PART I [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements for Lake Shore Bancorp, Inc. are presented, detailing financial condition, income, comprehensive income, equity, and cash flows [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) Total assets increased to **$596.8 million** by September 30, 2019, primarily due to a rise in net loans receivable Consolidated Statements of Financial Condition (Unaudited) | (Dollars in thousands) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$596,815** | **$545,708** | | Cash and Cash Equivalents | $20,558 | $30,751 | | Securities available for sale | $75,093 | $86,193 | | Loans receivable, net | $462,993 | $392,471 | | **Total Liabilities** | **$514,356** | **$465,904** | | Total Deposits | $471,275 | $432,458 | | Long-term debt | $34,650 | $24,650 | | **Total Stockholders' Equity** | **$82,459** | **$79,804** | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Net income for Q3 2019 rose to **$1.21 million** from **$1.06 million** YoY, driven by higher net interest income Key Income Statement Data (Unaudited, in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $4,953 | $4,535 | $14,174 | $13,274 | | Provision for Loan Losses | $300 | $125 | $725 | $315 | | **Net Income** | **$1,212** | **$1,058** | **$2,915** | **$3,000** | | Basic and diluted EPS | $0.20 | $0.17 | $0.48 | $0.49 | | Dividends declared per share | $0.12 | $0.10 | $0.36 | $0.30 | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income for Q3 2019 significantly increased to **$1.41 million** from **$0.56 million** YoY, driven by unrealized gains on securities Comprehensive Income Summary (Unaudited, in thousands) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $1,212 | $1,058 | $2,915 | $3,000 | | Other Comprehensive Income (Loss) | $197 | $(494) | $1,440 | $(1,542) | | **Total Comprehensive Income** | **$1,409** | **$564** | **$4,355** | **$1,458** | [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased from **$79.8 million** to **$82.5 million** by September 30, 2019, driven by net income and comprehensive income - Total stockholders' equity increased to **$82.5 million** at September 30, 2019, from **$79.8 million** at January 1, 2019[15](index=15&type=chunk) - Key changes during the nine months ended September 30, 2019 include: net income of **$2.9 million**, other comprehensive income of **$1.4 million**, cash dividends declared of approximately **$1.0 million**, and treasury stock purchases of **$1.0 million**[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents decreased by **$10.2 million** for the nine months ended September 30, 2019, primarily due to investing activities Cash Flow Summary for Nine Months Ended Sept 30 (Unaudited, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $4,315 | $3,839 | | Net Cash Used in Investing Activities | $(59,882) | $(32,290) | | Net Cash Provided by Financing Activities | $45,374 | $25,607 | | **Net Decrease in Cash and Cash Equivalents** | **$(10,193)** | **$(2,844)** | [Notes to Unaudited Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Detailed explanations of accounting policies and financial data are provided, including investment securities, loan loss allowance, and fair value measurements - The Company adopted ASU 2016-02, "Leases (Topic 842)" on January 1, 2019, resulting in the recognition of lease liabilities of **$916,000** and right-of-use (ROU) assets of **$904,000**[26](index=26&type=chunk) - The Company is a smaller reporting company and expects to adopt the new credit loss standard (CECL, ASU 2016-13) for fiscal years beginning after December 15, 2022, anticipating an increase to the allowance for loan losses upon adoption[31](index=31&type=chunk) - On October 23, 2019, the Board declared a quarterly cash dividend of **$0.12** per share, with the majority shareholder, Lake Shore, MHC, waiving its right to receive the full dividend[134](index=134&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=57&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance and condition, focusing on net interest income, asset quality, and operational results [Analysis of Net Interest Income](index=61&type=section&id=Analysis%20of%20Net%20Interest%20Income) Net interest margin increased to **3.66%** in Q3 2019, driven by higher loan volume and yield, partially offset by increased cost of liabilities Net Interest Margin and Spread | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Interest Rate Spread | 3.41% | 3.41% | 3.37% | 3.40% | | Net Interest Margin | 3.66% | 3.61% | 3.61% | 3.58% | - The increase in net interest margin for Q3 2019 was primarily impacted by an increased volume of higher-yielding average loan balances, which