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LAKE SHORE BANCORP, INC.

(LSBK)
  Report
Delayed Nasdaq  -  03:49 2022-12-07 pm EST
12.50 USD   -0.79%
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Lake Shore Bancorp : Quarterly Report for Quarter Ending June 30, (Form 10-Q)

08/15/2022 | 03:36pm EST
lsbk-20220630x10q

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 000-51821

LAKE SHORE BANCORP, INC.

(Exact name of registrant as specified in its charter)

United States

20-4729288

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

31 East Fourth Street, Dunkirk, New York

14048

(Address of principal executive offices)

(Zip code)

(716) 366-4070

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

LSBK

The NasdaqStock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes[X]No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes[X]No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer x

Smaller reporting company x

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:

There were 5,707,587 shares of the registrant's common stock, $0.01 par value per share, outstanding at August 10, 2022.

TABLE OF CONTENTS

ITEM

PART I

PAGE

1

FINANCIAL STATEMENTS

-

Consolidated Statements of Financial Condition as of June 30, 2022 (Unaudited) and December 31, 2021

1

-

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

2

-

Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

3

-

Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, and June 30, 2021 and 2022 (Unaudited)

4

-

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited)

6

-

Notes to Unaudited Consolidated Financial Statements

7

2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

32

3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

48

4

CONTROLS AND PROCEDURES

49

PART II

1A

RISK FACTORS

49

2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

50

6

EXHIBITS

51

SIGNATURES

51

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

June 30,

December 31,

2022

2021

(Unaudited)

(Dollars in thousands, except share data)

Assets

Cash and due from banks

$

9,633

$

37,533

Interest earning deposits

17,523

30,052

Cash and Cash Equivalents

27,156

67,585

Securities

77,540

88,816

Federal Home Loan Bank stock, at cost

1,763

1,606

Loans receivable, net of allowance for loan losses 2022 $6,747; 2021 $6,118

547,200

517,206

Premises and equipment, net

8,479

8,736

Accrued interest receivable

2,379

2,483

Bank owned life insurance

23,073

22,877

Other assets

6,905

4,430

Total Assets

$

694,495

$

713,739

Liabilities and Stockholders' Equity

Liabilities

Deposits:

Interest bearing

$

470,121

$

482,508

Non-interest bearing

108,147

110,676

Total Deposits

578,268

593,184

Long-term debt

24,950

21,950

Advances from borrowers for taxes and insurance

3,320

3,198

Other liabilities

7,343

7,431

Total Liabilities

613,881

625,763

Stockholders' Equity

Common stock, $0.01par value per share, 25,000,000shares authorized; 6,836,514shares issued and 5,710,779shares outstanding at June 30, 2022 and 6,836,514shares issued and 5,692,410shares outstanding at December 31, 2021

68

68

Additional paid-in capital

31,410

31,350

Treasury stock, at cost (1,125,735shares at June 30, 2022 and 1,144,104shares at December 31, 2021)

(13,519)

(13,660)

Unearned shares held by ESOP

(1,151)

(1,194)

Unearned shares held by compensation plans

(312)

(157)

Retained earnings

72,711

70,591

Accumulated other comprehensive (loss) income

(8,593)

978

Total Stockholders' Equity

80,614

87,976

Total Liabilities and Stockholders' Equity

$

694,495

$

713,739

See notes to consolidated financial statements.

1

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

(Unaudited)

(Dollars in thousands, except per share data)

Interest Income

Loans, including fees

$

5,869

$

5,700

$

11,289

$

11,277

Investment securities, taxable

211

181

400

362

Investment securities, tax-exempt

316

280

626

573

Other

35

8

50

14

Total Interest Income

6,431

6,169

12,365

12,226

Interest Expense

Deposits

329

583

676

1,210

Long-term debt

109

139

213

282

Other

15

16

30

33

Total Interest Expense

453

738

919

1,525

Net Interest Income

5,978

5,431

11,446

10,701

Provision for Loan Losses

100

500

500

650

Net Interest Income after Provision for Loan Losses

5,878

4,931

10,946

10,051

Non-Interest Income

Service charges and fees

315

270

557

500

Debit card fees

225

230

425

432

Earnings on bank owned life insurance

98

104

196

209

Unrealized loss on equity securities

(8)

(14)

(9)

(20)

Unrealized gain on interest rate swap

70

10

253

96

Recovery on previously impaired investment securities

4

11

10

32

Net (loss) gain on sale of loans

(6)

52

(18)

209

Other

22

20

38

45

Total Non-Interest Income

720

683

1,452

1,503

Non-Interest Expense

Salaries and employee benefits

2,460

2,243

4,867

4,344

Occupancy and equipment

778

658

1,535

1,340

Data processing

376

374

691

733

Professional services

335

480

634

749

Advertising

123

180

259

313

Postage and supplies

60

77

114

140

FDIC insurance

47

43

92

87

Other

398

340

917

642

Total Non-Interest Expense

4,577

4,395

9,109

8,348

Income before Income Taxes

2,021

1,219

3,289

3,206

Income Tax Expense

337

226

544

525

Net Income

$

1,684

$

993

$

2,745

$

2,681

Basic and diluted earnings per common share

$

0.29

$

0.17

$

0.47

$

0.45

Dividends declared per share

$

0.16

$

0.13

$

0.32

$

0.26

See notes to consolidated financial statements.


2

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended June 30,

2022

2021

(Unaudited)

(Dollars in thousands)

Net Income

$

1,684

$

993

Other Comprehensive (Loss) Income, net of tax benefit (expense):

Unrealized holding (losses) gains on securities available for sale, net of tax benefit (expense)

(3,434)

219

Reclassification adjustments related to:

Recovery on previously impaired investment securities included in net income, net of tax expense

(3)

(8)

Total Other Comprehensive (Loss) Income

(3,437)

211

Total Comprehensive (Loss) Income

$

(1,753)

$

1,204

Six Months Ended June 30,

2022

2021

(Unaudited)

(Dollars in thousands)

Net Income

$

2,745

$

2,681

Other Comprehensive Loss, net of tax benefit:

Unrealized holding losses on securities, net of tax benefit

(9,563)

(567)

Reclassification adjustments related to:

Recovery on previously impaired investment securities included in net income, net of tax expense

(8)

(25)

Total Other Comprehensive Loss

(9,571)

(592)

Total Comprehensive (Loss) Income

$

(6,826)

$

2,089

See notes to consolidated financial statements.


3

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, and June 30, 2021 and 2022 (Unaudited)

Unearned

Unearned Shares

Accumulated

Additional

Shares

Held by

Other

Common

Paid-In

Treasury

Held by

Compensation

Retained

Comprehensive

Stock

Capital

Stock

ESOP

Plans

Earnings

Income

Total

(Dollars in thousands, except share and per share data)

Balance - January 1, 2021

$

68

$

31,201

$

(11,584)

$

(1,279)

$

(118)

$

65,488

$

2,148

$

85,924

Net income

-

-

-

-

-

1,688

-

1,688

Other comprehensive loss, net of tax benefit of $213

-

-

-

-

-

-

(803)

(803)

ESOP shares earned (1,984shares)

-

8

-

21

-

-

-

29

Stock based compensation

-

11

-

-

-

-

-

11

Compensation plan shares granted (20,958shares)

-

-

196

-

(196)

-

-

-

Compensation plan shares forfeited (1,392shares)

-

-

(13)

-

13

-

-

-

Compensation plan shares earned (2,057shares)

-

10

-

-

21

-

-

31

Purchase of treasury stock, at cost (43,834shares)

-

-

(652)

-

-

-

-

(652)

Cash dividends declared ($0.13per share)

-

-

-

-

-

(268)

-

(268)

Balance - March 31, 2021

$

68

$

31,230

$

(12,053)

$

(1,258)

$

(280)

$

66,908

$

1,345

$

85,960

Balance - April 1, 2021

$

68

$

31,230

$

(12,053)

$

(1,258)

$

(280)

$

66,908

$

1,345

$

85,960

Net income

-

-

-

-

-

993

-

993

Other comprehensive income, net of tax expense of $55

-

-

-

-

-

-

211

211

ESOP shares earned (1,984shares)

-

8

-

22

-

-

-

30

Stock based compensation

-

11

-

-

-

-

-

11

Compensation plan shares earned (4,375shares)

-

24

-

-

42

-

-

66

Purchase of treasury stock, at cost (36,094shares)

-

-

(547)

-

-

-

-

(547)

Cash dividends declared ($0.13per share)

-

-

-

-

-

(280)

-

(280)

Balance - June 30, 2021

$

68

$

31,273

$

(12,600)

$

(1,236)

$

(238)

$

67,621

$

1,556

$

86,444

4

Unearned

Unearned Shares

Accumulated

Additional

Shares

Held by

Other

Common

Paid-In

Treasury

Held by

Compensation

Retained

Comprehensive

Stock

Capital

Stock

ESOP

Plans

Earnings

(Loss) Income

Total

(Dollars in thousands, except share and per share data)

