United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY 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 Nasdaq Stock 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, $0.01 par value per share, 25,000,000 shares authorized; 6,836,514 shares issued and 5,710,779 shares outstanding at June 30, 2022 and 6,836,514 shares issued and 5,692,410 shares outstanding at December 31, 2021		68		68
Additional paid-in capital		31,410		31,350
Treasury stock, at cost (1,125,735 shares at June 30, 2022 and 1,144,104 shares 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.


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.

‎

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.

‎

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 (1,984 shares)		-		8		-		21		-		-		-		29
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares granted (20,958 shares)		-		-		196		-		(196)		-		-		-
Compensation plan shares forfeited (1,392 shares)		-		-		(13)		-		13		-		-		-
Compensation plan shares earned (2,057 shares)		-		10		-		-		21		-		-		31
Purchase of treasury stock, at cost (43,834 shares)		-		-		(652)		-		-		-		-		(652)
Cash dividends declared ($0.13 per 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 (1,984 shares)		-		8		-		22		-		-		-		30
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares earned (4,375 shares)		-		24		-		-		42		-		-		66
Purchase of treasury stock, at cost (36,094 shares)		-		-		(547)		-		-		-		-		(547)
Cash dividends declared ($0.13 per share)		-		-		-		-		-		(280)		-		(280)
Balance - June 30, 2021	$	68	$	31,273	$	(12,600)	$	(1,236)	$	(238)	$	67,621	$	1,556	$	86,444

							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 (1,984 shares)		-		8		-		22		-		-		-		30
Compensation plan shares granted (27,132 shares)		-		-		255		-		(255)		-		-		-
Compensation plan shares earned (2,749 shares)		-		16		-		-		26		-		-		42
Cash dividends declared ($0.16 per 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 (1,984 shares)		-		7		-		21		-		-		-		28
Compensation plan shares forfeited (3,062 shares)		-		-		(29)		-		29		-		-		-
Compensation plan shares earned (4,942 shares)		-		29		-		-		45		-		-		74
Purchase of treasury stock, at cost (5,701 shares)		-		-		(85)		-		-		-		-		(85)
Cash dividends declared ($0.16 per 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.

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.

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.

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 no CARES 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.

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


	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, 31 and 29 municipal bonds with a cost of $12.1 million and $10.6 million and fair value of $10.6 million and $11.0 million, 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, 21 and 20 municipal bonds with a cost of $6.3 million and $6.0 million and fair value of $5.5 million and $6.2 million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

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 172 securities in the “unrealized losses less than twelve months” category and 12 securities 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.

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 22,368 shares 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 $8,000 and $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 $9,000 and $20,000, respectively, on the equity securities, which was recorded in non-interest income in the consolidated statements of income. There were no sales 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

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.

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.


	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

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

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 $4.6 million 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

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 $7.0 million 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 $4.6 million 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

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.

No additional 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

	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 $269,000 and $123,000 at 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 $1.7 million 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

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 no loss 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.

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 three active stock-based compensation plans and one expired 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 $102,000 and $107,000 for 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 $174,000 and $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 297,562 shares 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 year period.

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	4.3 years	64,548	$	14.38	5.3 years

Options exercisable at end of period	64,548	$	14.38	4.3 years	51,636	$	14.38	5.3 years

Fair value of options granted	-	$	-		-	$	-

At June 30, 2022, stock options had no intrinsic value and there were no remaining options available for grant under the Stock Option Plan. There were no stock 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

in prior periods. Compensation expense related to the Stock Option Plan amounted to $8,000 for 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 119,025 shares 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 119,025 shares 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 $6,000 for the three months ended June 30, 2021 and $12,000 for 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 180,000 shares of common stock pursuant to grants of restricted stock awards and up to 20,000 shares 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

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 93,741 shares 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 $74,000 and $60,000 for the three months ended June 30, 2022 and 2021, respectively. Compensation expense related to unvested restricted stock awards under the EIP amounted to $116,000 and $85,000 for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, $498,000 of 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	4.3 years	20,000	$	14.38	5.3 years

Options exercisable at end of period	20,000	$	14.38	4.3 years	15,998	$	14.38	5.3 years

Fair value of options granted	-		-		-		-

At June 30, 2022, stock options had no intrinsic value and there were no remaining options available for grant under the EIP. There were no stock 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 $3,000 for the three months ended June 30, 2021 and $5,000 for 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 years of service once the employee is eligible to participate in the ESOP. The Company utilized $2.6 million of the proceeds of its 2006 stock offering to extend a loan to the ESOP and the ESOP used such proceeds to purchase 238,050 shares of stock on the open market at an average price of $10.70 per share, plus commission expenses. As a result of the purchase of shares by the ESOP, total stockholders’ equity of the Company was reduced by $2.6 million. As of June 30, 2022, the balance of the loan to the ESOP was $1.4 million and the fair value of unallocated shares was $1.5 million. As of June 30, 2022, there were 80,403 allocated shares and 111,089 unallocated shares compared to 81,719 allocated shares and 119,024 unallocated shares at June 30, 2021. The ESOP compensation expense was $28,000 for the

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

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.