grew by **$67.6 million** (**17.6%**) compared to Q3 2018[159](index=159&type=chunk) - The average cost of interest-bearing liabilities rose by **30 basis points** in Q3 2019 YoY, mainly due to higher rates on time deposits and money market accounts amid increased competition[159](index=159&type=chunk) [Comparison of Financial Condition at September 30, 2019 and December 31, 2018](index=65&type=section&id=Comparison%20of%20Financial%20Condition) Total assets grew by **9.4%** to **$596.8 million**, driven by an **18.0%** increase in net loans, primarily commercial real estate and construction - Net loans receivable increased by **$70.5 million** (**18.0%**), with commercial real estate loans growing by **$51.9 million** (**34.5%**) and commercial construction loans by **$10.2 million** (**46.0%**)[165](index=165&type=chunk) - Total deposits increased by **$38.8 million** (**9.0%**), with growth across core deposits (**+$26.4 million**) and time deposits (**+$12.4 million**) due to competitive rates[171](index=171&type=chunk) Non-Performing Assets (in thousands) | Metric | Sept 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total non-performing loans | $3,428 | $3,218 | | Total non-performing assets | $4,198 | $3,896 | | Non-performing loans as a % of total loans | 0.74% | 0.82% | | Non-performing assets as a % of total assets | 0.70% | 0.71% | - The allowance for loan losses increased to **$4.1 million**, representing **0.89%** of total net loans, up from **0.87%** at year-end 2018[170](index=170&type=chunk) [Comparison of Results of Operations](index=70&type=section&id=Comparison%20of%20Results%20of%20Operations) Q3 2019 net income increased **14.6%** YoY to **$1.2 million** due to higher net interest income, while nine-month net income slightly decreased - Q3 2019 net income increased by **$154,000** (**14.6%**) YoY, primarily due to a **$990,000** (**21.2%**) increase in loan interest income[174](index=174&type=chunk)[175](index=175&type=chunk) - The provision for loan losses for Q3 2019 was **$300,000**, a **140.0%** increase from Q3 2018, reflecting inherent losses on new loan growth[182](index=182&type=chunk) - For the nine months ended Sept 30, 2019, net income decreased by **$85,000** (**2.8%**) YoY, as a **$900,000** increase in net interest income was offset by a **$492,000** increase in non-interest expenses and a **$410,000** increase in the provision for loan losses[192](index=192&type=chunk) - Non-interest expenses for the nine-month period increased by **$492,000** (**4.3%**), driven by higher salaries and benefits (**+$327,000**) and occupancy and equipment costs (**+$120,000**)[205](index=205&type=chunk) [Liquidity and Capital Resources](index=80&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity from deposits and FHLBNY advances, with robust capital levels significantly exceeding 'Well Capitalized' thresholds - Primary sources of funds include deposits, loan and security cash flows, and FHLBNY advances; the company has access to **$112.0 million** from the FHLBNY, with **$34.7 million** outstanding as of September 30, 2019[207](index=207&type=chunk) Bank Regulatory Capital Ratios (September 30, 2019) | Ratio | Actual (%) | To Be Well Capitalized (%) | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 17.01% | >= 6.50% | | Tier 1 capital (to risk-weighted assets) | 17.01% | >= 8.00% | | Total capital (to risk-weighted assets) | 17.93% | >= 10.00% | | Tier 1 Leverage | 13.18% | >= 5.00% | - The Bank's capital conservation buffer was **9.93%**, significantly exceeding the **2.50%** minimum requirement for 2019[217](index=217&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=83&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not required as the Company is a smaller reporting company - Disclosure is not required as the Company is a smaller reporting company[219](index=219&type=chunk) [Item 4. Controls and Procedures](index=83&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control - 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[220](index=220&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[221](index=221&type=chunk)[222](index=222&type=chunk) PART II - Other Information [Item 1A. Risk Factors](index=85&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K - There have been no material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K[223](index=223&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=85&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2019, the company repurchased **16,990** shares of common stock at **$14.99** per share, and approved a new repurchase plan Company Purchases of Equity Securities (Q3 2019) | Period | Total Shares Purchased (shares) | Average Price Paid per Share ($) | | :--- | :--- | :--- | | July 2019 | 9,600 | $15.05 | | August 2019 | 7,390 | $14.92 | | September 2019 | - | - | | **Total** | **16,990** | **$14.99** | - On September 6, 2019, a new stock repurchase plan was approved, authorizing the repurchase of up to **116,239** shares[224](index=224&type=chunk) [Item 6. Exhibits](index=85&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the report, including CEO and CFO certifications and XBRL data files - Exhibits filed include certifications by the CEO and CFO pursuant to Sarbanes-Oxley Sections 302 and 906, as well as XBRL Interactive Data Files[225](index=225&type=chunk) [Signatures](index=87&type=section&id=SIGNATURES)

PART I: Financial Information [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Lake Shore Bancorp's unaudited consolidated financial statements, including condition, income, cash flows, and detailed notes [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) As of June 30, 2019, total assets increased to $578.1 million, driven by loan growth, with liabilities and equity also rising Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and Cash Equivalents | $21,777 | $30,751 | | Loans receivable, net | $440,175 | $392,471 | | Total Assets | $578,052 | $545,708 | | **Liabilities & Equity** | | | | Total Deposits | $457,472 | $432,458 | | Total Liabilities | $496,388 | $465,904 | | Total Stockholders' Equity | $81,664 | $79,804 | | **Total Liabilities and Stockholders' Equity** | **$578,052** | **$545,708** | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Net income decreased for Q2 and the six months ended June 30, 2019, primarily due to higher loan loss provisions and increased non-interest expenses Key Performance Indicators (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $4,683 | $4,407 | $9,221 | $8,739 | | Provision for Loan Losses | $350 | $115 | $425 | $190 | | Net Income | $805 | $1,006 | $1,703 | $1,942 | | Diluted EPS | $0.13 | $0.16 | $0.28 | $0.32 | | Dividends declared per share | $0.12 | $0.10 | $0.24 | $0.20 | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash decreased by $9.0 million for the six months ended June 30, 2019, due to investing activities offsetting operating and financing inflows Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $2,040 | $2,225 | | Net Cash Used in Investing Activities | $(39,735) | $(23,871) | | Net Cash Provided by Financing Activities | $28,721 | $23,856 | | **Net (Decrease) Increase in Cash** | **$(8,974)** | **$2,210** | [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Notes detail accounting policies, financial instruments, and key events, including ASU 2016-02 adoption and a subsequent dividend declaration - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, resulting in the recognition of Right-of-Use (ROU) assets of **$904,000** and lease liabilities of **$916,000**[24](index=24&type=chunk) - The Company is preparing for the adoption of ASU 2016-13 (CECL), which is expected to increase the allowance for loan losses, with a proposed deferral for smaller reporting companies to fiscal years beginning after December 15, 2022[28](index=28&type=chunk)[29](index=29&type=chunk) - The allowance for loan losses increased to **$3.86 million** at June 30, 2019, from $3.45 million at year-end 2018, with a provision of **$425,000** for the first six months of 2019, up from $190,000 in the prior-year period[48](index=48&type=chunk)[167](index=167&type=chunk) - On July 24, 2019, the Board declared a quarterly cash dividend of **$0.12 per share**, with the majority shareholder waiving its right to receive **$0.06 per share** of this dividend[132](index=132&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=55&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, attributing net income decline to higher loan loss provisions and expenses, while highlighting strong loan growth and capital position [Analysis of Net Interest Income](index=59&type=section&id=Analysis%20of%20Net%20Interest%20Income) Net interest income and margin improved in Q2 2019 due to loan growth, despite rising cost of interest-bearing liabilities Net Interest Margin and Spread Analysis | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $4,683k | $4,407k | $9,221k | $8,739k | | Interest Rate Spread | 3.34% | 3.36% | 3.36% | 3.39% | | Net Interest Margin | 3.58% | 3.54% | 3.59% | 3.56% | - The increase in net interest income for the first six months of 2019 was primarily driven by a **$638 million** positive impact from increased volume of interest-earning assets, partially offset by a **$156 million** negative impact from rate changes[156](index=156&type=chunk) [Comparison of