefits of $198,000, or 7.5%.
Income Tax Expense. Income tax expense was $378,000 for the three months ended June 30, 2025, an increase of $162,000, or 75.0%, as compared to $216,000 for the three months ended June 30, 2024. The increase in income tax expense from the prior year quarter was due to an increase in pre-tax income earned during the current quarter as well as an increase in the
43
effective tax rate during the second quarter of 2025. The effective tax rate was 16.5% for the three months ended June 30, 2025 as compared to 16.2% for the three months ended June 30, 2024.
Comparison of Results of Operations for the Six Months Ended June 30, 2025 and 2024
General. Net income was $3.0 million for the six months ended June 30, 2025, or $0.53 per diluted share, an increase of $845,000, or 39.7%, compared to net income of $2.1 million, or $0.36 per diluted share, for the six months ended June 30, 2024. Net income for the six months ended June 30, 2025 was positively impacted by a $1.2 million increase in net interest income along with a decrease in non-interest expenses.
Net Interest Income. Net interest income for the six months ended June 30, 2025 increased by $1.2 million, or 12.1%, to $11.6 million as compared to $10.3 million for the first half of 2024. Net interest margin and interest rate spread were 3.67% and 3.13%, respectively, for the six months ended June 30, 2025 as compared to 3.12% and 2.55%, respectively, for the six months ended June 30, 2024.
Interest Income. Interest income increased by $111,000, or 0.6%, to $17.5 million for the six months ended June 30, 2025 when compared to the six months ended June 30, 2024. This increase was primarily due to an increase in the interest earned on loans of $943,000, or 6.2%, with a 38 basis points increase in the average yield on loans. This increase was mostly offset by a $742,000, or 59.6% decrease in interest earned on interest earning deposits resulting from a $23.0 million, or 47.5%, decrease in the average balance of interest-earning deposits and a 119 basis points decrease in the average yield of interest earning deposits primarily due to the repayment of FHLBNY borrowings during the period.
Interest Expense. Interest expense decreased $1.1 million, or 16.2%, to $5.9 million for the six months ended June 30, 2025, compared to $7.0 million for the six months ended June 30, 2024. The decrease in interest expense was primarily due to a 29 basis points decrease in average interest rate paid on interest-bearing liabilities and a decrease in the average balance of interest-bearing liabilities of $32.2 million, or 6.2%. During the first half of 2025, there was a $825,000 decrease in interest expense on total deposit accounts when compared to the first half of 2024 due to a 29 basis points decrease in the average interest rate paid on total deposits along with a decrease in average total deposit balance of $9.9 million, or 2.0%. The decrease in the average interest rate paid on deposit accounts was primarily due to the decrease in market interest rates, time deposit repricing, and a marginal shift in deposit composition. Average interest-bearing deposit balances decreased 2.0% during the first half of 2025 when compared to the first half of 2024 due to a decrease in all deposit categories except money market accounts. Interest expense on borrowed funds and other interest-bearing liabilities also decreased $312,000, or 76.3%, during the first half of 2025 when compared to the first half of 2024, primarily due to a $22.4 million, or 81.6%, decrease in the average balance of borrowed funds and other interest-bearing liabilities outstanding as we reduced our FHLBNY borrowings.
Provision (Credit) for Credit Losses. The Company recorded a $48,000 provision for credit losses on loans and unfunded commitments during the six months ended June 30, 2025, as compared to a credit of $637,000 to the provision for credit losses during the six months ended June 30, 2024. The increase in the allowance for credit losses on loans and unfunded commitments and the corresponding provision for credit losses recognized during the first half of 2025 was the result of an increase in the calculation of expected quantitative losses inclusive of forecasted economic trends, primarily related to the residential mortgage loan pool, partially offset by a decrease in the calculation of expected losses for the commercial loan pool.
Non-Interest Income. Non-interest income increased by $79,000, or 5.5%, to $1.5 million for the six months ended June 30, 2025, as compared to $1.4 million for the six months ended June 30, 2024. The increase was primarily due to a $100,000 increase in unrealized gain on equity securities and a $46,000 increase in earnings on annuity assets in connection with the purchase of annuities during the fourth quarter of 2024, partially offset by a $42,000 decrease in service charges and fees and a $17,000 decrease in debit card fees.
