Lake Shore Bancorp, Inc. Announces Second Quarter 2024 Financial Results "I am pleased with Lake Shore's earnings for the second quarter of 2024 and year-to-date. We continue to remain disciplined and focused on executing our strategic plan and it is beginning to bear results," stated Kim C. Liddell, President, CEO, and Director. "I am proud of our team and their efforts to enhance shareholder value and the overall performance of the organization." • Net income increased to $1.1 million during the second qu ...

United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 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 inco ...

[Executive Summary & Financial Highlights](index=1&type=section&id=Executive%20Summary%20%26%20Financial%20Highlights) This section provides an overview of Q1 2024 performance, key financial metrics, and strategic highlights [Q1 2024 Performance Overview](index=1&type=section&id=Q1%202024%20Performance%20Overview) Lake Shore Bancorp, Inc. reported a significant decrease in Q1 2024 net income, primarily due to lower net interest income and changes in credit loss provision Q1 2024 Net Income and EPS | Metric | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Net Income | $1.0 million | $1.7 million | -$0.7 million | -39.8% | | Diluted EPS | $0.17 | $0.29 | -$0.12 | -41.4% | - Net income was negatively impacted by a decrease in net interest income and the period-over-period change in the provision for credit losses, partially offset by reduced non-interest expense and increased non-interest income[2](index=2&type=chunk) [Key Financial Highlights](index=1&type=section&id=Key%20Financial%20Highlights) The company increased deposits, reduced wholesale funding, improved book value per share, and maintained a "well capitalized" status - Total deposits increased by **$3.8 million**, or **0.6%**, since December 31, 2023, with uninsured deposits at **12.6%** as of March 31, 2024[3](index=3&type=chunk) - Reliance on wholesale funding was reduced by repaying **$11.0 million** of brokered CDs and **$10.0 million** of Federal Home Loan Bank of New York (FHLBNY) borrowings[3](index=3&type=chunk) - Members approved a dividend waiver for up to **$0.72 per share** for dividends potentially declared through April 2, 2025[3](index=3&type=chunk) Capital and Shareholder Metrics | Metric | March 31, 2024 | December 31, 2023 | Change (%) | | :----- | :------------- | :---------------- | :--------- | | Book Value per Share | $15.22 | $15.17 | 0.3% | | Tier 1 Leverage Ratio | 13.05% | N/A | N/A | | Total Risk-Based Capital Ratio | 18.13% | N/A | N/A | [Detailed Financial Performance Analysis](index=2&type=section&id=Detailed%20Financial%20Performance%20Analysis) This section provides an in-depth analysis of net interest income, non-interest income, and non-interest expense for the quarter [Net Interest Income](index=2&type=section&id=Net%20Interest%20Income) Net interest income decreased significantly in Q1 2024, accompanied by compression in net interest margin and interest rate spread Net Interest Income and Margin Trends | Metric | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Net Interest Income | $5.1 million | $6.3 million | -$1.2 million | -18.4% | | Net Interest Margin | 3.10% | 3.76% | -0.66% | -17.6% | | Interest Rate Spread | 2.55% | 3.48% | -0.93% | -26.7% | [Interest Income](index=2&type=section&id=Interest%20Income) Interest income increased due to a higher average yield on interest-earning assets, despite a slight decrease in average asset balance Interest Income Drivers | Metric | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Interest Income | $8.6 million | $8.0 million | $0.658 million | 8.3% | | Avg Yield on Interest-Earning Assets | +45 bps | N/A | N/A | N/A | | Avg Balance of Interest-Earning Assets | -1.1% | N/A | N/A | N/A | [Interest Expense](index=2&type=section&id=Interest%20Expense) Interest expense surged due to a substantial increase in the average interest rate paid on interest-bearing liabilities, particularly time deposits Interest Expense Components | Metric | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Interest Expense | $3.5 million | $1.7 million | $1.8 million | 109.4% | | Avg Interest Rate on Interest-Bearing Liabilities | +138 bps | N/A | N/A | N/A | | Interest Expense on Time Deposits | +$1.3 million | N/A | N/A | N/A | | Avg Interest Rate on Time Deposits | +192 bps | N/A | N/A | N/A | | Avg Time Deposit Balances | +21.6% | N/A | N/A | N/A | | Interest Expense on Borrowed Funds | -$115,000 | N/A | N/A | -33.1% | [Non-Interest Income](index=2&type=section&id=Non-Interest%20Income) Non-interest income increased, driven by higher earnings from BOLI restructuring and a favorable variance from interest rate swaps Non-Interest Income Performance | Metric | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Non-Interest Income | $707,000 | $554,000 | $153,000 | 27.6% | - Increase primarily due to a **$110,000** increase in earnings on bank-owned life insurance (BOLI) in connection with restructuring during Q4 2023[7](index=7&type=chunk) - Favorable variance of **$49,000** related to interest rate swaps during Q1 2024 as a result of unwinding the swaps during 2023[7](index=7&type=chunk) [Non-Interest Expense](index=2&type=section&id=Non-Interest%20Expense) Non-interest expense decreased due to significant reductions in professional services and advertising, partially offset by higher FDIC insurance and data processing costs Non-Interest Expense Breakdown | Metric | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Non-Interest Expense | $5.0 million | $5.5 million | -$0.522 million | -9.5% | - Professional services expense decreased by **$523,000**, or **61.5%**[8](index=8&type=chunk) - Advertising costs decreased by **$127,000**, or **71.3%**[8](index=8&type=chunk) - FDIC insurance expense increased by **$184,000**, or **193.7%**, due to increased premium assessments related to regulatory matters[8](index=8&type=chunk) [Asset Quality and Balance Sheet](index=3&type=section&id=Asset%20Quality%20and%20Balance%20Sheet) This section reviews credit quality metrics and provides a summary of the company's balance sheet changes [Credit Quality](index=3&type=section&id=Credit%20Quality) The allowance for credit losses decreased, while non-performing assets as a percentage of total assets increased Credit Loss and Non-Performing Asset Trends | Metric | March 31, 2024 | December 31, 2023 | Change | | :----- | :------------- | :---------------- | :----- | | Allowance for Credit Losses on Loans | $6.2 million | $6.5 million | -$0.3 million | | Allowance for Credit Losses on Unfunded Commitments | $356,000 | $485,000 | -$129,000 | | Non-performing Assets as % of Total Assets | 0.55% | 0.47% | +0.08% | | Allowance for Credit Losses as % of Net Loans | 1.12% | 1.16% | -0.04% | - The decline in the allowance for credit losses to net loans was primarily due to a decrease in quantitative loss factors derived from historical loss rates[10](index=10&type=chunk) [Balance Sheet Summary](index=3&type=section&id=Balance%20Sheet%20Summary) Total assets decreased slightly, while stockholders' equity saw a modest increase, influenced by net income and unrealized losses Overall Balance