	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.

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

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	5.5-7.3 years	5.5 years

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	5.9 years	5.9 years

⁽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 $73,000 and valuation allowance of $38,000.

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

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

During the three months ended June 30, 2021, the Company repurchased 36,094 shares of common stock at an average cost of $15.15 per share. During the six months ended June 30, 2021, the Company repurchased 79,928 shares of common stock at an average cost of $15.00 per 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 20,958 shares of common stock out of treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.39 per share to fund awards that had been granted under the plan. During the six months ended June 30, 2021, there were 1,392 shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per 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)

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 $0.18 per share on the Company’s common stock, payable on August 19, 2022 to shareholders of record as of August 2, 2022. Lake Shore, MHC (the “MHC”), which holds 3,636,875 shares, 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 $0.68 per share. The MHC waived $582,000 and $1.2 million of dividends during the three and six months ended June 30, 2022, respectively. Cumulatively the MHC has waived approximately $17.3 million 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Safe-Harbor

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections about the Company’s and the Bank’s industry, and management’s beliefs and assumptions. Words such as anticipates, expects, intends, plans, believes, estimates and variations of such words and expressions are intended to identify forward-looking statements. Such statements are not guarantees of future performance

and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, actual results may differ materially from those expressed or forecast in such forward-looking statements.

Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 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,

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-K filed 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.

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

$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.


	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.

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

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.

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


	At June 30,		At December 31,		Change
	2022		2021		$		%
	(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family⁽¹⁾	$	164,006	$	158,826	$	5,180	3.3	%
Home equity		49,931		48,071		1,860	3.9	%
Commercial		288,975		266,525		22,450	8.4	%
Construction - Commercial		22,615		21,824		791	3.6	%
Total real estate loans		525,527		495,246		30,281	6.1	%
Other Loans:
Commercial		23,358		23,216		142	0.6	%
Consumer		1,333		1,317		16	1.2	%
Total gross loans		550,218		519,779		30,439	5.9	%
Allowance for loan losses		(6,747)		(6,118)		(629)	10.3	%
Net deferred loan costs		3,729		3,545		184	5.2	%
Loans receivable, net	$	547,200	$	517,206	$	29,994	5.8	%

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

The increase in loans receivable, net was primarily due to increases in commercial real estate, one-to four-family real estate, home equity and commercial construction loans. The Bank remains strategically focused on originating shorter duration, adjustable rate commercial real estate loans and commercial business loans to properly manage interest rate risk. During the six months ended June 30, 2022, $4.6 million of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans originated during 2021 or 2020 were forgiven. There are no outstanding PPP loans at June 30, 2022, as compared to $4.6 million at December 31, 2021. During the six months ended June 30, 2022, $90,000 of fee income related to PPP loan forgiveness was recorded as loan interest income on the consolidated statements of income.

Asset Quality. The following table presents information regarding activity in our allowance for loan losses and our asset quality ratios at or for the dates indicated:


	At or for the Six Months Ended June 30,
	2022			2021
	(Dollars in thousands)
Balance at beginning of year	$	6,118		$	5,857
Provision for loan losses		500			650
Charge-offs:
Real estate loans:
Residential, one- to four-family		-			(12)
Home equity		-			-
Commercial		(4)			(3)
Construction – Commercial and Residential, one- to four-family		-			-
Other loans:
Commercial		-			-
Consumer		(41)			(8)
Total charge-offs		(45)			(23)
Recoveries:
Real estate loans:
Residential, one- to four-family		17			-
Home equity		1			-
Commercial		154			2
Construction – Commercial and Residential, one- to four-family		-			-
Other loans:
Commercial		-			-
Consumer		2			5
Total recoveries		174			7
Net recoveries (charge-offs)		129			(16)
Balance at end of period	$	6,747		$	6,491
Average loans outstanding	$	530,458		$	535,938
Allowance for loan losses as a percent of total net loans		1.23	%		1.19	%
Allowance for loan losses as a percent of non-performing loans		239.17	%		249.85	%
Ratio of net recoveries (charge-offs) to average loans outstanding by loan type⁽¹⁾:
Real estate loans:
Residential, one- to four-family		0.02	%		(0.02)	%
Home equity		-	%		-	%
Commercial		0.11	%		-	%
Construction – Commercial		-	%		-	%
Other loans:
Commercial		-	%		-	%
Consumer		(5.99)	%		(0.47)	%
Ratio of net recoveries (charge-offs) to average loans outstanding		0.05	%		(0.01)	%
⁽¹⁾ Annualized
		At June 30,			At December 31,
		2022			2021
Non-performing loans as a percent of total net loans:		0.52	%		1.86	%
Non-performing assets as a percent of total assets:		0.44	%		1.37	%

Total non-performing assets decreased by $6.7 million, or 68.3%, to $3.1 million at June 30, 2022 from $9.8 million at December 31, 2021, primarily due to a decrease in non-accrual loans during the first six months of 2022 which was impacted by a payoff received on one impaired commercial real estate loan. As a result of this payoff, the non-performing loans as a percent of total net loans ratio decreased to 0.52% at June 30, 2022 from 1.86% at December 31, 2021.