Balance - January 1, 2022

$

68

$

31,350

$

(13,660)

$

(1,194)

$

(157)

$

70,591

$

978

$

87,976

Net income

-

-

-

-

-

1,061

-

1,061

Other comprehensive loss, net of tax benefit of $1,630

-

-

-

-

-

-

(6,134)

(6,134)

ESOP shares earned (1,984shares)

-

8

-

22

-

-

-

30

Compensation plan shares granted (27,132shares)

-

-

255

-

(255)

-

-

-

Compensation plan shares earned (2,749shares)

-

16

-

-

26

-

-

42

Cash dividends declared ($0.16per share)

-

-

-

-

-

(312)

-

(312)

Balance - March 31, 2022

$

68

$

31,374

$

(13,405)

$

(1,172)

$

(386)

$

71,340

$

(5,156)

$

82,663

Balance - April 1, 2022

$

68

$

31,374

$

(13,405)

$

(1,172)

$

(386)

$

71,340

$

(5,156)

$

82,663

Net income

-

-

-

-

-

1,684

-

1,684

Other comprehensive loss, net of tax benefit of $914

-

-

-

-

-

-

(3,437)

(3,437)

ESOP shares earned (1,984shares)

-

7

-

21

-

-

-

28

Compensation plan shares forfeited (3,062shares)

-

-

(29)

-

29

-

-

-

Compensation plan shares earned (4,942shares)

-

29

-

-

45

-

-

74

Purchase of treasury stock, at cost (5,701shares)

-

-

(85)

-

-

-

-

(85)

Cash dividends declared ($0.16per share)

-

-

-

-

-

(313)

-

(313)

Balance - June 30, 2022

$

68

$

31,410

$

(13,519)

$

(1,151)

$

(312)

$

72,711

$

(8,593)

$

80,614

See notes to consolidated financial statements.

5

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Six Months Ended June 30,

2022

2021

(Unaudited)

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

2,745

$

2,681

Adjustments to reconcile net income to net cash provided by operating activities:

Net amortization of investment securities

55

75

Net amortization of deferred loan costs

147

232

Provision for loan losses

500

650

Recovery on previously impaired investment securities

(10)

(32)

Unrealized loss on equity securities

9

20

Unrealized gain on interest rate swap

(253)

(96)

Originations of loans held for sale

(1,309)

(6,580)

Proceeds from sales of loans held for sale

1,291

6,789

Loss (gain) on sale of loans held for sale

18

(209)

Depreciation and amortization

449

430

Increase in bank owned life insurance, net

(196)

(209)

ESOP shares committed to be released

58

59

Stock based compensation expense

116

119

Decrease in accrued interest receivable

104

125

Decrease (increase) in other assets

406

(76)

Writedowns of foreclosed real estate

1

7

Decrease in other liabilities

(28)

(429)

Net Cash Provided by Operating Activities

4,103

3,556

CASH FLOWS FROM INVESTING ACTIVITIES

Activity in debt securities:

Maturities, prepayments and calls

5,248

10,109

Purchases

(6,141)

(9,218)

Purchases of Federal Home Loan Bank Stock

(157)

(54)

Redemptions of Federal Home Loan Bank Stock

-

128

Loan origination and principal collections, net

(30,822)

(23,245)

Proceeds from sale of foreclosed real estate

36

55

Additions to premises and equipment

(192)

(286)

Net Cash Used in Investing Activities

(32,028)

(22,511)

CASH FLOWS FROM FINANCING ACTIVITIES

Net (decrease) increase in deposits

(14,916)

26,224

Net decrease in advances from borrowers for taxes and insurance

122

104

Proceeds from issuance of long-term debt

5,000

-

Repayment of long-term debt

(2,000)

(2,800)

Purchase of treasury stock

(85)

(1,199)

Cash dividends paid

(625)

(548)

Net Cash (Used in) Provided by Financing Activities

(12,504)

21,781

Net (Decrease) Increase in Cash and Cash Equivalents

(40,429)

2,826

CASH AND CASH EQUIVALENTS - BEGINNING

67,585

42,975

CASH AND CASH EQUIVALENTS - ENDING

$

27,156

$

45,801

SUPPLEMENTARY CASH FLOWS INFORMATION

Interest paid

$

925

$

1,532

Income taxes paid

$

275

$

825

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Foreclosed real estate acquired in settlement of loans

$

181

$

97

Securities purchased and not settled

$

-

$

900

See notes to consolidated financial statements.

6

Lake Shore Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

The interim consolidated financial statements include the accounts of Lake Shore Bancorp, Inc. (the "Company", "us", "our", or "we") and Lake Shore Savings Bank (the "Bank"), its wholly owned subsidiary. All intercompany accounts and transactions of the consolidated subsidiary have been eliminated in consolidation.

The interim consolidated financial statements included herein as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all information or footnotes necessary for a complete presentation of the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated statement of financial condition at December 31, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The consolidated statements of income for the three and six months ended June 30, 2022 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2022.

To prepare these consolidated financial statements in conformity with GAAP, management of the Company made a number of estimates and assumptions relating to the reporting of assets and liabilities and the reporting of revenue and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, securities valuation estimates, evaluation of impairment of securities, income taxes and deferred compensation liabilities.

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition as of June 30, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Note 2 - New Accounting Standards

Accounting Standards to be Adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"("ASU 2016-13"). ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss ("CECL") model). Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. Further, ASU 2016-13 made certain targeted amendments to the existing impairment standards for available for sale ("AFS") debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis. An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

7

The Company has determined its data requirements and is developing its methodologies for calculating the expected credit losses under ASU 2016-13 which has allowed the Company to run parallel loss reserve calculations. Data integrity associated with these methodologies is being reviewed and enhancements to the current process are being considered. We expect that the new guidance will result in an increase to the allowance for loan losses given that the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss under the current accounting standard. The extent of this increase is still being evaluated. We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial reporting procedures.

The Company is required to adopt this guidance on January 1, 2023.

In March 2022, FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures"("ASU 2022-02"). The final standard affects all entities after adoption of ASU 2016-13, mentioned above. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The FASB's decision to eliminate the TDR accounting model is in response to feedback that the CECL model already incorporates credit losses from loans modified as TDRs, and consequently, the related accounting and disclosures no longer provide the same level of benefit to users. In lieu of the TDR accounting model, creditors will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications for borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-off by year of origination. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL and ASU 2022-02 for fiscal years beginning after December 15, 2022. The Company does not expect this ASU to have a significant impact on its consolidated financial statements.

Note 3 - COVID-19

On March 11, 2020, the World Health Organization recognized an outbreak of a novel strain of the coronavirus, COVID-19, as a pandemic. The COVID-19 pandemic adversely affected the economy, including lower interest rates, and resulted in the enactment of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

As reported during prior periods, at the onset of the pandemic the Bank became a participating lender in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") to assist small businesses in our market areas that were impacted by the pandemic. As of June 30, 2022, all of the PPP loans that we originated as of December 31, 2021 have been forgiven by the SBA. There are noCARES Act modifications outstanding as of June 30, 2022.

The Company continues to evaluate the risks presented by the ongoing pandemic, along with the impact of the federal and state regulations that have been enacted due to the pandemic, as these events may have a material adverse impact on the Company's future results, operations, financial position, capital and liquidity. At this time the Company cannot quantify the potential impact of the ongoing pandemic on future operations.

8

Note 4 - Investment Securities

The amortized cost and fair value of securities are as follows:

June 30, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(Dollars in thousands)

SECURITIES

Debt Securities Available for Sale

U.S. government agencies

$

2,008

$

-

$

(86)

$

1,922

Municipal bonds

50,749

32

(7,752)

43,029

Mortgage-backed securities:

Collateralized mortgage obligations-private label

13

-

(1)

12

Collateralized mortgage obligations-government sponsored entities

15,065

9

(977)

14,097

Government National Mortgage Association

64

1

-

65

Federal National Mortgage Association

13,890

8

(1,428)

12,470

Federal Home Loan Mortgage Corporation

6,612

4

(788)

5,828

Asset-backed securities-private label

-

101

-

101

Asset-backed securities-government sponsored entities

6

-

-

6

Total Debt Securities Available for Sale

$

88,407

$

155

$

(11,032)

$

77,530

Equity Securities

22

-

(12)

10

Total Securities

$

88,429

$

155

$

(11,044)

$

77,540

9

December 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(Dollars in thousands)

SECURITIES

Debt Securities Available for Sale

U.S. government agencies

$

2,009

$

204

$

-

$

2,213

Municipal bonds

49,812

1,085

(141)

50,756

Mortgage-backed securities:

Collateralized mortgage obligations-private label

14

1

-

15

Collateralized mortgage obligations-government sponsored entities

17,798

209

(193)

17,814

Government National Mortgage Association

76

7

-

83

Federal National Mortgage Association

10,773

53

(66)

10,760

Federal Home Loan Mortgage Corporation

7,068

87

(119)

7,036

Asset-backed securities-private label

-

110

-

110

Asset-backed securities-government sponsored entities

9

1

-

10

Total Debt Securities Available for Sale

$

87,559

$

1,757

$

(519)

$

88,797

Equity Securities

22

-

(3)

19

Total Securities

$

87,581

$

1,757

$

(522)

$

88,816

Debt Securities

All of our collateralized mortgage obligations are backed by one- to four-family residential mortgages.