Sheet Changes | Metric | March 31, 2024 | December 31, 2023 | Change ($) | Change (%) | | :----- | :------------- | :---------------- | :--------- | :--------- | | Total Assets | $717.6 million | $725.1 million | -$7.5 million | -1.0% | | Stockholders' Equity | $86.5 million | $86.3 million | +$0.2 million | +0.3% | - Increase in stockholders' equity primarily attributed to **$1.0 million** in net income, partially offset by a **$798,000** unrealized mark-to-market loss on available-for-sale securities[12](index=12&type=chunk) [Assets](index=3&type=section&id=Assets) Cash and cash equivalents increased, while securities available for sale decreased, and net loans remained stable Asset Composition | Metric | March 31, 2024 | December 31, 2023 | Change ($) | Change (%) | | :----- | :------------- | :---------------- | :--------- | :--------- | | Cash and Cash Equivalents | $55.0 million | $53.7 million | +$1.3 million | +2.3% | | Securities Available for Sale | $58.7 million | $60.4 million | -$1.7 million | -2.8% | | Loans Receivable, Net | $555.5 million | $555.8 million | -$0.3 million | -0.1% | [Liabilities and Equity](index=3&type=section&id=Liabilities%20and%20Equity) Total deposits increased, and total borrowings significantly decreased, reflecting reduced reliance on wholesale funding Liabilities and Equity Structure | Metric | March 31, 2024 | December 31, 2023 | Change ($) | Change (%) | | :----- | :------------- | :---------------- | :--------- | :--------- | | Total Deposits | $594.7 million | $590.9 million | +$3.8 million | +0.6% | | Total Borrowings | $25.3 million | $35.3 million | -$10.0 million | -28.4% | [Company Information](index=3&type=section&id=Company%20Information) This section provides an overview of Lake Shore Bancorp, Inc. and its operations, along with a safe harbor statement for forward-looking information [About Lake Shore Bancorp, Inc.](index=3&type=section&id=About%20Lake%20Shore%20Bancorp%2C%20Inc.) Lake Shore Bancorp, Inc. is the holding company for Lake Shore Savings Bank, a community-oriented financial institution operating in Western New York - Lake Shore Bancorp, Inc. is the mid-tier holding company of Lake Shore Savings Bank, a federally chartered, community-oriented financial institution[13](index=13&type=chunk) - The Bank operates eleven full-service branch locations across Chautauqua and Erie Counties in Western New York[13](index=13&type=chunk) - The Bank offers a broad range of retail and commercial lending and deposit services[13](index=13&type=chunk) [Safe Harbor Statement](index=3&type=section&id=Safe%20Harbor%20Statement) This statement clarifies that forward-looking statements are subject to significant risks and uncertainties, and actual results may differ materially - This release contains forward-looking statements based on current expectations, estimates, and projections, identified by words such as "anticipates," "expects," "intends," "plans," "believes," "estimates"[14](index=14&type=chunk) - Forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, including compliance with regulatory orders, data security breaches, and economic conditions[14](index=14&type=chunk)[15](index=15&type=chunk) - The Company does not undertake to publicly update or revise forward-looking statements if future changes make it clear that projected results will not be realized[15](index=15&type=chunk) [Selected Financial Data](index=5&type=section&id=Selected%20Financial%20Data) This section provides key financial tables, including condition data, income statements, financial ratios, asset quality ratios, and share information [Selected Financial Condition Data](index=5&type=section&id=Selected%20Financial%20Condition%20Data) This table presents key balance sheet items, including total assets, cash, securities, loans, deposits, debt, and equity Selected Financial Condition Data (in thousands) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Total assets | $717,582 | $725,118 | | Cash and cash equivalents | $54,953 | $53,730 | | Securities available for sale | $58,682 | $60,442 | | Loans receivable, net | $555,455 | $555,828 | | Deposits | $594,704 | $590,924 | | Long-term debt | $25,250 | $35,250 | | Stockholders' equity | $86,510 | $86,273 | [Condensed Statements of Income](index=5&type=section&id=Condensed%20Statements%20of%20Income) This table provides a condensed income statement, detailing interest income and expense, net interest income, non-interest items, and net income Condensed Statements of Income (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Interest income | $8,609 | $7,951 | | Interest expense | $3,476 | $1,660 | | Net interest income | $5,133 | $6,291 | | (Credit) provision for credit losses | $(352) | $(625) | | Net interest income after (credit) provision for credit losses | $5,485 | $6,916 | | Total non-interest income | $707 | $554 | | Total non-interest expense | $4,995 | $5,517 | | Income before income taxes | $1,197 | $1,953 | | Income tax expense | $183 | $269 | | Net income | $1,014 | $1,684 | | Basic and diluted earnings per share | $0.17 | $0.29 | [Selected Financial Ratios](index=6&type=section&id=Selected%20Financial%20Ratios) This table presents key financial performance ratios, including return on assets and equity, interest rate spread, and net interest margin Selected Financial Ratios | Selected Financial Ratios | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Return on average assets | 0.57% | 0.94% | | Return on average equity | 4.69% | 8.16% | | Average interest-earning assets to average interest-bearing liabilities | 126.33% | 127.65% | | Interest rate spread | 2.55% | 3.48% | | Net interest margin | 3.10% | 3.76% | [Asset Quality Ratios](index=6&type=section&id=Asset%20Quality%20Ratios) This table details asset quality ratios, covering non-performing loans and assets, and allowance for credit losses relative to loans Asset Quality Ratios | Asset Quality Ratios | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :---------------- | | Non-performing loans as a percentage of net loans | 0.71% | 0.60% | | Non-performing assets as a percentage of total assets | 0.55% | 0.47% | | Allowance for credit losses as a percentage of net loans | 1.12% | 1.16% | | Allowance for credit losses as a percentage of non-performing loans | 159.19% | 193.09% | [Share Information](index=6&type=section&id=Share%20Information) This table provides key share-related information, including common stock outstanding, treasury stock held, and book value per share Share Information | Share Information | March 31, 2024 | December 31, 2023 | | :---------------- | :------------- | :---------------- | | Common stock, number of shares outstanding | 5,684,784 | 5,686,288 | | Treasury stock, number of shares held | 1,151,730 | 1,150,226 | | Book value per share | $15.22 | $15.17 |