Other assets increased $2.5 million, or 55.9%, to $6.9 million at June 30, 2022 from $4.4 million at December 31, 2021. The increase was primarily due to a $2.5 million increase in deferred tax receivables related to unrealized mark to market losses on the debt securities available for sale portfolio due to the increase in market interest rates.

The table below shows changes in deposit balances by type of deposit account between June 30, 2022 and December 31, 2021:


	At June 30,		At December 31,		Change
	2022		2021		$		%
	(Dollars in thousands)
Core Deposits
Demand deposits and NOW accounts:
Non-interest bearing	$	108,147	$	110,676	$	(2,529)	(2.3)	%
Interest bearing		88,719		95,104		(6,385)	(6.7)	%
Money market		169,370		175,886		(6,516)	(3.7)	%
Savings		78,530		74,155		4,375	5.9	%
Total core deposits		444,766		455,821		(11,055)	(2.4)	%
Non-core Deposits
Time deposits		133,502		137,363		(3,861)	(2.8)	%
Total deposits	$	578,268	$	593,184	$	(14,916)	(2.5)	%

The decrease in total deposits was primarily due to a decrease in net core deposits and time deposits. The decrease in net core deposits was primarily due to the use of deposit balances by commercial customers to fund business operations. The decrease in time deposits was primarily due to a decrease in customer demand for these types of deposit products. The Company’s strategic focus continues to be centered on organic growth of low-cost core deposits among its retail and commercial customers in an effort to manage interest expense and strengthen customer relationships.

Long-term debt consisting of advances from the Federal Home Loan Bank of New York (“FHLBNY”), increased by $3.0 million, or 13.7%, from $22.0 million at December 31, 2021 to $25.0 million at June 30, 2022. The additional borrowings were utilized to provide liquidity at a fixed cost for business operations and to partially mitigate interest rate risk.

Total stockholders’ equity decreased $7.4 million, or 8.4%, to $80.6 million at June 30, 2022 from $88.0 million at December 31, 2021. The decrease in stockholders’ equity was primarily attributed to a $9.6 million decrease in accumulated other comprehensive (loss) income as a result of an increase in market interest rates. Total stockholders’ equity was also impacted by dividends paid of $625,000, partially offset by net income of $2.7 million during the first six months of 2022.

Comparison of Results of Operations for the Three Months Ended June 30, 2022 and 2021

General. Net income was $1.7 million for the three months ended June 30, 2022, or $0.29 per diluted share, an increase of $691,000, or 69.6%, compared to net income of $1.0 million, or $0.17 per diluted share, for the three months ended June 30, 2021. Net income for the three months ended June 30, 2022 reflected a $547,000

increase in net interest income, a $400,000 decrease in provision for loans losses and a $37,000 increase in non-interest income, which was partially offset by a $182,000 increase in non-interest expense and a $111,000 increase in income tax expense when compared to the three months ended June 30, 2021.

Interest Income. Interest income increased by $262,000, or 4.2%, to $6.4 million for the three months ended June 30, 2022 when compared to the three months ended June 30, 2021. Loan interest income increased by $169,000, or 3.0%, to $5.9 million for the three months ended June 30, 2022 as compared to the prior year period primarily due to an increase in the average yield on loans. The average yield on loans was 4.33% for the three months ended June 30, 2022 as compared to 4.21% for the three months ended June 30, 2021 primarily due to an increase in interest rates since June 30, 2021. The average balance of loans for the three months ended June 30, 2022 was $542.0 million compared to the average balance of loans of $541.1 million for the three months ended June 30, 2021.

Investment interest income increased $66,000, or 14.3%, to $527,000 for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to a $6.4 million, or 8.3%, increase in the average balance of the investment portfolio from $76.8 million for the three months ended June 30, 2021 to $83.2 million for the three months ended June 30, 2022. The increase in the average balance was primarily due to securities purchases which largely consisted of municipal bond and mortgage backed securities, partially offset by securities paydowns and redemptions of callable municipal bonds. The increase in investment income was also due to a 13 basis points increase in the average yield earned on the investment portfolio. The average yield was 2.53% for the three months ended June 30, 2022 as compared to 2.40% for the three months ended June 30, 2021. The increase in the average yield was primarily due to an increase in interest rates since June 30, 2021.