At June 30, 2022 and December 31, 2021, 31and 29municipal bonds with a cost of $12.1million and $10.6million and fair value of $10.6million and $11.0million, respectively, were pledged under a collateral agreement with the Federal Reserve Bank ("FRB") of New York for liquidity borrowing. In addition, at June 30, 2022 and December 31, 2021, 21and 20municipal bonds with a cost of $6.3million and $6.0million and fair value of $5.5million and $6.2million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance limits.

10

The following table sets forth the Company's investment in securities with gross unrealized losses of less than twelve months and gross unrealized losses of twelve months or more and associated fair values as of the dates indicated:

Less than 12 months

12 months or more

Total

Gross

Gross

Gross

Unrealized

Unrealized

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(Dollars in thousands)

June 30, 2022

U.S. Government Agencies

$

1,922

$

(86)

$

-

$

-

$

1,922

$

(86)

Municipal bonds

32,442

(7,130)

2,669

(622)

35,111

(7,752)

Mortgage-backed securities

25,321

(2,475)

3,837

(719)

29,158

(3,194)

$

59,685

$

(9,691)

$

6,506

$

(1,341)

$

66,191

$

(11,032)

December 31, 2021

Municipal bonds

$

9,601

(120)

$

857

$

(21)

$

10,458

$

(141)

Mortgage-backed securities

21,141

(211)

3,083

(167)

24,224

(378)

$

30,742

$

(331)

$

3,940

$

(188)

$

34,682

$

(519)

The Company reviews all investment securities on an ongoing basis for the presence of other-than-temporary-impairment ("OTTI") with formal reviews performed quarterly.

At June 30, 2022, the Company's investment portfolio included 172securities in the "unrealized losses less than twelve months" category and 12securities in the "unrealized losses twelve months or more" category. Management has the intent and ability to hold these securities until maturity. Management believes the temporary impairments were due to declines in fair value resulting from changes in interest rates and/or increased credit liquidity spreads since the securities were purchased. The unrealized losses on debt securities shown in the previous tables were recorded as a component of other comprehensive loss, net of tax benefit on the Company's consolidated statements of stockholders' equity.

The following table presents a summary of the credit-related OTTI charges recognized as components of income:

For The Six Months Ended June 30,

2022

2021

(Dollars in thousands)

Beginning balance

$

162

$

221

Additions:

Credit loss not previously recognized

-

-

Reductions:

Losses realized during the period on OTTI previously recognized

-

-

Receipt of cash flows on previously recorded OTTI

(10)

(32)

Ending balance

$

152

$

189

A deterioration in credit quality and/or other factors that may limit the liquidity of a security in our portfolio might adversely affect the fair values of the Company's investment portfolio and may increase the potential that certain unrealized losses will be designated as "other-than-temporary" and that the Company may incur additional write-downs in future periods.

During the six months ended June 30, 2022 and 2021, the Company did not sell any debt securities.

11

Scheduled contractual maturities of debt securities are as follows:

Amortized

Fair

Cost

Value

(Dollars in thousands)

June 30, 2022:

Less than one year

$

415

$

416

After one year through five years

5,071

4,954

After five years through ten years

10,320

9,636

After ten years

36,951

29,945

Mortgage-backed securities

35,644

32,472

Asset-backed securities

6

107

$

88,407

$

77,530

Equity Securities

At June 30, 2022 and December 31, 2021, equity securities consisted of 22,368shares of Federal Home Loan Mortgage Corporation ("FHLMC") common stock. During the three months ended June 30, 2022 and 2021, the Company recognized an unrealized loss of $8,000and $14,000, respectively,on the equity securities, which was recorded in non-interest income in the consolidated statements of income. During the six months ended June 30, 2022 and 2021, the Company recognized an unrealized loss of $9,000and $20,000, respectively,on the equity securities, which was recorded in non-interest income in the consolidated statements of income. There were nosales of equity securities during the six months ended June 30, 2022 and 2021.

Note 5 - Allowance for Loan Losses

Management segregates the loan portfolio into loan types and analyzes the risk level for each loan type when determining its allowance for loan losses. The loan types are as follows:

Real Estate Loans:

One- to Four-Family - are loans secured by first lien collateral on residential real estate primarily held in the Western New York region. These loans can be affected by economic conditions and the value of underlying properties. Western New York's housing market has consistently demonstrated stability in home prices despite economic conditions. Furthermore, the Company has conservative underwriting standards and its residential lending policies and procedures ensure that its one- to four-family residential mortgage loans generally conform to secondary market guidelines.

Home Equity- are loans or lines of credit secured by first or second liens on owner-occupied residential real estate primarily held in the Western New York region. These loans can also be affected by economic conditions and the values of underlying properties. Home equity loans may have increased risk of loss if the Company does not hold the first mortgage resulting in the Company being in a secondary position in the event of collateral liquidation. The Company does not originate interest only home equity loans.

Commercial Real Estate- are loans used to finance the purchase of real property, which generally consists of developed real estate that is held as first lien collateral for the loan. These loans are secured by real estate properties that are primarily held in the Western New York region. Commercial real estate lending involves additional risks compared with one- to four-family residential lending, because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, and repayment of such loans may be subject to adverse conditions in the real estate market or economic conditions to a greater extent than one- to four-family residential mortgage loans. Also, commercial real estate loans typically involve relatively large loan balances concentrated with single borrowers or groups of related borrowers.

Construction- are loans to finance the construction of either one- to four-family owner occupied homes or commercial real estate. At the end of the construction period, the loan automatically converts to

12

either a one- to four-family or commercial mortgage, as applicable. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion compared to the actual cost of construction. The Company limits its risk during construction as disbursements are not made until the required work for each advance has been completed and an updated lien search is performed. The completion of the construction progress is verified by a Company loan officer or inspections performed by an independent appraisal firm. Construction loans also expose us to the risk of construction delays which may impair the borrower's ability to repay the loan.

Other Loans:

Commercial- includes business installment loans, lines of credit and other commercial loans. Most of our commercial loans have fixed interest rates, and are for terms generally not in excess of 5 years. Whenever possible, we collateralize these loans with a lien on business assets and equipment and require the personal guarantees from principals of the borrower. Commercial loans generally involve a higher degree of credit risk, as commercial loans can involve relatively large loan balances to a single borrower or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation of the commercial business and the income stream of the borrower. Such risks can be significantly affected by economic conditions. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment because the equipment or other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial loan depends primarily on the credit worthiness of the borrowers (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

Consumer- consist of loans secured by collateral such as an automobile or a deposit account, unsecured loans and lines of credit. 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 allowance for loan losses is a valuation account that reflects the Company's evaluation of the losses inherent in its loan portfolio. In order to determine the adequacy of the allowance for loan losses, the Company estimates losses by loan type using historical loss factors, as well as other environmental factors, such as trends in loan volume and loan type, loan concentrations, changes in the experience, ability and depth of the Company's lending management, and national and local economic conditions. The Company's determination as to the classification of loans and the amount of loss allowances are subject to review by bank regulators, which can require the establishment of additional loss allowances.

The Company also reviews all loans on which the collectability of principal may not be reasonably assured, by reviewing payment status, financial conditions and estimated value of loan collateral. These loans are assigned an internal loan grade, and the Company assigns an amount of loss allowances to these classified loans based on loan grade.

Although the allocations noted below are by loan type, the allowance for loan losses is general in nature and is available to offset losses from any loan in the Company's portfolio. The unallocated component of the allowance for loan losses reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for existing specific and general losses in the portfolio.

13

The following tables summarize the activity in the allowance for loan losses for the three and six months ended June 30, 2022 and 2021 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of June 30, 2022 and December 31, 2021:

Real Estate Loans

Other Loans

One- to Four-Family(2)

Home Equity

Commercial

Construction - Commercial

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)

June 30, 2022

Allowance for Loan Losses:

Balance - April 1, 2022

$

382

$

271

$

4,937

$

420

$

443

$

28

$

19

$

6,500

Charge-offs

-

-

(4)

-

-

(21)

-

(25)

Recoveries

17

-

154

-

-

1

-

172

Provision (credit)

50

59

(179)

(47)

36

16

165

100

Balance - June 30, 2022

$

449

$

330

$

4,908

$

373

$

479

$

24

$

184

$

6,747

Balance - January 1, 2022

$

383

$

211

$

4,377

$

360

$

531

$

32

$

224

$

6,118

Charge-offs

-

-

(4)

-

-

(41)

-

(45)

Recoveries

17

1

154

-

-

2

-

174

Provision (credit)

49

118

381

13

(52)

31

(40)

500

Balance - June 30, 2022

$

449

$

330

$

4,908

$

373

$

479

$

24

$

184

$

6,747

Ending balance: individually evaluated for impairment

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Ending balance: collectively evaluated for impairment

$

449

$

330

$

4,908

$

373

$

479

$

24

$

184

$

6,747

Gross Loans Receivable (1):

Ending balance

$

164,006

$

49,931

$

288,975

$

22,615

$

23,358

$

1,333

$

-

$

550,218

Ending balance: individually evaluated for impairment

$

252

$

23

$

-

$

-

$

-

$

-

$

-

$

275

Ending balance: collectively evaluated for impairment

$

163,754

$

49,908

$

288,975

$

22,615

$

23,358

$

1,333

$

-

$

549,943

(1)Gross Loans Receivable does not include allowance for loan losses of $(6,747) or deferred loan costs of $3,729.