Stock Information - Lake Shore Bancorp's common stock is traded on the Nasdaq Global Market under the symbol "LSBK" with 63.96% of shares held by Lake Shore, MHC as of December 31, 2023[18]. Loan Portfolio - The loan portfolio totals $558.536 million, with $172.005 million in residential one- to four-family loans and $316.986 million in commercial loans[44]. - The company retains the majority of loans originated, with a focus on fixed-rate and adjustable-rate mortgage loans[41]. - The loan maturity table indicates that a significant portion of loans is due beyond 15 years, totaling $152.976 million[44]. - Total loans outstanding at the end of 2023 were $558.5 million, a decrease of 3.1% from $576.7 million in 2022[46]. - Total loan originations for 2023 were $56.3 million, down 64.1% from $157.2 million in 2022[46]. - Commercial real estate loans totaled $300.5 million, representing 53.8% of the total loan portfolio as of December 31, 2023[46]. - One- to four-family residential loans amounted to $172.0 million, accounting for 30.8% of the total loan portfolio[54]. - Home equity loans and lines of credit reached $51.9 million, making up 9.3% of the total loan portfolio[65]. - Construction loans totaled $16.4 million, representing 2.9% of the total loan portfolio[52]. - Jumbo loans totaled $5.7 million, or 3.3% of the one- to four-family residential mortgage portfolio[58]. - As of December 31, 2023, commercial business loans totaled $16.5 million, representing 3.0% of the total loan portfolio[67]. - Consumer loans amounted to $1.1 million, accounting for 0.2% of the total loan portfolio, with a decline in volume due to borrowers opting for home equity lines of credit[69]. Economic Environment - The primary market area includes Erie and Chautauqua Counties, with a combined population of approximately 1.1 million as of July 1, 2022[30]. - The company anticipates continued lending opportunities driven by economic growth in the region, despite the impact of the COVID-19 pandemic[33]. - Competition for loans and deposits is intense, with significant pressure from both traditional banks and online service providers[37]. - The local economies served are diversified, with principal employment sectors including service-related industries, wholesale and retail trade, and durable-goods manufacturing[34]. - Local economic conditions in Western New York, particularly in Erie and Chautauqua counties, are critical for future growth, with risks associated with population and income levels[206]. - As of December 31, 2023, the year-over-year consumer price index (CPI) increase was 3.4%, leading to a 100 basis points interest rate hike by the Federal Reserve in 2023[207]. - High inflation and rising interest rates may adversely affect loan demand and borrowers' repayment ability, impacting overall business performance[207]. Asset Quality and Credit Losses - The company maintains a high level of asset quality, with a focus on commercial real estate and one- to four-family residential mortgage loans[77]. - The allowance for credit losses on loans and unfunded commitments is a valuation allowance for expected credit losses, reviewed quarterly[87]. - The company adopted ASU 2016-13 (Topic 326) on January 1, 2023, replacing the incurred loss methodology with CECL for financial instruments[87]. - Loans classified as "Substandard" indicate potential loss if deficiencies are not corrected, while "Doubtful" loans have a high likelihood of non-collection[85]. - Non-performing loans are evaluated individually, and losses are recorded against the allowance for credit losses when collection is deemed unlikely[80]. - As of December 31, 2023, the total allocated allowance for credit losses was $6,463,000, a decrease from $6,930,000 in 2022, representing a 6.7% decline[92]. - The commercial real estate loans accounted for 81.0% of the total allowance in 2023, slightly down from 81.3% in 2022[92]. - The total unallocated allowance for credit losses was $0 as of December 31, 2023, compared to $135,000 (1.9% of total allowance) in 2022[92]. Deposits and Funding - The total deposits in the IntraFi Network Deposits program rose to $12.9 million in 2023 from $8.1 million in 2022, reflecting a 59.3% increase[109]. - Brokered time deposits increased significantly to $16.0 million in 2023 from $1.7 million in 2022, indicating a substantial growth of 841.2%[109]. - The total time deposit accounts amounted to $150,502,000 as of December 31, 2023, compared to $152,958,000 in 2022, showing a slight decrease of 1.6%[112]. - Uninsured deposits in excess of the FDIC insurance limit of $250,000 were $75.7 million, or 12.8% of total deposits, compared to $82.5 million, or 16.6% in 2022[113]. Regulatory Compliance and Governance - The Bank has been designated as being in "Troubled Condition" and must notify the OCC prior to changes in senior executive officers or board members[128]. - A Consent Order was entered into with the OCC on February 9, 2023, requiring the Bank to create a compliance committee and develop a corporate governance program[126]. - The Bank is required to maintain a Tier 1 Leverage capital ratio of 10% and a Total Risk-Based capital ratio of 13% as per the Individual Minimum Capital Requirement[129]. - The Bank's non-interest expenses are expected to remain elevated due to the Agreement with the Federal Reserve Bank of Philadelphia and the Consent Order[132]. - The Bank's management is committed to addressing compliance issues outlined in the Order and the Agreement with the Federal Reserve Bank[194]. - The Bank's BSA/AML compliance programs have been cited for deficiencies, which could lead to additional sanctions and operational restrictions[195]. - Lake Shore Savings is in compliance with Regulation O regarding extensions of credit to insiders, ensuring adherence to federal regulations[161]. - The bank is required to notify its primary federal regulator within 36 hours of a significant computer-security incident, as per the final rule effective April 1, 2022[163]. Capital and Dividends - Lake Shore, MHC is soliciting members to vote on a proposal to waive dividends aggregating up to $0.72 per share, with a special meeting scheduled for April 2, 2024[183]. - The Federal Reserve Board may restrict the ability of Lake Shore, MHC to pay dividends if a subsidiary bank becomes undercapitalized[182]. - The company announced the suspension of quarterly dividend payments on February 15, 2023, pending approval from the Federal Reserve Board to resume payments[183]. - Lake Shore Bancorp's ability to pay dividends is significantly influenced by Lake Shore Savings' capacity to make capital distributions[198]. - The Bank's ability to distribute capital is limited to net income for the current and prior two calendar years under OCC regulations[199]. - The ability to pay dividends to stockholders may be significantly impaired if the Federal Reserve Board does not grant the dividend waiver request[203]. Cybersecurity and Data Security - The company experienced a data security incident in November 2021, which led to increased operating costs and the implementation of additional security measures[210]. - Ongoing expenses related to cybersecurity enhancements and hiring key personnel have been incurred as a result of the 2021 incident[213]. - The company relies heavily on information systems, making it vulnerable to potential breaches that could harm reputation and financial condition[214]. - Future incidents could have a material adverse effect on business operations and financial results, leading to increased regulatory scrutiny and potential liabilities[214].