Other interest income increased by $27,000, or 337.5%, to $35,000 for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The average yield increased to 0.72% for the three months ended June 30, 2022 from 0.07% for the three months ended June 30, 2021, while the average balance of other interest earning assets decreased from $44.7 million for the three months ended June 30, 2021 to $19.4 million for the three months ended June 30, 2022. The increase in the average yield on other interest earning assets was primarily due to higher average rates earned on excess funds, as a result of the increase in short term market interest rates since June 30, 2021. The decrease in the average balance of other interest earning assets was primarily due to the use of excess funds to fund loan originations.

Interest Expense. Interest expense decreased $285,000, or 38.6%, to $453,000 for the three months ended June 30, 2022 compared to $738,000 for the three months ended June 30, 2021 primarily due to a decrease in interest paid on deposits. Interest paid on deposits decreased by $254,000, or 43.6%, to $329,000 for the three months ended June 30, 2022 when compared to the three months ended June 30, 2021. The decrease in interest expense on deposits was primarily due to a 21 basis points decrease in the average interest rate paid on deposit accounts and a $23.8 million, or 15.3%, decrease in the average balance of time deposits. The decrease in the average balance of time deposits was primarily due to a decrease in customer demand for these types of deposit products. The average balance of deposits for the three months ended June 30, 2022 was $474.7 million with an average rate of 0.28% compared to the average balance of deposits of $474.6 million and an average rate of 0.49% for the three months ended June 30, 2021. The decrease in the average rate paid on deposits was primarily due to the maturity of higher rate time deposits since June 30, 2021.

Interest expense on long-term debt decreased by $30,000, or 21.6%, to $109,000 for the three months ended June 30, 2022 when compared to the three months ended June 30, 2021 primarily due to a decrease in the average balance of advances from the FHLBNY. The average balance of advances from the FHLBNY for the three months ended June 30, 2022 was $22.2 million with an average rate of 1.97% compared to an average balance of $28.0 million and an average rate of 1.99% for the three months ended June 30, 2021. The decrease in average balance was due to the Company paying off maturing debt with excess cash on hand since June 30, 2021.

Provision for Loan Losses. A $100,000 provision to the allowance for loan losses was recorded during the three months ended June 30, 2022 compared to $400,000 for the three months ended June 30, 2021. The

Company recorded a specific reserve related to the downgrade and impairment of one commercial real estate loan during the second quarter of 2021.

We complete a comprehensive quarterly evaluation to determine our provision for loan losses. The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.

During the three months ended June 30, 2022, the Company recorded a credit provision of $226,000 for commercial real estate and construction – commercial loans. This consisted of a $154,000 recovery on a previously impaired commercial real estate loan that paid off during the 2nd quarter of 2022. The credit provision was also impacted by a decrease in general allowance due to a decrease in commercial real estate and construction – commercial loans and a decrease in criticized and classified loans for these loan types during the three months ended June 30, 2022. A $36,000 net provision was recorded for commercial business loans primarily due to an increase in unclassified loans for this loan type during the three months ended June 30, 2022. The net provision for commercial business loans was partially offset by a decrease in criticized and classified loans for this loan type during the three months ended June 30, 2022. A $125,000 net provision was recorded for one-to four-family, home equity and consumer loans that primarily reflected adjustments to certain qualitative factors and an increase in classified loans for these loan types during the three months ended June 30, 2022. A $165,000 provision was recorded for the unallocated category of loan losses to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

During the three months ended June 30, 2021, the Company recorded a $662,000 net provision for commercial real estate and construction – commercial loans. This consisted of a $495,000 provision for a specific reserve related to the downgrade and impairment of one commercial real estate loan during the period. It also included a $167,000 general allowance to reflect inherent losses within the portfolio due to $11.0 million of organic growth during the 2021 period. A $79,000 net credit provision was recorded for one-to four-family, home equity and consumer loans that primarily reflected adjustments to certain qualitative factors for these loan types and a decrease in classified loans, partially offset by loan charge-offs for these loans types during the three months ended June 30, 2021. A $26,000 net credit provision was recorded for commercial business loans which primarily reflected adjustments to certain qualitative factors for this loan type. A $57,000 unallocated credit provision was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

Refer to Note 5 of the Notes to the Consolidated Financial Statements for additional details on the provision for loan losses.

Non-Interest Income. Non-interest income increased by $37,000, or 5.4%, to $720,000 for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase was primarily due to a $60,000 increase in unrealized gains on interest rate swaps due to an increase in long-term interest rates during the three months ended June 30, 2022. The increase was also due to a $45,000, or 16.7%, increase in service charges and fees during the three months ended June 30, 2022 as compared to the prior year period. The increase in non-interest income was partially offset by $58,000 decrease in gains on the sale of residential mortgage loans due to the impact of a rising interest rate environment, a lower volume of loans sold, and less income earned per loan at time of sale.