(2)Includes one- to four-family construction loans.

14

Real Estate Loans

Other Loans

One- to Four-Family(1)

Home Equity

Commercial

Construction - Commercial

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)

June 30, 2021

Allowance for Loan Losses:

Balance - April 1, 2021

$

375

$

220

$

4,158

$

477

$

587

$

24

$

163

$

6,004

Charge-offs

(12)

-

(3)

-

-

(2)

-

(17)

Recoveries

-

-

1

-

-

3

-

4

Provision (credit)

(38)

(51)

644

18

(26)

10

(57)

500

Balance - June 30, 2021

$

325

$

169

$

4,800

$

495

$

561

$

35

$

106

$

6,491

Balance - January 1, 2021

$

346

$

172

$

4,052

$

434

$

676

$

27

$

150

$

5,857

Charge-offs

(12)

-

(3)

-

-

(8)

-

(23)

Recoveries

-

-

2

-

-

5

-

7

Provision (credit)

(9)

(3)

749

61

(115)

11

(44)

650

Balance - June 30, 2021

$

325

$

169

$

4,800

$

495

$

561

$

35

$

106

$

6,491

(1)Includes one- to four-family construction loans.

Real Estate Loans

Other Loans

One- to Four-Family(2)

Home Equity

Commercial

Construction - Commercial

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)

December 31, 2021

Allowance for Loan Losses:

Balance - December 31, 2021

$

383

$

211

$

4,377

$

360

$

531

$

32

$

224

$

6,118

Ending balance: individually evaluated for impairment

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Ending balance: collectively evaluated for impairment

$

383

$

211

$

4,377

$

360

$

531

$

32

$

224

$

6,118

Gross Loans Receivable (1):

Ending Balance

$

158,826

$

48,071

$

266,525

$

21,824

$

23,216

$

1,317

$

-

$

519,779

Ending balance: individually evaluated for impairment

$

261

$

24

$

7,002

$

-

$

-

$

-

$

-

$

7,287

Ending balance: collectively evaluated for impairment

$

158,565

$

48,047

$

259,523

$

21,824

$

23,216

$

1,317

$

-

$

512,492

(1) Gross Loans Receivable does not include allowance for loan losses of $(6,118) or deferred loan costs of $3,545.

(2)Includes one- to four-family construction loans.

A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect the scheduled payments of principal and interest when due according to the contractual

15

terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled payments when due. Impairment is measured on a loan-by-loan basis for commercial real estate loans and commercial loans. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, home equity, or one- to four-family loans for impairment disclosure, unless they are subject to a troubled debt restructuring.

The following is a summary of information pertaining to impaired loans at or for the periods indicated:

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment

Balance

Allowance

Investment

Recognized

For the Six Months Ended

At June 30, 2022

June 30, 2022

(Dollars in thousands)

With no related allowance recorded:

Residential, one- to four-family

$

252

$

252

$

-

$

257

$

7

Home equity

23

23

-

23

-

Commercial real estate(1)

-

-

-

4,921

-

Total impaired loans with no related allowance

275

275

-

5,201

7

(1)Average Commercial Real Estate loans consisted of one loan which was paid off during the six months ended June 30, 2022.

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment

Balance

Allowance

Investment

Recognized

For the Year Ended

At December 31, 2021

December 31, 2021

(Dollars in thousands)

With no related allowance recorded:

Residential, one- to four-family

$

261

$

261

$

-

$

269

$

13

Home equity

24

24

-

25

1

Commercial real estate

7,002

7,002

-

8,786

219

Total impaired loans

7,287

7,287

-

9,080

233

16

The following table provides an analysis of past due loans and non-accruing loans as of the dates indicated:

30-59 Days

60-89 Days

90 Days or More

Total Past

Current

Total Loans

Loans on Non-

Past Due

Past Due

Past Due

Due

Due

Receivable

Accrual

(Dollars in thousands)

June 30, 2022:

Real Estate Loans:

Residential, one- to four-family(1)

$

448

$

233

$

1,656

$

2,337

$

161,669

$

164,006

$

2,035

Home equity

239

195

589

1,023

48,908

49,931

569

Commercial(2)

-

-

-

-

288,975

288,975

-

Construction - commercial

-

-

-

-

22,615

22,615

-

Other Loans:

Commercial(3)

-

-

-

-

23,358

23,358

-

Consumer

14

5

-

19

1,314

1,333

10

Total

$

701

$

433

$

2,245

$

3,379

$

546,839

$

550,218

$

2,614

30-59 Days

60-89 Days

90 Days or More

Total Past

Current

Total Loans

Loans on Non-

Past Due

Past Due

Past Due

Due

Due

Receivable

Accrual

(Dollars in thousands)

December 31, 2021:

Real Estate Loans:

Residential, one- to four-family(1)

$

373

$

758

$

1,096

$

2,227

$

156,599

$

158,826

$

1,878

Home equity

265

146

532

943

47,128

48,071

636

Commercial(2)

-

-

-

-

266,525

266,525

7,002

Construction - commercial

-

-

-

-

21,824

21,824

-

Other Loans:

Commercial(3)

-

-

-

-

23,216

23,216

-

Consumer

7

7

5

19

1,298

1,317

5

Total

$

645

$

911

$

1,633

$

3,189

$

516,590

$

519,779

$

9,521

(1)Includes one- to four-family construction loans.

(2)Commercial Real Estate loans on non-accrual consists of one loan which was moved to non-accrual status during the year ended December 31, 2021. This loan was paid off during the six months ended June 30, 2022.

(3) Includes $4.6million of Paycheck Protection Program ("PPP") loans at December 31, 2021, which do not require payments for a certain amount of time under the CARES Act and are 100% guaranteed by SBA. All PPP loans were forgiven as of June 30, 2022.

The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. A loan does not have to be 90 days delinquent in order to be classified as non-accrual. When interest accrual is discontinued, all unpaid accrued interest is reversed. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

The Company's policies provide for the classification of loans as follows:

Pass/Performing;

Special Mention - does not currently expose the Company to a sufficient degree of risk but does possess credit deficiencies or potential weaknesses deserving the Company's close attention;

Substandard - has one or more well-defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A

17

substandard asset would be one inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral, if applicable;

Doubtful - has all the weaknesses inherent in substandard loans with the additional characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss; and

Loss - loan is considered uncollectible and continuance without the establishment of a specific valuation reserve is not warranted.

The Company's Asset Classification Committee is responsible for monitoring risk ratings and making changes as deemed appropriate. Each commercial loan is individually assigned a loan classification. The Company's consumer loans, including residential one- to four-family loans and home equity loans, are not classified as described above. Instead, the Company uses the delinquency status as the basis for classifying these loans. Generally, all consumer loans more than 90 days past due are classified and placed in non-accrual. Such loans that are well-secured and in the process of collection will remain in accrual status.

The following tables summarize the internal loan grades applied to the Company's loan portfolio as of June 30, 2022 and December 31, 2021:

Pass/Performing

Special Mention

Substandard

Doubtful

Loss

Total

(Dollars in thousands)

June 30, 2022

Real Estate Loans:

Residential, one- to four-family(1)

$

161,775

$

-

$

2,231

$

-

$

-

$

164,006

Home equity

48,886

-

1,045

-

-

49,931

Commercial(2)

282,026

5,876

1,073

-

-

288,975

Construction - commercial

22,615

-

-

-

-

22,615

Other Loans:

Commercial(3)

19,626

1,211

2,521

-

-

23,358

Consumer

1,323

-

6

-

4

1,333

Total

$

536,251

$

7,087

$

6,876

$

-

$

4

$

550,218

Pass/Performing

Special Mention

Substandard

Doubtful

Loss

Total

(Dollars in thousands)

December 31, 2021

Real Estate Loans:

Residential, one- to four-family(1)

$

156,931

$

-

$

1,895

$

-

$

-

$

158,826

Home equity

47,167

-

904

-

-

48,071

Commercial(2)

252,391

6,682

7,452

-

-

266,525

Construction - commercial

21,824

-

-

-

-

21,824

Other Loans:

Commercial(3)

18,076

1,742

3,398

-

-

23,216

Consumer

1,308

-

4

-

5

1,317

Total

$

497,697

$

8,424

$

13,653

$

-

$

5

$

519,779

(1)Includes one- to four-family construction loans.