[PART I Financial Information](index=3&type=section&id=PART%20I%20Financial%20Information) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited consolidated financial statements for Lake Shore Bancorp, Inc. as of September 30, 2023, detailing financial condition, income, and cash flows, including CECL adoption [Consolidated Statements of Financial Condition](index=3&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) Total assets increased to $713.6 million as of September 30, 2023, primarily driven by a significant rise in cash, partially offset by decreases in net loans and securities Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Total Assets** | **$713,563** | **$699,914** | **$13,649** | **2.0%** | | Cash and Cash Equivalents | $45,999 | $9,633 | $36,366 | 377.5% | | Loans receivable, net | $564,848 | $573,537 | ($8,689) | (1.5%) | | Securities | $57,952 | $73,047 | ($15,095) | (20.7%) | | **Total Liabilities** | **$631,706** | **$618,730** | **$12,976** | **2.1%** | | Total Deposits | $584,158 | $570,119 | $14,039 | 2.5% | | Long-term debt | $36,450 | $24,950 | $11,500 | 46.1% | | **Total Stockholders' Equity** | **$81,857** | **$81,184** | **$673** | **0.8%** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income decreased to $1.57 million in Q3 2023 and $4.07 million year-to-date, primarily due to increased interest expense and higher non-interest expenses Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $6,295 | $6,345 | $18,800 | $17,791 | | (Credit) Provision for Credit Losses | ($199) | $0 | ($1,011) | $500 | | Non-Interest Income | $605 | $668 | $1,712 | $2,120 | | Non-Interest Expense | $5,196 | $4,870 | $16,614 | $13,979 | | **Net Income** | **$1,571** | **$1,771** | **$4,071** | **$4,516** | | **Diluted EPS** | **$0.27** | **$0.30** | **$0.69** | **$0.77** | [Notes to Unaudited Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Details significant accounting policies, including CECL adoption, investment securities with unrealized losses, loan portfolio credit quality, and other financial commitments - The Company adopted the Current Expected Credit Loss (CECL) standard (ASC 326) on January 1, 2023, resulting in a cumulative effect adjustment that decreased retained earnings by **$723,000**[22](index=22&type=chunk)[23](index=23&type=chunk) - As of September 30, 2023, the investment securities portfolio had gross unrealized losses of **$16.6 million**, primarily attributed to increases in market interest rates, with no allowance for credit losses deemed necessary for these securities[39](index=39&type=chunk)[42](index=42&type=chunk) - The allowance for credit losses on unfunded loan commitments was **$351,000** as of September 30, 2023, established following the adoption of CECL on January 1, 2023, which initially created a **$633,000** liability for this exposure[59](index=59&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Details financial performance and condition, highlighting regulatory actions, compressed net interest income due to rising interest expenses, and changes in the loan portfolio and liquidity - The Bank is subject to a Consent Order from the OCC and a Written Agreement with the Federal Reserve Bank of Philadelphia due to deficiencies, restricting dividend payments and debt incurrence without prior approval, and is expected to increase non-interest expenses[118](index=118&type=chunk)[119](index=119&type=chunk) - Net interest margin decreased to **3.74%** in Q3 2023 from **3.92%** in Q3 2022, as the average interest rate paid on interest-bearing liabilities increased by **140 basis points**, outpacing the **91 basis point** increase in the average yield on interest-earning assets[125](index=125&type=chunk)[128](index=128&type=chunk)[130](index=130&type=chunk) - Total assets increased by **$13.6 million (2.0%)** to **$713.6 million** since year-end 2022, driven by a **$36.4 million** increase in cash, while net loans receivable decreased by **$8.7 million (1.5%)** and securities decreased by **$15.0 million (20.7%)**[132](index=132&type=chunk) - Total deposits grew by **$14.0 million (2.5%)**, driven by a **$62.9 million (41.1%)** increase in higher-cost time deposits, while lower-cost core deposits declined by **$48.9 million (11.7%)**, reflecting a shift in customer preference in the current rate environment[138](index=138&type=chunk)[140](index=140&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company, as a smaller reporting company, is not required to provide this disclosure - Disclosure is not required as the Company is a smaller reporting company[173](index=173&type=chunk) [Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report[174](index=174&type=chunk) - There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[175](index=175&type=chunk) [PART II Other Information](index=49&type=section&id=PART%20II%20Other%20Information) [Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) Highlights updated risk factors, including Federal Reserve restrictions on dividends and debt, and potential liquidity pressures from decreased banking sector confidence due to recent institutional failures - A significant risk factor is the Written Agreement with the Federal Reserve Bank of Philadelphia, effective June 28, 2023, which restricts the company from declaring dividends, engaging in share repurchases, or incurring new debt without prior written approval[177](index=177&type=chunk)[179](index=179&type=chunk) - The company identifies recent failures of other financial institutions as a risk factor that could decrease depositor confidence, create liquidity pressures, reduce net interest margins, and potentially lead to increased FDIC premiums or special assessments[179](index=179&type=chunk)[180](index=180&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase any common stock during Q3 2023, with the stock repurchase program suspended and 30,626 shares remaining authorized - The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2023[181](index=181&type=chunk)[183](index=183&type=chunk) - The Company has suspended its stock repurchase program, with a maximum of **30,626** shares yet to be purchased under the plan[181](index=181&type=chunk)[183](index=183&type=chunk) [Exhibits](index=51&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL data files