Non-Interest Expense. Non-interest expense increased by $182,000, or 4.1%, to $4.6 million for the three months ended June 30, 2022 as compared to $4.4 million for the three months ended June 30, 2021. Salary and employee benefits expense increased $217,000, or 9.7%, primarily due to a $118,000 decrease in deferred salaries associated with a decrease in the number of loans originated during the three months ended June 30, 2022 when compared to the three months ended June 30, 2021. The increase was also due to annual salary increases. Occupancy and equipment expense increased $120,000, or 18.2%, primarily due to an increase in maintenance contracts and equipment expenses related to the core processing system conversion completed in the third quarter of 2021 and the conversion to a cloud-based computing system completed in the second quarter of 2022. Other expenses increased $58,000, or 17.1%, primarily due to foreclosure related expenses. The increase in non-interest expense was partially offset by a $145,000, or 30.2%, decrease in professional services

primarily due to one-time costs associated with the Company’s core processing system conversion during the three months ended June 30, 2021.

Income Taxes Expense. Income tax expense was $337,000 for the three months ended June 30, 2022, an increase of $111,000, or 49.1%, as compared to $226,000 for the three months ended June 30, 2021. The increase in income tax expense was primarily due to an increase in income before taxes, partially offset by a decrease in the effective tax rate. The effective tax rate for the three months ended June 30, 2022 and 2021 was 16.7% and 18.5%, respectively. The decrease in the effective tax rate was primarily due to an increase in the mix of tax-exempt income derived from our municipal bond portfolio in relation to our pre-tax income.

Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021

General. Net income was $2.7 million for the six months ended June 30, 2022, or $0.47 per diluted share, an increase of $64,000, or 2.4%, compared to net income of $2.7 million, or $0.45 per diluted share, for the six months ended June 30, 2021. Net income for the six months ended June 30, 2022 reflected a $745,000 increase in net interest income and a $150,000 decrease in provision for loans losses, which was partially offset by a $761,000 increase in non-interest expense, a $51,000 decrease in non-interest income and a $19,000 increase in income tax expense when compared to the six months ended June 30, 2021.

Interest Income. Interest income increased by $139,000, or 1.1%, to $12.4 million for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021. Loan interest income increased by $12,000, or 0.1%, to $11.3 million for the six months ended June 30, 2022 as compared to the prior year period. The average balance of loans for the six months ended June 30, 2022 was $530.5 million with an average yield of 4.26% compared to the average balance of loans of $535.9 million and an average yield of 4.21% for the six months ended June 30, 2021.

Investment interest income increased $91,000, or 9.7%, to $1.0 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to an $8.4 million, or 10.8%, increase in the average balance of the investment portfolio from $78.0 million for the six months ended June 30, 2021 to $86.4 million for the six months ended June 30, 2022. The increase in the average balance was primarily due to securities purchases which largely consisted of municipal bond and mortgage backed securities, partially offset by securities paydowns and redemptions of callable municipal bonds. The average yield was 2.40% for the six months ended June 30, 2021 as compared to 2.38% for the six months ended June 30, 2022.

Other interest income increased by $36,000, or 257.1%, to $50,000 for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The average yield increased to 0.34% for the six months ended June 30, 2022 from 0.07% for the six months ended June 30, 2021, while the average balance of other interest earning assets decreased from $38.3 million for the six months ended June 30, 2021 to $29.2 million for the six months ended June 30, 2022. The increase in the average yield on other interest earning assets was primarily due to higher average rates earned on excess funds, as a result of the increase in short term market interest rates since June 30, 2021. The decrease in the average balance of other interest earning assets was primarily due to the use of excess funds to fund loan originations.

Interest Expense. Interest expense decreased $606,000, or 39.7%, to $919,000 for the six months ended June 30, 2022 compared to $1.5 million for the six months ended June 30, 2021 primarily due to a decrease in interest paid on deposits. Interest paid on deposits decreased by $534,000, or 44.1%, to $676,000 for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021. The decrease in interest expense on deposits was primarily due to a 23 basis points decrease in the average interest rate paid on deposit accounts and a $23.5 million, or 14.3%, decrease in average balance of time deposits for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The decrease in average balance of time deposits was primarily due to a decrease in customer demand for these types of deposit products. The average balance of deposits for the six months ended June 30, 2022 was $476.7 million with an average rate of 0.28% compared to the average balance of deposits of $470.8 million and an average rate of 0.51% for the six months ended June 30, 2021. The decrease in the average rate paid on deposits was primarily due to the maturity of higher rate time deposits since June 30, 2021.