(2)The Substandard classification category for Commercial Real Estate loans includes one $7.0million loan relationship that was deemed to be impaired during the year ended December 31, 2021. This loan was paid off during the six months ended June 30, 2022.

(3) The Pass/Performing category for Commercial Loans includes $4.6million of PPP loans at December 31, 2021, which do not require payments for a certain amount of time under the CARES Act and are 100% guaranteed by SBA. All PPP loans were forgiven as of June 30, 2022.

TDRs occur when we grant borrowers concessions 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, modifications of the terms of the debt, the transfer of assets or the issuance of an equity interest by the borrower to satisfy all or part of the

18

debt, or the addition of borrower(s). The Company identifies loans for potential TDRs 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 TDR 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. The Company's TDRs are impaired loans, which may result in specific allocations and subsequent charge-offs if appropriate.

Some loan modifications classified as TDRs may not ultimately result in full collection of principal and interest, as modified, which may result in potential losses. These potential losses have been factored into our overall estimate of the allowance for loan losses.

The following table summarizes the loans that were classified as TDRs as of the dates indicated:

Non-Accruing

Accruing

TDRs That Have Defaulted on Modified Terms Year to Date

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

(Dollars in thousands)

At June 30, 2022

Real Estate Loans:

Residential, one- to four-family

7

$

252

1

$

8

6

$

244

-

$

-

Home equity

2

23

1

14

1

9

-

-

Total

9

$

275

2

$

22

7

$

253

-

$

-

At December 31, 2021

Real Estate Loans:

Residential, one- to four-family

7

$

261

1

$

11

6

$

250

-

$

-

Home equity

2

24

1

15

1

9

1

15

Commercial(1)

1

7,002

1

7,002

-

-

-

-

Total

10

$

7,287

3

$

7,028

7

$

259

1

$

15

(1)Commercial Real Estate loans consisted of one loan which was paid off during the six months ended June 30, 2022.

Noadditional loan commitments were outstanding to these borrowers at June 30, 2022 and December 31, 2021.

The following table details the activity in loans which were first deemed to be TDRs during the three and six months ended June 30, 2022 and 2021.

For the Three Months Ended June 30, 2022

For The Three Months Ended June 30, 2021

Number of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Number of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

(Dollars in thousands)

Real Estate Loans:

Residential, one- to four-family

-

$

-

$

-

1

$

38

$

38

Home equity

-

-

-

1

10

10

Total

-

$

-

$

-

2

$

48

$

48

19

For the Six Months June 30, 2022

For the Six Months June 30, 2021

Number of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Number of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

(Dollars in thousands)

Real Estate Loans:

Residential, one- to four-family

-

$

-

$

-

1

$

38

$

38

Home equity

-

-

-

1

10

10

Total

-

$

-

$

-

2

$

48

$

48

Foreclosed real estate consists of property acquired in settlement of loans which is carried at its fair value less estimated selling costs. Write-downs from cost to fair value less estimated selling costs are recorded at the date of acquisition or repossession and are charged to the allowance for loan losses. Foreclosed real estate was $269,000and $123,000at June 30, 2022 and December 31, 2021, respectively, and was included as a component of other assets on the consolidated statements of financial condition. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $1.7million at June 30, 2022 and December 31, 2021.

Note 6 - Earnings per Share

Earnings per share was calculated for the three and six months ended June 30, 2022 and 2021, respectively. Basic earnings per share is based upon the weighted average number of common shares outstanding, exclusive of unearned shares held by the Employee Stock Ownership Plan of Lake Shore Bancorp, Inc. (the "ESOP") and by the Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan ("EIP"). Diluted earnings per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. Stock options are regarded as potential common stock and are

20

considered in the diluted earnings per share calculations to the extent they would be dilutive and computed using the treasury stock method.

The calculated basic and diluted earnings per share are as follows:

Three Months Ended June 30,

2022

2021

Numerator - net income

$

1,684,000

$

993,000

Denominator:

Basic weighted average shares outstanding

5,903,048

5,919,204

Increase in weighted average shares outstanding due to:

Stock options

1,702

3,237

Diluted weighted average shares outstanding

5,904,750

5,922,441

Earnings per share:

Basic

$

0.29

$

0.17

Diluted

$

0.29

$

0.17

Six Months Ended June 30,

2022

2021

Numerator - net income

$

2,745,000

$

2,681,000

Denominator:

Basic weighted average shares outstanding

5,867,805

5,916,175

Increase in weighted average shares outstanding due to:

Stock options

3,088

2,097

Diluted weighted average shares outstanding

5,870,893

5,918,272

Earnings per share:

Basic

$

0.47

$

0.45

Diluted

$

0.47

$

0.45

Note 7 - Commitments to Extend Credit

The Company has commitments to extend credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Company's exposure to credit loss is represented by the contractual amount of these commitments. There were noloss reserves associated with these commitments at June 30, 2022 and December 31, 2021. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

21

The following commitments to extend credit were outstanding as of the dates specified:

Contract Amount

June 30,

December 31,

2022

2021

(Dollars in thousands)

Commitments to grant loans

$

41,504

$

61,234

Unfunded commitments under lines of credit

76,288

73,387

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the customer.

Note 8 - Stock-based Compensation

As of June 30, 2022, the Company had threeactive stock-based compensation plans and oneexpired stock based compensation plan, which are described below. The compensation cost that has been recorded under salary and benefits expense in the non-interest expense section of the consolidated statements of income for these plans was $102,000and $107,000for the three months ended June 30, 2022 and 2021, respectively. The compensation cost that has been recorded for the six months ended June 30, 2022 and 2021 was $174,000and $178,000, respectively.

2006 Stock Option Plan

The Company's 2006 Stock Option Plan (the "Stock Option Plan"), which was approved by the Company's stockholders, permitted the grant of options to its employees and non-employee directors for up to 297,562shares of common stock. The Stock Option Plan expired on October 24, 2016, and grants of options can no longer be awarded.

Both incentive stock options and non-qualified stock options have been granted under the Stock Option Plan. The exercise price of each stock option equals the market price of the Company's common stock on the date of grant and an option's maximum term is ten years. The stock options generally vest over a five yearperiod.

A summary of the status of the Stock Option Plan during the six months ended June 30, 2022 and 2021 is presented below:

:

2022

2021

Options

Weighted Average Exercise Price

Remaining Contractual Life

Options

Weighted Average Exercise Price

Remaining Contractual Life

Outstanding at beginning of year

64,548

$

14.38

64,548

$

14.38

Granted

-

-

-

-

Exercised

-

-

-

-

Outstanding at end of period

64,548

$

14.38

4.3years

64,548

$

14.38

5.3years

Options exercisable at end of period

64,548

$

14.38

4.3years

51,636

$

14.38

5.3years

Fair value of options granted

-

$

-

-

$

-

At June 30, 2022, stock options had no intrinsic value and there were noremaining options available for grant under the Stock Option Plan. There were nostock options exercised during the three and six months ended June 30, 2022 and 2021. At June 30, 2022, all compensation cost related to the Stock Option Plan has been recognized

22

in prior periods. Compensation expense related to the Stock Option Plan amounted to $8,000for the three month period ended June 30, 2021.Compensation expense related to the Stock Option Plan for the six month period ended June 30, 2021 was $17,000.

2006 Recognition and Retention Plan

The Company's 2006 Recognition and Retention Plan ("RRP"), which was approved by the Company's stockholders, permitted the grant of restricted stock awards ("Awards") to employees and non-employee directors for up to 119,025shares of common stock. The RRP expired on October 24, 2016, and as of October 24, 2016, all shares permitted under the plan have been granted.

As of June 30, 2022, all 119,025shares in the plan have vested and been distributed to eligible participants under the RRP. At June 30, 2022, all compensation cost related to the RRP has been recognized in prior periods. Compensation expense amounted to $6,000for the three months ended June 30, 2021and $12,000for the six months ended June 30, 2021.

A summary of the status of unvested shares under the RRP for the six months ended June 30, 2021 is as follows:

At June 30, 2021

Weighted Average Grant Price (per Share)

Unvested shares outstanding at beginning of year

1,618

$

14.38

Granted

-

-

Vested

-

-

Unvested shares outstanding at end of period

1,618

$

14.38

2012 Equity Incentive Plan

The Company's 2012 Equity Incentive Plan (the "EIP"), which was approved by the Company's stockholders on May 23, 2012, authorizes the issuance of up to 180,000shares of common stock pursuant to grants of restricted stock awards and up to 20,000shares of common stock pursuant to grants of incentive stock options and non-qualified stock options, subject to permitted adjustments for certain corporate transactions. Employees and non-employee directors of Lake Shore Bancorp or its subsidiaries are eligible to receive awards under the EIP, except that non-employees may not be granted incentive stock options.