Non-Interest Expense. Non-interest expense was $9.5 million for the six months ended June 30, 2025, a decrease of $389,000, or 3.9%, as compared to $9.9 million for the six months ended June 30, 2024. The decrease related primarily to
44
a decline in FDIC insurance expense of $417,000, or 74.1%, due to a decrease in premium assessments related to remediating regulatory matters. As a result of management's efforts to decrease the use of external consultants and optimize operating expenses, professional services decreased by $159,000, or 22.0%, and occupancy and equipment expenses decreased by $93,000, or 6.7%. These decreases were partially offset by an increase in salaries and employee benefits of $355,000, or 6.6%, and a $17,000, or 1.9%, increase in data processing primarily due to an increase in costs related to core system maintenance when compared to the prior year period.
Income Taxes Expense. Income tax expense was $585,000 for the six months ended June 30, 2025, an increase of $186,000, or 46.6%, as compared to $399,000 for the six months ended June 30, 2024. The increase in income tax expense from the first half of 2024 was primarily related to the increase in pre-tax income earned during the first half of 2025 and an increase in the effective tax rate during the first half of 2025. The effective tax rate was 16.4% for the first half of 2025 and 15.8% for the first half of 2024.
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 allow us to borrow the maximum lending values designated by the type of collateral pledged. As of June 30, 2025, 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 $90.3 million, which was collateralized by certain fixed-rate residential, one- to four-family loans. At June 30, 2025, and December 31, 2024, we had outstanding advances under this agreement of $2.0 million and $10.3 million, respectively. As of June 30, 2025, we had available borrowing capacity of $88.3 million under the aforementioned agreement with the FHLBNY.
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 June 30, 2025, and December 31, 2024, there were no securities pledged to the Federal Reserve Bank and we had no balances outstanding. Additionally, as of June 30, 2025, the Bank has uncollateralized intraday credit with the Federal Reserve Bank that allows for certain transactions to not be rejected for which there are insufficient funds in our Federal Reserve Master Account during normal hours of operation.
Lastly, we have also established an unsecured line of credit with a correspondent bank for $20.0 million. There were no borrowings on this line as of June 30, 2025 and December 31, 2024.
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 six months ended June 30, 2025, we originated loans of approximately $37.9 million as compared to approximately $24.7 million of loans originated during the six months ended June 30, 2024. Loan originations exceeded principal repayments and other deductions during the six months ended June 30, 2025 by $8.0 million. The Company did not make any purchases of investment securities or sell any investment securities during the six months ended June 30, 2025.
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 $627.5 million at June 30, 2025 as compared to $573.0 million at December 31, 2024. Approximately $188.4 million of time deposit accounts are scheduled to mature within one year as of June 30, 2025. Based
45
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 June 30, 2025, the Bank exceeded all of its regulatory capital requirements.
Regulatory Capital
The federal banking agencies have developed a “Community Bank Leverage Ratio” ("CBLR") (bank’s tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A “qualifying community bank” may elect to utilize the Community Bank Leverage Ratio in lieu of the general applicable risk-based capital requirements under Basel III. If the community bank exceeds this ratio it will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Basel III. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio at 9.0%. The Bank elected to be subject to this new definition when it became effective on January 1, 2020, and has continued to use the Community Bank Leverage Ratio since that time. As of June 30, 2025 and December 31, 2024, the Bank’s Community Bank Leverage Ratio was 14.37% and 13.83%, respectively.
In order to be considered “well-capitalized” by the FDIC, a non-CBLR savings bank must maintain a Tier 1 Leverage capital ratio of 5% and a Total Risk-Based capital ratio of 10%. At June 30, 2025 and December 31, 2024, the Bank’s Tier 1 Leverage capital ratio was 14.37% and 13.83%, respectively, and its Total Risk-Based capital ratio was 18.94% and 18.79%, respectively. Accordingly, the Bank was considered to be well-capitalized under applicable regulatory capital requirements.
Off-Balance Sheet Arrangements
Other than loan commitments, we do not have any 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. Refer to Note 7 in the Notes to our unaudited consolidated financial statements for a summary of loan commitments outstanding as of June 30, 2025.
It em 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosure is not required as the Company is a smaller reporting company.
Item 4. Con trols and Procedures.
Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer and Chief 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 Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.
46
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 June 30, 2025 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PA RT II
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.