[PART I - Financial Information](index=3&type=section&id=PART%20I) [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Financial statements show total assets at **$714.0 million**, with net income decreasing due to higher expenses and a **$723,000** CECL impact Consolidated Statements of Financial Condition Highlights (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$714,041** | **$699,914** | | Cash and Cash Equivalents | $35,582 | $9,633 | | Loans receivable, net | $569,503 | $573,537 | | Securities | $65,377 | $73,047 | | **Total Liabilities** | **$630,647** | **$618,730** | | Total Deposits | $581,965 | $570,119 | | Long-term debt | $36,450 | $24,950 | | **Total Stockholders' Equity** | **$83,394** | **$81,184** | Consolidated Statements of Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $6,214 | $5,978 | $12,505 | $11,446 | | (Credit) Provision for Credit Losses | $(187) | $100 | $(812) | $500 | | **Net Income** | **$816** | **$1,684** | **$2,500** | **$2,745** | | **Diluted EPS** | **$0.14** | **$0.29** | **$0.43** | **$0.47** | - On January 1, 2023, the Company adopted the Current Expected Credit Loss (CECL) methodology (ASC 326), resulting in a cumulative effect adjustment that decreased retained earnings by **$723,000**[23](index=23&type=chunk)[24](index=24&type=chunk) [Note 3 – Investment Securities](index=10&type=section&id=Note%203%20%E2%80%93%20Investment%20Securities) The securities portfolio decreased to **$65.4 million**, with **$12.6 million** in unrealized losses and **$49,000** in realized losses from Q2 sales Securities Portfolio Composition (Fair Value, in thousands) | Security Type | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | U.S. government agencies | $1,841 | $1,833 | | Municipal bonds | $36,692 | $42,414 | | Mortgage-backed securities | $26,738 | $28,702 | | Other | $103 | $104 | | **Total Securities** | **$65,377** | **$73,047** | - As of June 30, 2023, the securities portfolio had gross unrealized losses of **$12.6 million**, primarily due to market interest rate changes, not credit issues[38](index=38&type=chunk)[42](index=42&type=chunk) - During the second quarter of 2023, the company sold twenty-three municipal bonds and two mortgage-backed securities, realizing a gross loss of **$49,000**[46](index=46&type=chunk) [Note 4 - Loans and Allowance for Credit Losses](index=13&type=section&id=Note%204%20-%20Loans%20and%20Allowance%20for%20Credit%20Losses) Net loans decreased slightly to **$569.5 million**, with a **$6.8 million** ACL (1.19% of loans) post-CECL, and stable non-performing loans at **$2.8 million** Loan Portfolio Composition (in thousands) | Loan Segment | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Residential, one- to four-family | $174,940 | $175,904 | | Home Equity | $50,750 | $53,057 | | Commercial Real Estate | $326,987 | $326,955 | | Commercial (Other) | $18,585 | $19,576 | | Consumer | $1,151 | $1,217 | | **Total gross loans** | **$572,413** | **$576,709** | Allowance for Credit Losses (ACL) Activity - H1 2023 (in thousands) | Description | Amount | | :--- | :--- | | Balance - January 1, 2023 | $7,065 | | Impact of adopting ASC 326 | $282 | | (Credit) provision | $(590) | | Net charge-offs/(recoveries) | $(1) | | **Balance – June 30, 2023** | **$6,758** | - Total non-accrual loans were **$2.8 million** as of June 30, 2023, a slight decrease from **$2.9 million** at year-end 2022, primarily in residential real estate[62](index=62&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income decreased due to higher regulatory and interest expenses, with deposits shifting to higher-cost time deposits amid regulatory restrictions on liquidity - The Bank consented to a Consent Order with the OCC and the parent companies entered into a Written Agreement with the Federal Reserve Bank of Philadelphia, which will keep non-interest expenses elevated due to deficiencies in IT, security, audit, and BSA/AML[117](index=117&type=chunk)[118](index=118&type=chunk) Key Performance Metrics Comparison (Net Income in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Margin | 3.65% | 3.71% | 3.71% | 3.54% | | Net Income (thousands) | $816 | $1,684 | $2,500 | $2,745 | | Non-performing assets / Total assets | 0.41% | N/A | 0.41% | N/A | - As a result of regulatory orders, the Company's access to FHLB funds is curtailed to short-term advances, a correspondent bank line of credit was terminated, and eligibility for the Federal Reserve's Bank Term Funding Program is unavailable[164](index=164&type=chunk) [Comparison of Financial Condition](index=40&type=section&id=Comparison%20of%20Financial%20Condition) Total assets increased to **$714.0 million** driven by cash, while deposits grew due to a **$60.8 million** shift to time deposits, and equity rose to **$83.4 million** - Total deposits increased by **2.1%** to **$582.0 million**, driven by a **39.8%** (**$60.8 million**) increase in time deposits, offset by an **11.7%** (**$49.0 million**) decrease in core deposits, reflecting a shift to higher-yielding products[137](index=137&type=chunk) - Non-performing assets decreased slightly by **2.6%** to **$2.9 million** at June 30, 2023, representing **0.41%** of total assets, down from **0.43%** at year-end 2022[135](index=135&type=chunk)[136](index=136&type=chunk) - Stockholders' equity rose **2.7%** to **$83.4 million**, primarily due to **$2.5 million** in net income, partially offset by a **$0.7 million** reduction to retained earnings from CECL adoption[141](index=141&type=chunk) [Comparison of Results of Operations](index=44&type=section&id=Comparison%20of%20Results%20of%20Operations) Q2 2023 net income fell **51.5%** to **$0.8 million** YoY, and H1 2023 net income decreased **8.9%** to **$2.5 million**, driven by increased non-interest and interest expenses - Q2 2023 net income decreased by **$0.9 million** (**51.5%**) YoY, primarily due to a **$1.3 million** (**28.9%**) increase in non-interest expense[142](index=142&type=chunk)[150](index=150&type=chunk) - Professional services expense for Q2 2023 increased by **$513,000** (**153.1%**) YoY due to regulatory remediation costs, while FDIC insurance expense rose by **$389,000** (**827.7%**) due to higher premium assessments[150](index=150&type=chunk) - Interest expense for Q2 2023 surged by **398.0%** to **$2.3 million**, driven by a **482.1%** increase in interest paid on deposits as the deposit mix shifted to higher-cost time deposits[145](index=145&type=chunk) [Liquidity and Capital Resources](index=47&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is