The Board of Directors granted restricted stock awards under the EIP during the six months ended June 30, 2022 as follows:

Grant Date

Number of Restricted Stock Awards

Vesting

Fair Value per Share of Award on Grant Date

Awardees

March 17, 2022

4,577

100% on December 9, 2022

$

15.00

Non-employee directors

March 30, 2022

22,555

100% on March 31, 2025 if three year performance metric is achieved

$

14.96

Employees

23

A summary of the status of unvested restricted stock awards under the EIP for the six months ended June 30, 2022 and 2021 is as follows:

At June 30, 2022

Weighted Average Grant Price (per Share)

At June 30, 2021

Weighted Average Grant Price (per Share)

Unvested shares outstanding at beginning of year

29,495

$

15.24

14,986

$

15.39

Granted

27,132

14.97

20,958

15.22

Forfeited

(3,062)

15.07

(1,392)

15.26

Unvested shares outstanding at end of period

53,565

$

15.11

34,552

$

15.29

As of June 30, 2022, there were 93,741shares of restricted stock that vested or were distributed to eligible participants under the EIP. Compensation expense related to unvested restricted stock awards under the EIP amounted to $74,000and $60,000for the three months ended June 30, 2022 and 2021, respectively. Compensation expense related to unvested restricted stock awards under the EIP amounted to $116,000and $85,000for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, $498,000of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 33 months.

A summary of the status of stock options under the EIP for the six months ended June 30, 2022 and 2021 is presented below:

2022

2021

Options

Exercise Price

Remaining Contractual Life

Options

Exercise Price

Remaining Contractual Life

Outstanding at beginning of year

20,000

$

14.38

20,000

$

14.38

Granted

-

-

-

-

Exercised

-

-

-

-

Forfeited

-

-

-

-

Outstanding at end of period

20,000

$

14.38

4.3years

20,000

$

14.38

5.3years

Options exercisable at end of period

20,000

$

14.38

4.3years

15,998

$

14.38

5.3years

Fair value of options granted

-

-

-

-

At June 30, 2022, stock options had no intrinsic value and there were noremaining options available for grant under the EIP. There were nostock options exercised during the three and six months ended June 30, 2022 and 2021. At June 30, 2022, all compensation cost related to the stock options granted under the EIP has been recognized in prior periods. Compensation expense related to stock options outstanding under the EIP amounted to $3,000for the three months ended June 30, 2021 and $5,000for the six months ended June 30, 2021.

Employee Stock Ownership Plan ("ESOP")

The Company established the ESOP for the benefit of eligible employees of the Company and Bank. All Company and Bank employees meeting certain age and service requirements are eligible to participate in the ESOP. Participants' benefits become fully vested after five yearsof service once the employee is eligible to participate in the ESOP. The Company utilized $2.6million of the proceeds of its 2006 stock offering to extend a loan to the ESOP and the ESOP used such proceeds to purchase 238,050shares of stock on the open market at an average price of $10.70per share, plus commission expenses. As a result of the purchase of shares by the ESOP, total stockholders' equity of the Company was reduced by $2.6million. As of June 30, 2022, the balance of the loan to the ESOP was $1.4million and the fair value of unallocated shares was $1.5million. As of June 30, 2022, there were 80,403allocated shares and 111,089unallocated shares compared to 81,719allocated shares and 119,024unallocated shares at June 30, 2021. The ESOP compensation expense was $28,000for the

24

three months ended June 30, 2022 and $30,000for the three months ended June 30, 2021 based on 1,984shares earned in each of those quarters. The ESOP compensation expense was $58,000for the six months ended June 30, 2022 and $59,000for the six months ended June 30, 2021 based on 3,968shares earned in each of those six month periods.

Note 9 - Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of June 30, 2022 and December 31, 2021 and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. The estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported here.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities measurements (Level 1) and the lowest priority to unobservable input measurements (Level 3). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.

Level 3: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The Company's consolidated statements of financial condition contain investment securities and derivative instruments that are recorded at fair value on a recurring basis. For financial instruments measured at fair value

25

on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2022 and December 31, 2021 were as follows:

Fair Value Measurements at June 30, 2022

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Other Unobservable Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Measured at fair value on a recurring basis:

Securities:

Debt Securities Available for Sale

U.S. government agencies

$

1,922

$

-

$

1,922

$

-

Municipal bonds

43,029

-

43,029

-

Mortgage-backed securities:

Collateralized mortgage obligations-private label

12

-

12

-

Collateralized mortgage obligations-government sponsored entities

14,097

-

14,097

-

Government National Mortgage Association

65

-

65

-

Federal National Mortgage Association

12,470

-

12,470

-

Federal Home Loan Mortgage Corporation

5,828

-

5,828

-

Asset-backed securities:

Private label

101

-

101

-

Government sponsored entities

6

-

6

-

Total Debt Securities Available for Sale

$

77,530

$

-

$

77,530

$

-

Equity securities

10

10

-

-

Total Securities

$

77,540

$

10

$

77,530

$

-

Interest Rate Swap(1)

$

194

$

-

$

194

$

-

(1)Included in Other Assets on the consolidated statements of financial condition.

26

Fair Value Measurements at December 31, 2021

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Other Unobservable Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Measured at fair value on a recurring basis:

Securities:

Debt Securities Available for Sale

U.S. government agencies

$

2,213

$

-

$

2,213

$

-

Municipal bonds

50,756

-

50,756

-

Mortgage-backed securities:

Collateralized mortgage obligations-private label

15

-

15

-

Collateralized mortgage obligations-government sponsored entities

17,814

-

17,814

-

Government National Mortgage Association

83

-

83

-

Federal National Mortgage Association

10,760

-

10,760

-

Federal Home Loan Mortgage Corporation

7,036

-

7,036

-

Asset-backed securities:

Private label

110

-

110

-

Government sponsored entities

10

-

10

-

Total Debt Securities Available for Sale

$

88,797

$

-

$

88,797

$

-

Equity securities

19

19

-

-

Total Securities

$

88,816

$

19

$

88,797

$

-

Interest Rate Swap(1)

$

(60)

$

-

$

(60)

$

-

(1)Included in Other Liabilities on the consolidated statements of financial condition

Level 2 inputs for assets or liabilities measured at fair value on a recurring basis might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment projections, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. The following is a description of valuation methodologies used for financial assets recorded at fair value on a recurring basis:

Investment securities - the fair values are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment projections, credit information, and the security' terms and conditions, among other things. Level 2 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 custodian, who use third party data service providers.

27

Interest Rate Swap - the fair value is based on a discounted cash flow model. The model's key assumptions include the contractual term of the derivative contract, including the period to maturity, and the use of observable market based inputs, such as interest rates, yield curves, nonperformance risk and implied volatility.

In addition to disclosure of the fair value of assets on a recurring basis, GAAP requires disclosures for assets and liabilities measured at fair value on a non-recurring basis, such as impaired assets, foreclosed real estate and mortgage servicing rights. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Non-recurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for loan losses. An impaired loan is carried at fair value based on either a recent appraisal less estimated selling costs of underlying collateral or discounted cash flows based on current market conditions. Once a loan is foreclosed, the fair value of the real estate owned continues to be evaluated based upon the market value of the repossessed real estate originally securing the loan.

Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The key assumptions used in the model include the estimated life of loans sold with servicing retained and the estimated cost to service the loans. Loan servicing rights are classified as Level 3 measurements due to the use of unobservable inputs, as well as management judgment and estimation.

For assets measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021, the fair value measurements by level within the fair value hierarchy were as follows:

Fair Value Measurements

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Other Unobservable Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Measured at fair value on a non-recurring basis:

At June 30, 2022

Mortgage servicing rights

$

219

$

-

$

-

$

219

At December 31, 2021

Foreclosed real estate

$

35

$

-

$

-

$

35

Mortgage servicing rights

220

-

-

220

28

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Fair Value Estimate

Valuation Technique

Unobservable Input

Range

Weighted Average

At June 30, 2022

Mortgage servicing rights

$

219

Discounted Cash Flow Model (1)

Discount Rate

10.00%

10.00%

Servicing Fees

0.25%

0.25%

Servicing Costs

0.15%

0.15%

Estimated Life of Loans

5.5-7.3years

5.5years

At December 31, 2021

Foreclosed real estate

$

35

Market valuation of property (2)

Direct Disposal Costs (3)

7.00%

7.00%

Mortgage servicing rights

220

Discounted Cash Flow Model (1)

Discount Rate

10.00%

10.00%

Servicing Fees

0.25%

0.25%

Servicing Costs

0.15%

0.15%

Estimated Life of Loans

5.9years

5.9years

(1)The fair value is based on a discounted cash flow model. The model's key assumptions are the estimated life of loans sold with servicing retained and the estimated cost to service the loans.

(2)Fair value is generally determined through independent third-party appraisals of the underlying collateral or by a purchase offer for the related property, which generally includes various Level 3 inputs which are not observable.

(3)The fair value basis of foreclosed real estate may be adjusted to reflect management estimates of disposal costs including, but not necessarily limited to, real estate brokerage commissions, legal fees, and delinquent property taxes.

At December 31, 2021, foreclosed real estate valued using Level 3 inputs had a carrying amount of $73,000and valuation allowance of $38,000.