Interest expense on long-term debt decreased by $69,000, or 24.5%, to $213,000 for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021 primarily due to a decrease in the average balance of advances from the FHLBNY. The average balance of advances from the FHLBNY for the six months ended June 30, 2022 was $22.1 million with an average rate of 1.95% compared to an average balance of $28.5 million and an average rate of 2.00% for the six months ended June 30, 2021. The decrease in average balance was due to the Company paying off maturing debt with excess cash on hand since June 30, 2021.

Provision for Loan Losses. A $500,000 provision to the allowance for loan losses was recorded during the six months ended June 30, 2022 compared to $650,000 for the six months ended June 30, 2021. During the six months ended June 30, 2022, the Company’s provision for loan losses was primarily due to an increase in commercial real estate and construction – commercial loan balances when compared to the same period in 2021. The provision for the six months ended June 30, 2021 was primarily due to a specific reserve associated with the downgrade and impairment of one commercial real estate loan and general reserves for loan originations during the period.

During the six months ended June 30, 2022, the Company recorded a net provision of $394,000 for commercial real estate and construction – commercial loans. This consisted of a $506,000 provision in general allowance due to an increase in commercial real estate and construction – commercial loans during the six months ended June 30, 2022, driven by organic loan growth in these loan categories. It also included a $42,000 increase in general allowance due to an increase in criticized and classified commercial real estate loans during the six months ended June 30, 2022. The net provision was partially offset by a $154,000 recovery on a previously impaired commercial real estate loan that paid off during the six months ended June 30, 2022. A $52,000 net credit provision was recorded for commercial business loans primarily due to a decrease in criticized and classified loans for this loan type. The net credit provision for commercial business loans was partially offset by an increase in unclassified loans for this loan type during the six months ended June 30, 2022. A $198,000 net provision was recorded for one-to four-family, home equity and consumer loans that primarily reflected adjustments to certain qualitative factors and an increase in classified loans for these loan types during the six months ended June 30, 2022. A $40,000 credit provision was recorded for the unallocated category of loan losses to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

During the six months ended June 30, 2021, the Company recorded an $810,000 net provision for commercial real estate and construction – commercial loans. This consisted of a $495,000 provision for a specific reserve related to the downgrade and impairment of one commercial real estate loan during the period. The provision also reflected a $289,000 general allowance to reflect inherent losses within the portfolio due to $20.3 million of organic growth during the 2021 period. It also included a $26,000 provision to reflect the $1.0 million increase in criticized and classified commercial real estate loans. A $115,000 net credit provision was recorded for commercial business loans which reflected a $92,000 credit allowance to account for a $256,000 decrease in criticized and classified commercial business loans and adjustments to certain qualitative factors. Furthermore, a $24,000 credit allowance to account for a $2.4 million decrease in outstanding commercial business loans, excluding PPP loans, during the six months ended June 30, 2021 was recorded. A $44,000 unallocated credit provision was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

Refer to Note 5 of the Notes to the Consolidated Financial Statements for additional details on the provision for loan losses.

Non-Interest Income. Non-interest income decreased by $51,000, or 3.4%, to $1.5 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The decrease was primarily due to a $227,000 decrease in gains on the sale of residential mortgage loans due to the impact of a rising interest rate environment, a lower volume of loans sold, and less income earned per loan at time of sale. The decrease in non-interest income was partially offset by a $157,000 increase in unrealized gains on interest rate swaps due

to an increase in long-term interest rates during the six months ended June 30, 2022. The decrease was also partially offset by a $57,000, or 11.4%, increase in service charges and fees during the six months ended June 30, 2022 as compared to the prior year period.

Non-Interest Expense. Non-interest expense increased by $761,000, or 9.1%, to $9.1 million for the six months ended June 30, 2022 as compared to $8.3 million for the six months ended June 30, 2021. Salary and employee benefits expense increased $523,000, or 12.0%, primarily due to a $403,000 decrease in deferred salaries associated with a decrease in the number of loans originated during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021. The increase was also due to annual salary increases. Other expenses increased $275,000, or 42.8%, primarily due to telephone, loan and foreclosure related expenses. Occupancy and equipment expense increased $195,000, or 14.6%, primarily due to an increase in maintenance contracts and equipment expenses related to the core processing system conversion completed in the third quarter of 2021 and the conversion to a cloud based computing system in the second quarter of 2022. The increase in non-interest expense was partially offset by a $115,000, or 15.4% decrease in professional services primarily due to one-time costs associated with the Company’s core processing system conversion during the six months ended June 30, 2021. The increase in total non-interest expenses was also partially offset by lower expenses for data processing, advertising, postage and supplies during the six months ended June 30, 2022 when compared to the same period in 2021.