maintained through deposits and cash flows, but regulatory actions have curtailed access to FHLB and other borrowing facilities; the Bank's capital ratios exceed minimums, remaining well-capitalized Bank Regulatory Capital Ratios (as of June 30, 2023) | Ratio | Bank's Actual | Required for Well-Capitalized Status | Individual Minimum Requirement | | :--- | :--- | :--- | :--- | | Tier 1 Leverage Ratio | 12.16% | 5.00% | 10.00% | | Total Risk-Based Capital Ratio | 17.23% | 10.00% | 13.00% | - The Bank's Community Bank Leverage Ratio was **12.16%** as of June 30, 2023, exceeding the **9.0%** minimum requirement[171](index=171&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Disclosure is not required as the Company qualifies as a smaller reporting company [Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of the end of the reporting period[175](index=175&type=chunk) - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[176](index=176&type=chunk) [PART II - Other Information](index=49&type=section&id=PART%20II) [Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) New material risks include restrictions from a Written Agreement with the Federal Reserve, impacting dividends and debt, and potential adverse impacts from recent bank failures on depositor confidence - A new risk factor is the Written Agreement with the Federal Reserve Bank of Philadelphia, which requires the company to act as a source of strength for the Bank and restricts dividends, share repurchases, and new debt without prior regulatory approval[178](index=178&type=chunk)[180](index=180&type=chunk) - The company identifies a risk related to recent failures of other banks, which has decreased confidence in the banking sector and could lead to liquidity pressures, reduced net interest margins, and increased credit losses[180](index=180&type=chunk)[181](index=181&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company suspended its stock repurchase program and made no purchases during Q2 2023, with **30,626** shares remaining authorized for repurchase - The Company has suspended its stock repurchase program and made no purchases of its equity securities during the second quarter of 2023[182](index=182&type=chunk) - As of June 30, 2023, there are **30,626** shares remaining that may be repurchased under the publicly announced plan[184](index=184&type=chunk) [Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files

Financial Performance - Total interest income for the three months ended March 31, 2023, was $7,951,000, an increase of 34% compared to $5,934,000 in the same period of 2022[12]. - Net income for the first quarter of 2023 was $1,684,000, representing a 59% increase from $1,061,000 in the first quarter of 2022[12]. - Basic and diluted earnings per common share for Q1 2023 were $0.29, up from $0.18 in Q1 2022[12]. - Total comprehensive income for Q1 2023 was $2,937,000, compared to a loss of $5,073,000 in Q1 2022[13]. - Net income for the three months ended March 31, 2023, was $1,684,000, compared to $1,061,000 for the same period in 2022, representing a 58.6% increase[94]. - Basic and diluted earnings per share for Q1 2023 were both $0.29, up from $0.18 in Q1 2022, reflecting a 61.1% increase[94]. Income and Expenses - Net interest income after provision for credit losses was $6,916,000 for Q1 2023, up from $5,068,000 in Q1 2022, marking a 36% increase[12]. - Total non-interest income decreased to $554,000 in Q1 2023 from $732,000 in Q1 2022, a decline of 24%[12]. - Total non-interest expense increased to $5,517,000 in Q1 2023, compared to $4,532,000 in Q1 2022, reflecting a rise of 22%[12]. Credit Losses and Provisions - The company reported a provision for credit losses of $(625,000) in Q1 2023, compared to a provision of $400,000 in Q1 2022, indicating a reversal of credit losses[12]. - The allowance for credit losses increased from $7,065 thousand on January 1, 2023, to $6,708 thousand by March 31, 2023, reflecting a provision of $(625) thousand during the quarter[56]. - The company expects credit losses to be reviewed by bank regulators, which may require additional expected credit losses to be established[30]. - The allowance for credit losses on unfunded loan commitments was recorded at $633,000 following the adoption of CECL[65]. Loans and Deposits - The net increase in deposits for Q1 2023 was $25,088,000, compared to a decrease of $364,000 in Q1 2022[16]. - Total gross loans amounted to $577.2 million as of March 31, 2023, with real estate loans totaling $556.9 million[49]. - The total gross loans receivable as of March 31, 2023, was $577,238,000, reflecting a slight increase from the previous quarter[71]. - The total past due loans as of March 31, 2023, were $2,872,000, with $1,927,000 being 90 days or more past due[71]. Securities and Investments - The total amortized cost of debt securities available for sale as of March 31, 2023, is $85,235,000, with unrealized losses of $11,618,000, resulting in a fair value of $73,742,000[37]. - The total fair value of securities, including equity and debt, was $73,751,000 at March 31, 2023, compared to $73,047,000 at December 31, 2022, representing an increase of approximately 1%[111]. - The fair value of municipal bonds was $43,412,000 at March 31, 2023, compared to $42,414,000 at December 31, 2022, reflecting an increase of approximately 2%[109]. Regulatory and Accounting Changes - The Company adopted ASU 2022-02 on January 1, 2023, which did not have a material impact on its consolidated financial statements but required enhanced vintage disclosures[35]. - The company adopted the current expected credit loss (CECL) model for estimating the allowance for credit losses effective January 1, 2023[51]. - The transition to ASC 326 reflects a shift from the incurred loss methodology to a more forward-looking approach for estimating credit losses[58]. Shareholder Equity and Compensation - The company did not repurchase any shares during the three months ended March 31, 2023, with 30,626 shares remaining under the stock repurchase program[126]. - Compensation expense related to unvested restricted stock awards under the 2012 Equity Incentive Plan amounted to $(49,000) for Q1 2023, compared to $42,000 for Q1 2022[102]. - As of March 31, 2023, there were 25,029 unvested shares outstanding under the 2012 Equity Incentive Plan, down from 56,627 shares at the same time in 2022[102].