29

The carrying amount and estimated fair value of the Company's financial instruments, whether carried at cost or fair value, are as follows:

Fair Value Measurements at June 30, 2022

Carrying

Estimated

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Other Unobservable Inputs

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Financial assets:

Cash and cash equivalents

$

27,156

$

27,156

$

27,156

$

-

$

-

Securities

77,540

77,540

10

77,530

-

Federal Home Loan Bank stock

1,763

1,763

-

1,763

-

Loans receivable, net

547,200

522,792

-

-

522,792

Accrued interest receivable

2,379

2,379

-

2,379

-

Interest rate swap

194

194

-

194

-

Mortgage servicing rights

219

219

-

-

219

Financial liabilities:

Deposits

578,268

579,437

-

579,437

-

Long-term debt

24,950

23,869

-

23,869

-

Accrued interest payable

49

49

-

49

-

Off-balance-sheet financial instruments

-

-

-

-

-

Fair Value Measurements at December 31, 2021

Carrying

Estimated

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Other Unobservable Inputs

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Financial assets:

Cash and cash equivalents

$

67,585

$

67,585

$

67,585

$

-

$

-

Securities

88,816

88,816

19

88,797

-

Federal Home Loan Bank stock

1,606

1,606

-

1,606

-

Loans receivable, net

517,206

504,018

-

-

504,018

Accrued interest receivable

2,483

2,483

-

2,483

-

Mortgage servicing rights

220

220

-

-

220

Financial liabilities:

Deposits

593,184

596,273

-

596,273

-

Long-term debt

21,950

22,073

-

22,073

-

Accrued interest payable

55

55

-

55

-

Interest rate swap

60

60

-

60

-

Off-balance-sheet financial instruments

-

-

-

-

-

Note 10 - Treasury Stock

During the three and six months ended June 30, 2022, the Company repurchased 5,701shares of common stock at an average cost of $14.91per share. These shares were repurchased pursuant to the Company's publicly announced common stock repurchase program. As of June 30, 2022, there were 30,626shares remaining to be repurchased under the existing stock repurchase program. During the six months ended June 30, 2022, the Company transferred 27,132shares of common stock out of treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.39per share to fund awards that had been granted under the plan. During

30

the six months ended June 30, 2022, there were 3,062shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39per share due to forfeitures.

During the three months ended June 30, 2021, the Company repurchased 36,094shares of common stock at an average cost of $15.15per share. During the six months ended June 30, 2021, the Company repurchased 79,928shares of common stock at an average cost of $15.00per share. The shares were repurchased pursuant to the Company's publicly announced common stock repurchase program. As of June 30, 2021, the Company had completed the repurchase of shares from the stock repurchase plan put in place during August 2020. During the six months ended June 30, 2021, the Company transferred 20,958shares of common stock out of treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.39per share to fund awards that had been granted under the plan. During the six months ended June 30, 2021, there were 1,392shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39per share due to forfeitures.

Note 11 - Other Comprehensive (Loss) Income

In addition to presenting the consolidated statements of comprehensive (loss) income herein, the following table shows the tax effects allocated to the Company's single component of other comprehensive (loss) income for the periods presented:

For the Three Months Ended June 30, 2022

For The Three Months Ended June 30, 2021

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

Pre-Tax Amount

Tax Expense

Net of Tax Amount

(Unaudited)

(Dollars in thousands)

Net unrealized (losses) gains on securities available for sale:

Net unrealized (losses) gains arising during the period

$

(4,347)

$

913

$

(3,434)

$

277

$

(58)

$

219

Less: reclassification adjustment related to:

Recovery on previously impaired investment securities included in net income

(4)

1

(3)

(11)

3

(8)

Total Other Comprehensive (Loss) Income

$

(4,351)

$

914

$

(3,437)

$

266

$

(55)

$

211

For the Six Months Ended June 30, 2022

For The Six Months Ended June 30, 2021

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

(Dollars in thousands)

Net unrealized losses on securities available for sale:

Net unrealized losses arising during the period

$

(12,105)

$

2,542

$

(9,563)

$

(718)

$

151

$

(567)

Less: reclassification adjustment related to:

Recovery on previously impaired investment securities included in net income

(10)

2

(8)

(32)

7

(25)

Total Other Comprehensive Loss

$

(12,115)

$

2,544

$

(9,571)

$

(750)

$

158

$

(592)

31

The following table presents the amounts reclassified out of the single component of the Company's accumulated other comprehensive (loss) income for the indicated periods:

Amounts Reclassified from Accumulated

Details about Accumulated Other

Other Comprehensive (Loss) Income

Affected Line Item

Comprehensive (Loss) Gain

for the three months ended June 30,

on the Consolidated

Components

2022

2021

Statements of Income

(Dollars in thousands)

Net unrealized losses on securities available for sale:

Recovery on previously impaired investment securities

$

(4)

$

(11)

Recovery on previously impaired investment securities

Provision for income tax expense

1

3

Income Tax Expense

Total reclassification for the period

$

(3)

$

(8)

Net Income

Amounts Reclassified from Accumulated

Details about Accumulated Other

Other Comprehensive Loss

Affected Line Item

Comprehensive Loss

for the six months ended June 30,

on the Consolidated

Components

2022

2021

Statements of Income

(Dollars in thousands)

Net unrealized losses on securities available sale:

Recovery on previously impaired investment securities

$

(10)

$

(32)

Recovery on previously impaired investment securities

Provision for income tax expense

2

7

Income Tax Expense

Total reclassification for the period

$

(8)

$

(25)

Net Income

Note 12 - Subsequent Events

On July 20, 2022, the Board of Directors declared a quarterly cash dividend of $0.18per share on the Company's common stock, payable on August 19, 2022to shareholders of record as of August 2, 2022. Lake Shore, MHC (the "MHC"), which holds 3,636,875shares, or approximately 63.7% of the Company's total outstanding stock, has elected to waive receipt of the dividend on its shares. On March 10, 2022, the MHC received the non-objection of the Federal Reserve Bank of Philadelphia to waive its right to receive dividends paid by the Company during the twelve months ending February 9, 2023, aggregating up to $0.68per share. The MHC waived $582,000and $1.2million of dividends during the three and six months ended June 30, 2022, respectively. Cumulatively the MHC has waived approximately $17.3million of cash dividends as of June 30, 2022. The dividends waived by the MHC are considered a restriction on the retained earnings of the Company.

Item2. 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

32

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, 2021, Part II, Item 1A of this Quarterly Report on Form 10-Q and the following:

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;

risks relating to the COVID-19 pandemic;

compliance with the Bank's Formal Agreement with the Office of the Comptroller of the Currency;

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;

deterioration in the credit quality of our loan portfolio and/or the value of the collateral securing repayment of loans;

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;

changes in accounting principles, policies, or guidelines;

our success in managing the risks involved in our business; and

other economic, competitive, 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. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. 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, 2022 compared to the consolidated financial condition as of December 31, 2021 and the consolidated results of operations for the three and six months ended June 30, 2022 and 2021.

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 gains and losses on interest rate swaps and the sales of securities and loans, our provision for loan losses and non-interest expenses which include salaries and employee benefits,

33

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 may materially impact the Company.

To operate successfully, we must manage various types of risk, including but not limited to, interest rate risk, credit risk, liquidity risk, operational and information technology risks, strategic risk, reputation risk and compliance risk. A significant form of market risk for the Company is interest rate risk, as the Company's assets and liabilities are sensitive to changes in interest rates. Interest rate risk is the exposure of our net interest income to adverse movements in interest rates. Net interest income is our primary source of revenue and interest rate risk is a significant non-credit related risk to which our Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of our assets and liabilities. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancing, the flow and mix of deposits and the fair value of securities.

In recent years, the Company has adjusted its strategies to manage interest rate risk by originating a greater volume of shorter-term, adjustable rate commercial real estate and commercial business loans and increasing its concentration of core deposits, which are less interest rate sensitive. The Company has entered into two interest rate swap arrangements with a total notional amount of $6.0 million to convert portions of its interest earning assets into fixed or adjustable rate interest-earning assets, as applicable, to manage its exposure to movements in interest rates.

Credit risk is the risk to our earnings and stockholders' equity that results from customers, to whom loans have been made, and from issuers of debt securities in which the Company has invested, failing to repay their obligations. The magnitude of this risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased. This risk is managed by policies approved by the Company's Board of Directors, review of compliance with the policies and periodic reporting and evaluation of loans or securities that are non-performing or demonstrate other characteristics of potential loss.

Recent Events

As previously reported on a Current Report on Form 8-Kfiled on July 19, 2022 with the SEC, the Bank, and the Office of the Comptroller of the Currency (the "OCC"), the Bank's primary federal regulator, entered into a formal written agreement (the "Agreement") effective as of July 13, 2022 relating to information technology, security and automated clearing house program deficiencies. Management and the Bank's Board of Directors are committed to promptly addressing the action items included in the Agreement.

Refer to Part II, Item 1A of this Quarterly Report on Form 10-Q for additional details related to the Agreement.