Income Taxes Expense. Income tax expense was $544,000 for the six months ended June 30, 2022, an increase of $19,000, or 3.6%, as compared to $525,000 for the six months ended June 30, 2021. The increase in income tax expense was primarily due to an increase in income before taxes. The effective tax rate for the six months ended June 30, 2022 and 2021 was 16.5% and 16.4%, respectively.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business. Liquidity is primarily needed to fund loan commitments, to pay the deposit withdrawal requirements of our customers as well as to fund current and planned expenditures. Our primary sources of funds consist of deposits, scheduled amortization and prepayments of loans and securities, maturities and sales of investments and loans, excess cash, interest earning deposits at other financial institutions, and funds provided from operations. We have written agreements with the FHLBNY, which allows us to borrow the maximum lending values designated by the type of collateral pledged. As of June 30, 2022, the maximum amount that we can borrow from the FHLBNY was $113.0 million and was collateralized by a pledge of certain fixed-rate residential, one- to four-family loans. At June 30, 2022, we had outstanding advances under this agreement of $25.0 million. We have a written agreement with the Federal Reserve Bank discount window for overnight borrowings which is collateralized by a pledge of our securities and allows us to borrow up to the value of the securities pledged, which was equal to a book value of $12.1 million and a fair value of $10.6 million as of June 30, 2022. There were no balances outstanding with the Federal Reserve Bank at June 30, 2022. We have also established lines of credits with correspondent banks for $42.0 million, of which $40.0 million is unsecured and the remaining $2.0 million will be secured by a pledge of our securities when a draw is made. There were no borrowings on these lines as of June 30, 2022.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, calls of investment securities, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Our primary investing activities include the origination of loans and the purchase of investment securities. For the six months ended June 30, 2022, we originated loans of approximately $92.9 million as compared to approximately $81.0 million of loans originated during the six months ended June 30, 2021. Loan originations exceeded principal repayments and other deductions during the first six months of 2022 by $30.8 million. Purchases of investment securities totaled $6.1 million and $9.2 million during the six months ended June 30, 2022 and 2021, respectively. These activities were funded primarily through deposit growth, principal payments received on loans and securities, borrowings and cash reserves.

As described elsewhere in this report, the Company has loan commitments to borrowers and borrowers have unused overdraft lines of protection, unused home equity lines of credit and unused commercial lines of credit that may require funding at a future date. The Company believes it has sufficient funds to fulfill these commitments, including sources of funds available through the use of FHLBNY advances or other liquidity sources. Total deposits were $578.3 million at June 30, 2022, as compared to $593.2 million at December 31, 2021. Approximately $63.2 million of time deposit accounts are scheduled to mature within one year as of June 30, 2022. Based on our deposit retention experience, current pricing strategy, and competitive pricing policies, we anticipate that a significant portion of these time deposits will remain with us following their maturity.

We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLBNY, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLBNY in the future.

We do not anticipate any material capital expenditures in 2022. We do not have any balloon or other payments due on any long-term obligations, other than the borrowing agreements noted above.

Capital

Federal regulations require a federal savings bank to meet certain capital standards, as discussed in the “Supervision and Regulation - Federal Banking Regulation – Capital Requirements” section included in our Annual Report on Form 10-K for the year ended December 31, 2021.

The federal banking agencies have developed a “Community Bank Leverage Ratio” (bank’s tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A “qualifying community bank” may elect to utilize the Community Bank Leverage Ratio in lieu of the general applicable risk-based capital requirements under Basel III. If the community bank exceeds this ratio it will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Basel III. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio at 9.0%. The Bank elected to be subject to this new definition when it became effective on January 1, 2020.

As of June 30, 2022, the Bank was considered a “qualifying community bank” and its Community Bank Leverage Ratio was 12.02% so it was deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.

Off-Balance Sheet Arrangements

Other than loan commitments and two interest rate swap agreements that are not designated as hedging instruments, as previously noted, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Refer to Note 7 in the Notes to our Consolidated Financial Statements for a summary of loan commitments outstanding as of June 30, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Disclosure is not required as the Company is a smaller reporting company.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II

Item 1A. Risk Factors.

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents a material update and addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The Bank is a party to a formal written agreement (the “Agreement”) with the OCC relating to information technology, security and automated clearing house program deficiencies. Failure to comply with the Agreement may result in further regulatory enforcement actions. We expect that our non-interest expense will increase as a result of remediation actions we will take in order to comply with the requirements of the Agreement which may adversely affect our financial performance.

Effective as of July 13, 2022, the Bank and the OCC entered into the Agreement. The Agreement provides, among other things, that the Bank will take the following actions within specified time frames as set forth in the Agreement:

create a compliance committee to monitor and oversee the Bank’s compliance with the Agreement and submit quarterly reports to the Board of Directors of the Bank and the OCC;

ensure that the Bank has competent management in place, review the capabilities, experience, qualifications and performance of the Bank’s management, including, but not limited to, the Chief Executive Officer, Chief Operating Officer, Chief Technology Officer and Information Security Officer, and the Board will determine whether management changes should be made;

if an officer will continue in his or her position, but the Board determines the officer’s depth of skills needs improvement, it will develop and implement a written program to improve the officer’s supervision and management of the Bank;

develop, adopt and implement a written program to effectively assess and manage the Bank’s information technology (“IT”) activities, commensurate with the level of risk and complexity of the Bank’s IT activities, subject to review and prior written determination of no supervisory objection by the OCC;

develop, adopt and implement a written information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer information, subject to review and prior written determination of no supervisory objection by the OCC; and

develop, adopt and implement a written automated clearing house risk management program, subject to review and prior written determination of no supervisory objection by the OCC.

As a result of the Agreement, the Bank must also obtain OCC written non-disapproval before effecting any change in its directors, senior executive officers or executive officers.

Management and the Bank’s Board of Directors are committed to promptly addressing the action items included in the Agreement. However, we may not be successful in complying fully with the provisions of the Agreement. The OCC will determine whether or not the provisions of the Agreement have been met. In the event we are in material non-compliance with the terms of the Agreement, the OCC has the authority to subject us to more restrictive enforcement actions, such as a cease and desist order, civil money penalties and removal of directors and officers from their positions with the Bank. Moreover, we expect that our non-interest expense will increase as a result of remediation actions we will take in order to comply with the requirements of the Agreement which may adversely affect our financial performance.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each month of the quarter ended June 30, 2022:

COMPANY PURCHASES OF EQUITY SECURITIES



Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs⁽¹⁾

April 1 through April 30, 2022	-	$	-	-	36,327
May 1 through May 31, 2022	5,701		14.91	5,701	30,626
June 1 through June 30, 2022	-		-	-	30,626
Total	5,701	$	14.91	5,701	30,626

⁽¹⁾On August 13, 2021, our Board of Directors (the “Company”) adopted a new stock repurchase program. The stock repurchase program authorizes the Company to repurchase up to an aggregate of 106,327 shares, or approximately 5% of its outstanding shares, excluding the shares held by Lake Shore, MHC. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase plan does not have an expiration date and superseded all of the prior stock repurchase programs.

Item 6. Exhibits



			31.1				Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
			31.2				Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*
			32.1				Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
			32.2				Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
			101.INS				Inline XBRL Instance Document^*
			101.SCH				Inline XBRL Taxonomy Extension Schema Document^*
			101.CAL				Inline XBRL Taxonomy Calculation Linkbase Document^*
			101.DEF				Inline XBRL Taxonomy Extension Definition Linkbase Document^*
			101.LAB				Inline XBRL Taxonomy Label Linkbase Document^*
			101.PRE				Inline XBRL Taxonomy Presentation Linkbase Document^*
			104				Cover Page Interactive Date File (formatted as inline XBRL and contained in Exhibit 101)*

________________

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		LAKE SHORE BANCORP, INC.
		(Registrant)

August 15, 2022	By:	/s/ Daniel P. Reininga
		Daniel P. Reininga
		President and Chief Executive Officer
		(Principal Executive Officer)

August 15, 2022	By:	/s/ Rachel A. Foley
		Rachel A. Foley
		Chief Financial Officer
		(Principal Financial Officer)

August 15, 2022	By:	/s/ Steven W. Schiavone
		Steven W. Schiavone
		Controller
		(Principal Accounting Officer)

Exhibit 311

Exhibit 31.1

CERTIFICATION

PURSUANT TO 17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel P. Reininga, certify that:

I have reviewed this quarterly report on Form 10-Q of Lake Shore Bancorp, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


August 15, 2022	/s/ Daniel P. Reininga
	Daniel P. Reininga
	President and Chief Executive Officer

Exhibit 312

Exhibit 31.2

CERTIFICATION

PURSUANT TO 17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Rachel A. Foley, certify that:

I have reviewed this quarterly report on Form 10-Q of Lake Shore Bancorp, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


August 15, 2022	/s/ Rachel A. Foley
	Rachel A. Foley
	Chief Financial Officer

Exhibit 321

Exhibit 32.1

CERTIFICATE PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lake Shore Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel P. Reininga, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.


August 15, 2022	/s/ Daniel P. Reininga
	Daniel P. Reininga
	President and Chief Executive Officer

Exhibit 322

Exhibit 32.2

CERTIFICATE PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lake Shore Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rachel A. Foley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and


August 15, 2022	/s/ Rachel A. Foley
	Rachel A. Foley
	Chief Financial Officer

lsbk-20220630.xsd
Attachment: EX-101.SCH

lsbk-20220630_cal.xml
Attachment: EX-101.CAL

lsbk-20220630_def.xml
Attachment: EX-101.DEF

lsbk-20220630_lab.xml
Attachment: EX-101.LAB

lsbk-20220630_pre.xml
Attachment: EX-101.PRE