Loan Performance and Composition - Lake Shore Bancorp's total loans outstanding increased to $576.7 million at the end of 2022, up from $519.8 million at the end of 2021, representing an increase of approximately 10.9%[45] - Total loan originations for 2022 were $157.2 million, a decrease of 6.7% compared to $168.6 million in 2021[45] - The company reported principal repayments totaling $98.7 million in 2022, down from $161.5 million in 2021, indicating a significant reduction of approximately 38.8%[45] - The loan portfolio composition includes $175.9 million in residential loans, $53.1 million in home equity loans, and $304.0 million in commercial loans as of December 31, 2022[42] - As of December 31, 2022, commercial real estate loans totaled $304.0 million, representing 52.7% of the total loan portfolio[47] - Multi-family apartment complexes accounted for 47.4% of the commercial real estate loan portfolio, totaling $156.2 million[47] - Construction loans amounted to $22.9 million, or 4.0% of the total loan portfolio as of December 31, 2022[52] - One- to four-family residential loans totaled $175.9 million, representing 30.5% of the total loan portfolio[55] - Home equity loans and lines of credit reached $53.1 million, accounting for 9.2% of the total loan portfolio[67] - Commercial business loans totaled $19.6 million, or 3.4% of the total loan portfolio as of December 31, 2022[71] - Jumbo loans amounted to $8.0 million, representing 4.6% of the one- to four-family residential mortgage portfolio[59] - The company sold $1.3 million of fixed-rate, conforming long-term residential mortgage loans during 2022 to manage interest rate risk[58] - The company has begun selling long-term, lower-yielding fixed-rate residential mortgages at origination in the secondary market[55] - At December 31, 2022, home equity loans where the company does not hold the first mortgage represented 31.3% of the outstanding principal within the home equity loan portfolio[68] - As of December 31, 2022, consumer loans totaled $1.2 million, representing less than 1% of the total loan portfolio[73] - Sold participations in commercial real estate loans amounted to $20.7 million, while commercial business loans totaled $258,000 as of December 31, 2022[75] Regulatory and Compliance Issues - The company is subject to regulatory oversight by the Federal Reserve Board and the Office of the Comptroller of the Currency, which impacts its operational strategies[22] - The company has been designated as being in "Troubled Condition" by the OCC, requiring prior notification for board member changes and certain severance payments[136] - A Consent Order was entered into with the OCC on February 9, 2023, mandating the establishment of a compliance committee and a written strategic plan for the Bank[134] - The company is subject to periodic examination by the OCC to ensure compliance with capital adequacy, asset quality, and other regulatory standards[140] - The bank's capital distribution is governed by federal regulations, requiring applications to be filed with the OCC prior to any dividend payments[152] - The Board of Directors has suspended quarterly dividend payments to focus capital resources on operational and compliance issues[154] - The Bank is under a Consent Order with the OCC due to deficiencies in information technology, security, and compliance, which may increase non-interest expenses and adversely affect financial performance[199] - The Bank's ability to pay dividends has been suspended by the Board of Directors to focus on addressing operational and compliance deficiencies[208] - The Bank must create a compliance committee to oversee adherence to the Consent Order and submit monthly reports to the Board and the OCC[202] - The Bank is expected to face increased costs due to remediation actions required by the Consent Order, which may burden management and internal resources[203] - Changes in laws and regulations may adversely affect the Bank's operations and increase compliance costs[207] Asset Quality and Loan Loss Allowance - The allowance for loan losses is maintained through provisions charged to income, reflecting the evaluation of inherent losses in the loan portfolio[92] - The company has a high level of asset quality, with a significant proportion of loans collateralized by stable property values in Western New York[81] - Loans classified as "Substandard" indicate defined weaknesses, while "Doubtful" loans have characteristics making full collection highly questionable[89] - The company may require additional loss allowances based on regulatory reviews of the allowance for loan losses[94] - Troubled debt restructurings (TDRs) occur when concessions are granted to borrowers facing financial difficulties, impacting the allowance for loan losses[87] - The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors[95] - Non-performing loans are reviewed periodically, with management determining impairment based on the borrower's financial condition[84] - As of December 31, 2022, the total allocated allowance for loan losses was $6.93 million, representing 98.1% of the total allowance, compared to $5.89 million (96.3%) in 2021[98] - The commercial real estate loans allowance increased to $5.40 million (76.4% of total allowance) in 2022 from $4.38 million (71.5%) in 2021, indicating a rise in risk assessment[98] - The total unallocated allowance for loan losses decreased to $135,000 in 2022 from $224,000 in 2021, reflecting improved credit quality[98] Capital and Funding Strategy - The company's Tier 1 Leverage capital ratio was 12.40% and Total Risk-Based capital ratio was 18.09% as of December 31, 2022, indicating compliance with the Individual Minimum Capital Requirement[137] - The company is required to maintain a Tier 1 Leverage capital ratio of 10% and a Total Risk-Based capital ratio of 13% as per the Individual Minimum Capital Requirement[137] - The bank's deposits at December 31, 2022, included $8.1 million in the IntraFi Network Deposits program, down from $13.4 million in 2021, indicating a shift in funding strategy[116] - Time deposits with remaining terms to maturity of less than one year amounted to $78.5 million in 2022, an increase from $72.6 million in 2021[119] - As of December 31, 2022, the company had $82.5 million in uninsured deposits exceeding the FDIC insurance limit of $250,000, down from $106.8 million in 2021[120] - The company reported $28.3 million in time deposits with balances of $250,000 or more, with $17.9 million maturing over twelve months[120] - At December 31, 2022, the company had $12.6 million in short-term borrowings and $25.0 million in long-term debt from the FHLBNY, compared to $22.0 million in long-term debt in 2021[120] Employee and Operational Strategies - The company employs 113 full-time and 7 part-time employees, with a focus on employee development and retention through educational opportunities and a comprehensive benefits package[127][129] - The bank's investment policy is reviewed and approved annually by the Board of Directors, ensuring compliance with risk management guidelines[100] - The bank's classification of investments includes two private-label asset-backed securities with a fair value of $96,000 as of December 31, 2022, reflecting ongoing credit risk assessments[109] Community and Market Position - The company anticipates continued lending opportunities driven by economic growth in the Western New York region, despite challenges posed by the COVID-19 pandemic[31] - Lake Shore Bancorp's market area includes approximately 1.0 million residents in Erie and Chautauqua Counties, with a diverse economic base and significant investment in healthcare and education sectors[28] - The company faces intense competition from various financial institutions, including commercial banks and online service providers, which may impact its growth and profitability[36] - Lake Shore Savings Bank received an "outstanding" rating in its most recent Community Reinvestment Act examination[162]

United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q United States 20-4729288 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) (Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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. (E ...

Financial Performance - Total interest income for the three months ended June 30, 2022, was $6,431,000, an increase of 4.25% compared to $6,169,000 in the same period of 2021[12]. - Net income for the three months ended June 30, 2022, was $1,684,000, representing a 69.5% increase from $993,000 in the same period of 2021[12]. - Basic and diluted earnings per common share for the three months ended June 30, 2022, were $0.29, compared to $0.17 for the same period in 2021[12]. - Net income for the six months ended June 30, 2022, was $2,745,000, a slight increase from $2,681,000 in the same period of 2021, representing a growth of 2.4%[19]. - For the three months ended June 30, 2022, net income was $1,684,000, compared to $993,000 for the same period in 2021, representing a 69.6% increase[75]. Income and Expenses - Non-interest income for the six months ended June 30, 2022, was $1,452,000, slightly down from $1,503,000 in the same period of 2021[12]. - Total non-interest expense for the three months ended June 30, 2022, was $4,577,000, an increase of 4.13% compared to $4,395,000 in the same period of 2021[12]. - The provision for loan losses decreased to $100,000 for the three months ended June 30, 2022, down from $500,000 in the same period of 2021[12]. - The provision for loan losses was $500,000 for the six months ended June 30, 2022, down from $650,000 in 2021, indicating a decrease of 23.1%[19]. - The provision for income tax expense for the six months ended June 30, 2022, was $2,000, down from $7,000 in 2021[118]. Cash Flow and Investments - Net cash provided by operating activities increased to $4,103,000 for the six months ended June 30, 2022, compared to $3,556,000 in 2021, reflecting a rise of 15.4%[19]. - Net cash used in investing activities was $32,028,000 for the six months ended June 30, 2022, compared to $22,511,000 in 2021, indicating an increase of 42.3%[19]. - Net cash used in financing activities was $12,504,000 for the six months ended June 30, 2022, a decrease from $21,781,000 in 2021, showing a reduction of 42.5%[19]. Securities and Investments - The total amortized cost of debt securities available for sale was $88,407,000, with a fair value of $77,530,000 as of June 30, 2022, reflecting unrealized losses of $11,032,000[33]. - The total debt securities available for sale amounted to $88,797,000, with gross unrealized losses of $1,757,000[34]. - The fair value of securities was $77,540,000 as of June 30, 2022, with a carrying amount of $77,540,000[111]. - The estimated fair value of debt securities available for sale was $77,530,000 as of June 30, 2022, down from $88,797,000 as of December 31, 2021[97][100]. Loan Portfolio and Allowance for Loan Losses - Gross loans receivable totaled $550,218,000 as of June 30, 2022, compared to $519,779,000 at the end of 2021, indicating a growth in the loan portfolio[52]. - The allowance for loan losses increased to $6,747,000 as of June 30, 2022, up from $6,118,000 at the beginning of the year, reflecting a provision of $100,000 for the second quarter[52]. - The ending balance for collectively evaluated loans for impairment was $6,747,000 as of June 30, 2022[52]. - The company reported a total of $4,921,000 in recorded investment for commercial real estate loans with no related allowance as of June 30, 2022[57]. - The total amount of loans classified as substandard as of June 30, 2022, was $6,876,000, compared to $13,653,000 as of December 31, 2021, showing a decrease in risk[64]. Dividends and Stockholder Equity - Cash dividends declared per share increased to $0.16 for the three months ended June 30, 2022, from $0.13 in the same period of 2021[12]. - The Company declared a quarterly cash dividend of $0.18 per share, payable on August 19, 2022, to shareholders of record as of August 2, 2022[119]. - Lake Shore, MHC waived dividends totaling $582,000 and $1.2 million for the three and six months ended June 30, 2022, respectively, cumulatively waiving approximately $17.3 million as of June 30, 2022[119]. Asset Quality and Risk Management - The company maintains conservative underwriting standards for its one- to four-family residential mortgage loans, which are primarily held in the Western New York region[46]. - The company reviews all investment securities on an ongoing basis for the presence of other-than-temporary-impairment (OTTI) with formal reviews performed quarterly[39]. - The total amount of non-accruing loans as of June 30, 2022, was $22,000, with 7 loans in the residential one- to four-family category[70]. - The company's asset classification committee is responsible for monitoring risk ratings and making changes as deemed appropriate, with a focus on individual loan classifications[62]. Miscellaneous - The company expects an increase in the allowance for loan losses due to the adoption of the CECL model, which will require covering the full remaining expected life of the portfolio[26]. - As of June 30, 2022, all Paycheck Protection Program loans originated by the company have been forgiven by the SBA, indicating successful support for small businesses during the pandemic[30]. - The company had $578,268,000 in deposits with an estimated fair value of $579,437,000 as of June 30, 2022[111].