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, 2021.

34

Critical Accounting Estimates

Disclosure of the Company's significant accounting estimates is included in the notes to the consolidated financial statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Some of these estimates require significant judgment, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses, as well as management's evaluation of securities valuation, impairment of securities and income taxes. There have been no material changes in critical accounting estimates since December 31, 2021.

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 and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities, interest earned and interest 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 the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan 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 $58,000 and $159,000 for the three month periods ended June 30, 2022 and 2021, respectively. The net amortization of deferred loan fees and costs were

35

$147,000 and $232,000 for the six month periods ended June 30, 2022 and 2021, 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, 2022

June 30, 2021

Average

Interest Income/

Yield/

Average

Interest Income/

Yield/

Balance

Expense

Rate(2)

Balance

Expense

Rate(2)

(Dollars in thousands)

Interest-earning assets:

Interest-earning deposits & federal funds sold

$

19,420

$

35

0.72%

$

44,708

$

8

0.07%

Securities(1)

83,206

527

2.53%

76,804

461

2.40%

Loans, including fees

542,027

5,869

4.33%

541,142

5,700

4.21%

Total interest-earning assets

644,653

6,431

3.99%

662,654

6,169

3.72%

Other assets

48,985

46,321

Total assets

$

693,638

$

708,975

Interest-bearing liabilities

Demand & NOW accounts

$

89,053

$

20

0.09%

$

83,021

$

19

0.09%

Money market accounts

176,359

94

0.21%

164,111

85

0.21%

Savings accounts

77,936

10

0.05%

72,373

9

0.05%

Time deposits

131,317

205

0.62%

155,120

470

1.21%

Borrowed funds & other interest-bearing liabilities

22,811

124

2.17%

28,670

155

2.16%

Total interest-bearing liabilities

497,476

453

0.36%

503,295

738

0.59%

Other non-interest bearing liabilities

114,140

118,536

Stockholders' equity

82,022

87,144

Total liabilities & stockholders' equity

$

693,638

$

708,975

Net interest income

$

5,978

$

5,431

Interest rate spread

3.63%

3.13%

Net interest margin

3.71%

3.28%

(1)The tax equivalent adjustment for bank qualified tax exempt municipal securities results in rates of 2.94% and 2.79% for the three months ended June 30, 2022 and 2021, respectively.

(2)Annualized.

36

For the Six Months Ended

For the Six Months Ended

June 30, 2022

June 30, 2021

Average

Interest Income/

Yield/

Average

Interest Income/

Yield/

Balance

Expense

Rate(2)

Balance

Expense

Rate(2)

(Dollars in thousands)

Interest-earning assets:

Interest-earning deposits & federal funds sold

$

29,236

$

50

0.34%

$

38,257

$

14

0.07%

Securities(1)

86,386

1,026

2.38%

77,952

935

2.40%

Loans, including fees

530,458

11,289

4.26%

535,938

11,277

4.21%

Total interest-earning assets

646,080

12,365

3.83%

652,147

12,226

3.75%

Other assets

52,289

45,904

Total assets

$

698,369

$

698,051

Interest-bearing liabilities

Demand & NOW accounts

$

89,342

$

39

0.09%

$

82,205

$

38

0.09%

Money market accounts

178,175

186

0.21%

162,181

170

0.21%

Savings accounts

76,251

20

0.05%

70,050

18

0.05%

Time deposits

132,925

431

0.65%

156,385

984

1.26%

Borrowed funds & other interest-bearing liabilities

22,688

243

2.14%

29,147

315

2.16%

Total interest-bearing liabilities

499,381

919

0.37%

499,968

1,525

0.61%

Other non-interest bearing liabilities

114,373

111,141

Stockholders' equity

84,615

86,942

Total liabilities & stockholders' equity

$

698,369

$

698,051

Net interest income

$

11,446

$

10,701

Interest rate spread

3.46%

3.14%

Net interest margin

3.54%

3.28%

(3)The tax equivalent adjustment for bank qualified tax exempt municipal securities results in rates of 2.76% and 2.79% for the six months ended June 30, 2022 and 2021, respectively.

(4)Annualized.

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 first period to the volume change between 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.

37

Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.

Three Months Ended June 30, 2022

Compared to

Three Months Ended June 30, 2021

Rate

Volume

Net Change

(Dollars in thousands)

Interest-earning assets:

Interest-earning deposits & federal funds sold

$

34

$

(7)

$

27

Securities

26

40

66

Loans, including fees

160

9

169

Total interest-earning assets

220

42

262

Interest-bearing liabilities:

Demand & NOW accounts

-

1

1

Money market accounts

3

6

9

Savings accounts

-

1

1

Time deposits

(201)

(64)

(265)

Total deposits

(198)

(56)

(254)

Other interest-bearing liabilities:

Borrowed funds & other interest-bearing liabilities

-

(31)

(31)

Total interest-bearing liabilities

(198)

(87)

(285)

Total change in net interest income

$

418

$

129

$

547

Six Months Ended June 30, 2022

Compared to

Six Months Ended June 30, 2021

Rate

Volume

Net Change

(Dollars in thousands)

Interest-earning assets:

Interest-earning deposits & federal funds sold

$

40

$

(4)

$

36

Securities

(9)

100

91

Loans, including fees

128

(116)

12

Total interest-earning assets

159

(20)

139

Interest-bearing liabilities:

Demand & NOW accounts

(2)

3

1

Money market accounts

(1)

17

16

Savings accounts

-

2

2

Time deposits

(422)

(131)

(553)

Total deposits

(425)

(109)

(534)

Other interest-bearing liabilities:

Borrowed funds & other interest-bearing liabilities

(7)

(65)

(72)

Total interest-bearing liabilities

(432)

(174)

(606)

Total change in net interest income

$

591

$

154

$

745

38

As shown in the above tables, the increase in net interest income for second quarter 2022 was primarily impacted by a decrease in the average cost of interest-bearing liabilities and an increase in the average rate on interest-earning assets when compared to the prior year period. Net interest margin increased to 3.71% for the second quarter 2022 as compared to 3.28% for the second quarter 2021. The average interest rate paid on interest-bearing liabilities decreased 23 basis points from 0.59% during second quarter 2021 to 0.36% during second quarter 2022. The decrease in the average interest rate paid on interest-bearing liabilities during second quarter 2022 was primarily due to a $23.8 million decrease in the average balance of time deposits and a 59 basis points decrease in the average interest rate paid on time deposits in comparison to the prior year period. The increase in net interest margin was also due to an increase in the average yield on interest-earning assets. The average yield on interest-earning assets for the 2022 second quarter increased by 27 basis points when compared to the prior year period primarily due to an increase in market interest rates during the first six months of 2022.

As shown in the above tables, the increase in net interest income for the six months ended June 30, 2022 was primarily due to a decrease in the average cost of interest-bearing liabilities when compared to the prior year period. Net interest margin increased to 3.54% for the six months ended June 30, 2022 as compared to 3.28% for the six months ended June 30, 2021. The average interest rate paid on interest-bearing liabilities decreased 24 basis points from 0.61% during the six months ended June 30, 2021 to 0.37% during the six months ended June 30, 2022. The decrease in the average interest rate paid on interest-bearing liabilities was primarily driven by a 61 basis points decrease in the average interest rate paid on time deposits and a $23.5 million decrease in the average balance of time deposits. The decrease in the average interest rate paid on interest-bearing liabilities during the six months ended June 30, 2022 was partially offset by a $5.9 million increase in the average balance of interest-bearing deposits in comparison to the prior year period. The increase in the average balance of interest-bearing deposits was primarily driven by an increase in the average balance of core deposit accounts. The increase in net interest margin was also partly due to an increase in the average yield on interest-earning assets. The average yield on interest-earning assets for the six months ended June 30, 2022 increased by eight basis points when compared to the prior year period primarily due to an increase in market interest rates during the first six months of 2022. The average balance of interest earning assets decreased $6.1 million, or 0.9%, during the six months ended June 30, 2022 when compared to the prior year period.

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Total assets at June 30, 2022 were $694.5 million, a decrease of $19.2 million, or 2.7%, from $713.7 million at December 31, 2021. The decrease in total assets was primarily due to a $40.4 million decrease in cash and cash equivalents and an $11.3 million decrease in securities available for sale, partially offset by a $30.0 million increase in loans receivable, net.

Cash and cash equivalents decreased by $40.4 million, or 59.8%, from $67.6 million at December 31, 2021 to $27.2 million at June 30, 2022. The decrease was primarily due to a $30.8 million cash outflow relating to net loan originations and a $14.9 million cash outflow related to a decrease in deposits.

Securities available for sale decreased by $11.3 million, or 12.7%, from $88.8 million at December 31, 2021 to $77.5 million at June 30, 2022. The decrease was primarily due to a $12.1 million increase in unrealized mark to market losses due to an increase in market interest rates during the six months ended June 30, 2022. The decrease was partially offset by net securities purchases.

39

Net loans receivable increased during the six months ended June 30, 2022 as shown in the table below: