The interim unaudited consolidated financial statements include the accounts of Lake Shore Bancorp, Inc., a federal corporation (the “Company”, "Lake Shore Bancorp," “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. On July 18, 2025, the Company was succeeded by Lake Shore Bancorp, Inc., a Maryland corporation and the Bank became Lake Shore Bank, a New York chartered commercial bank as more fully described below. The Company refers to Lake Shore Bancorp, Inc., a Maryland corporation on and after July 18, 2025.

The interim unaudited consolidated financial statements included herein as of June 30, 2025 and for the three and six months ended June 30, 2025 and 2024 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), 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 balance sheet at December 31, 2024 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 unaudited 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, 2024. The consolidated statements of income for the three and six months ended June 30, 2025 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2025.

To prepare these unaudited 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 credit losses, securities valuation estimates, and income taxes.

Changes in Accounting Estimates

During the first quarter of 2025, the Company transitioned its allowance for credit losses ("ACL") methodology for loans and unfunded commitments from a vintage model to a discounted cash flow model for all loan segments and loans that are not individually evaluated. In particular, loan-level probability of default ("PD") and loss severity (also referred to as loss given default ("LGD")) is applied to derive a baseline expected loss as of the valuation date. These expected default and severity rates, which are regression-derived and based on benchmark historical performance data, are calibrated to incorporate the Company's reasonable and supportable forecasts of future losses as well as any necessary qualitative adjustments. The loan segments utilized in the discounted cash flow model are consistent with those used in the vintage model and previously disclosed by the Company.

The Company relies on benchmark and peer data when deriving its best estimate of PD, LGD, and other model assumptions, including prepayment and curtailment speeds, with consideration given to a bank's size and geographical region in relation to the Company's when included within respective peer data sets. As part of the Company's estimation process, it assesses the reasonableness of data, assumptions, and model methodology utilized to derive its allowance for credit losses.

For each of the modeled segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for various elements including, but not limited to, estimated prepayment speeds, curtailment rates, PD rates, and LGD rates. The Company utilizes national unemployment and gross domestic product ("GDP") forecasts calibrated to peer benchmark data for its reasonable and supportable forecasting of expected default within the cash flow model. To further adjust the allowance for credit losses for expected losses not already reflected within the quantitative component of the calculation, the Company considers qualitative factors for current conditions known as of the valuation date, including, but not limited to, trends in the nature and volume of the loan portfolio, loan concentrations, changes in the experience, ability and depth of the Company’s lending management, and national and local economic conditions.

The allowance for credit losses is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that the Company believes do not share risk characteristics are evaluated on an individual basis. Non-accrual loans are individually evaluated and when deemed appropriate, are assigned a reserve based on such evaluation, which may be determined by the underlying collateral value or the loan-level estimated discounted cash flows. The Company considers several factors in its determination of whether to classify loans as collateral-dependent and individually evaluate such loans. When loans are considered to be collateral-dependent, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

These refinements have been accounted for as changes in accounting estimates under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250 - Accounting Changes and Error Corrections, with prospective application beginning in the period of change.

These changes, along with attribution changes in the Bank's loan portfolio as of the valuation date, resulted in a $37,000 increase in the ACL for loans and a $9,000 increase in the reserve for unfunded commitments at March 31, 2025 when compared to December 31, 2024.

Corporate Structure

Effective July 18, 2025, Lake Shore Bancorp, Inc. (“Lake Shore Bancorp”) incorporated under the laws of the State of Maryland became the banking holding company of Lake Shore Bank, a New York commercial bank and its only wholly-owned subsidiary.

On January 27, 2025, Lake Shore, MHC, the former parent mutual holding company of Lake Shore Bancorp, Inc., a federal corporation ("Lake Shore Federal Bancorp"), adopted a Plan of Conversion and Reorganization (the "Plan") pursuant to which Lake Shore, MHC, would undertake a "second-step" conversion and Lake Shore Savings Bank, a federally chartered savings bank, the wholly-owned subsidiary of Lake Shore Bancorp Federal, would reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure.

Pursuant to the Plan, (i) Lake Shore Savings Bank became the wholly-owned subsidiary of Lake Shore Bancorp, converted its charter to a New York chartered commercial bank, and was renamed as Lake Shore Bank, (ii) the shares of common stock of Lake Shore Federal Bancorp owned by persons other than Lake Shore, MHC (the shares owned by Lake Shore, MHC were canceled) were converted into shares of common stock of Lake Shore Bancorp based on an exchange ratio designed to preserve the percentage ownership interests of such persons (excluding shares of common stock of Lake Shore Bancorp purchased in the stock offering described below and cash received in lieu of issuance of fractional shares of common stock of Lake Shore Bancorp, and as adjusted to reflect certain assets held by Lake Shore, MHC), and (iii) Lake Shore Bancorp offered and sold shares of common stock, representing the ownership interest of Lake Shore, MHC in Lake Shore Federal Bancorp, in a subscription offering. The number and price of shares of Lake Shore Bancorp common stock sold in the offering and the exchange ratio were based on Lake Shore Bancorp's pro forma market value on a fully converted basis, as determined by an independent appraisal.

The Plan was subject to regulatory approval as well as approval by the depositors of Lake Shore Savings Bank and by Lake Shore Federal Bancorp stockholders (including approval by the holders of a majority of the outstanding shares of Lake Shore Federal Bancorp's common stock held by persons other than the MHC). The Plan received all required regulatory, depositor and stockholder approval, and the conversion and offering were consummated on July 18, 2025.

The conversion was consummated through the merger of Lake Shore, MHC with and into Lake Shore Federal Bancorp, followed by the merger of Lake Shore Federal Bancorp with and into Lake Shore Bancorp, which occurred on July 18, 2025. In the subscription offering, Lake Shore Bancorp raised gross proceeds of $49.5 million by selling 4,950,460 shares of its common stock (approximately the midpoint of the offering range) at $10.00 per share to depositors of the Bank.

As part of the conversion transaction, each outstanding share of Lake Shore Federal Bancorp common stock owned by the public stockholders of Lake Shore Federal Bancorp (stockholders other than Lake Shore, MHC) as of the closing date were converted into shares of Lake Shore Bancorp's common stock based on an exchange ratio of 1.3549 shares of Lake Shore Bancorp's common stock for each share of Lake Shore Federal Bancorp common stock so that Lake Shore Federal Bancorp's existing public stockholders would own approximately the same percentage of Lake Shore Bancorp's common stock as they owned of Lake Shore Federal Bancorp's common stock immediately prior to the conversion. A total of 7,825,501 shares of common stock were outstanding following the completion of the stock offering. Earnings per share and other share information disclosed herein do not reflect the effect of Lake Shore Bancorp's conversion and related stock offering.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of June 30, 2025 for items that should potentially be recognized or disclosed in the unaudited consolidated financial statements. The evaluation was conducted through the date these unaudited consolidated financial statements were issued.

As previously disclosed on a Current Report on Form 8-K, the Board of Directors of the Company declared a cash dividend of $0.09 per share on its outstanding common stock. The dividend is expected to be paid on August 13, 2025 to stockholders of record as of August 4, 2025.