Financial Condition](index=63&type=section&id=Comparison%20of%20Financial%20Condition) Total assets grew by 5.9% to $578.1 million, driven by a 12.2% increase in net loans, primarily commercial real estate - The strategic focus on originating shorter duration, adjustable-rate commercial real estate loans continued, with this portfolio growing by **$41.7 million (27.7%)** in the first six months of 2019[162](index=162&type=chunk)[163](index=163&type=chunk) - Total non-performing loans increased by **$158,000 (4.9%)** to **$3.4 million** at June 30, 2019, primarily due to an increase in non-accrual home equity loans, while non-performing assets as a percentage of total assets remained stable at **0.71%**[166](index=166&type=chunk) - Total deposits grew by **$25.0 million (5.8%)**, driven by a **$15.4 million** increase in time deposits and a **$9.6 million** increase in core deposits[168](index=168&type=chunk) [Comparison of Results of Operations](index=67&type=section&id=Comparison%20of%20Results%20of%20Operations) Net income decreased due to a significant increase in loan loss provisions and higher non-interest expenses, despite growth in interest income - Q2 2019 provision for loan losses was **$350,000**, a significant increase from $115,000 in Q2 2018, mainly to reflect inherent losses from the **20.6%** growth in the commercial real estate portfolio during the quarter[177](index=177&type=chunk) - Q2 2019 non-interest income fell **16.9%** to **$546,000**, primarily due to a **$61,000** unrealized loss on a derivative contract and a **$55,000** decrease in recoveries on impaired securities[184](index=184&type=chunk) - Q2 2019 non-interest expenses rose **4.4%** to **$3.9 million**, driven by higher salaries and benefits (**$103,000** increase) and occupancy and equipment costs (**$38,000** increase)[185](index=185&type=chunk) [Liquidity and Capital Resources](index=75&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital, exceeding all regulatory requirements with robust capital ratios and borrowing capacity Bank Capital Ratios as of June 30, 2019 | Ratio | Actual | Minimum for Adequacy | To Be Well Capitalized | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 17.45% | >= 4.50% | >= 6.50% | | Tier 1 capital (to risk-weighted assets) | 17.45% | >= 6.00% | >= 8.00% | | Total capital (to risk-weighted assets) | 18.34% | >= 8.00% | >= 10.00% | | Tier 1 Leverage (to adjusted total assets) | 13.38% | >= 4.00% | >= 5.00% | - The Bank's capital conservation buffer was **10.34%** as of June 30, 2019, significantly exceeding the **2.50%** minimum requirement for 2019[214](index=214&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=79&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Disclosure for market risk is not required as the Company qualifies as a smaller reporting company - The company is a smaller reporting company and is therefore not required to provide disclosures for this item[216](index=216&type=chunk) [Item 4. Controls and Procedures](index=79&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - 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 reporting period[217](index=217&type=chunk)[218](index=218&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, these controls[219](index=219&type=chunk) PART II: Other Information [Item 1A. Risk Factors](index=81&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the Company's previously disclosed risk factors have been reported - No material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K have been reported[220](index=220&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=81&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 43,900 shares of common stock in Q2 2019, with 16,990 shares remaining for repurchase Company Purchases of Equity Securities (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 22,500 | $15.59 | | May 2019 | 6,400 | $15.05 | | June 2019 | 15,000 | $15.04 | | **Total** | **43,900** | **$15.32** | - The current stock repurchase plan, approved on May 16, 2018, authorized the repurchase of up to **121,190 shares**, with **16,990 shares** remaining available as of June 30, 2019[221](index=221&type=chunk) [Item 6. Exhibits](index=82&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the report, including CEO/CFO certifications and XBRL data files

[PART I Financial Information](index=4&type=section&id=PART%20I%20Financial%20Information) [Item 1. Financial Statements](index=4&type=section&id=Item%201%2E%20Financial%20Statements) This section presents Lake Shore Bancorp's unaudited consolidated financial statements for Q1 2019 and 2018, covering financial condition, income, comprehensive income, equity, and cash flows, along with detailed accounting notes [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) As of March 31, 2019, total assets increased to **$554,497 thousand** from **$545,708 thousand** at December 31, 2018, driven by higher net loans, deposits, and stockholders' equity Consolidated Balance Sheet Summary (Unaudited) | (Dollars in thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and Cash Equivalents | $31,106 | $30,751 | | Securities available for sale | $84,865 | $86,193 | | Loans receivable, net | $401,047 | $392,471 | | **Total Assets** | **$554,497** | **$545,708** | | **Liabilities** | | | | Total Deposits | $440,540 | $432,458 | | **Total Liabilities** | **$473,435** | **$465,904** | | **Total Stockholders' Equity** | **$81,062** | **$79,804** | | **Total Liabilities and Stockholders' Equity** | **$554,497** | **$545,708** | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Net income for Q1 2019 decreased slightly to **$898 thousand** from **$936 thousand** in Q1 2018, primarily due to increased interest expense on deposits offsetting interest income growth Consolidated Income Statement Summary (Unaudited) | (Dollars in thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $4,538 | $4,332 | | Provision for Loan Losses | $75 | $75 | | Non-Interest Income | $589 | $590 | | Non-Interest Expenses | $4,003 | $3,758 | | Income before Income Taxes | $1,049 | $1,089 | | **Net Income** | **$898** | **$936** | | Basic and diluted earnings per common share | $0.15 | $0.15 | | Dividends declared per share | $0.12 | $0.10 | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income for Q1 2019 significantly improved to **$1,526 thousand** from **$239 thousand** in Q1 2018, driven by net income and a positive swing in other comprehensive income from securities gains Comprehensive Income Summary (Unaudited) | (Dollars in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Income | $898 | $936 | | Other Comprehensive Income (Loss) | $628 | $(697) | | **Total Comprehensive Income** | **$1,526** | **$239** | [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased from **$79,804 thousand** at year-end 2018 to **$81,062 thousand** at March 31, 2019, primarily due to net income and other comprehensive income - Key changes in stockholders' equity for Q1 2019 include: net income of **$898 thousand**, other comprehensive income of **$628 thousand**, cash dividends of **$267 thousand**, and treasury stock purchases of **$111 thousand**[17](index=17&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities was **$303 thousand** in Q1 2019, while investing activities used **$6,780 thousand** and financing activities provided **$6,832 thousand**, resulting in a **$355 thousand** net increase in cash Cash Flow Summary (Unaudited) | (Dollars in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $303 | $478 | | Net Cash Used in Investing Activities | $(6,780) | $(5,092) | | Net Cash Provided by Financing Activities | $6,832 | $11,239 | | **Net Increase in Cash and Cash Equivalents** | **$355** | **$6,625** | | **Cash and Cash Equivalents - Ending** | **$31,106** | **$47,538** | [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section provides detailed explanations for the financial statements, covering accounting policies, new standard adoptions, investment and loan portfolio breakdowns, allowance for loan losses, and fair value measurements - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing lease liabilities of **$916 thousand** and right-of-use (ROU) assets of **$904 thousand**[28](index=28&type=chunk) - The Company is preparing for ASU 2016-13 (CECL) adoption, which is expected to increase the allowance for loan losses, with the full impact still under evaluation[32](index=32&type=chunk) - On April 24, 2019, the Board declared a **$0.12 per share** quarterly cash dividend, which the majority shareholder, Lake Shore, MHC, waived, totaling approximately **$436 thousand**[130](index=130&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=52&type=section&id=Item%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's Q1 2019 financial performance and condition, highlighting stable net interest margin, strategic commercial real estate lending, and robust capital levels [Analysis of Net Interest Income](index=56&type=section&id=Analysis%20of%20Net%20Interest%20Income) Net interest income increased by **$206 thousand** to **$4,538 thousand** in Q1 2019, driven by loan growth but offset by a 30 basis point rise in interest-bearing liability costs, maintaining a stable net interest margin Net Interest Margin and Spread | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Interest Income | $4,538 thousand | $4,332 thousand | | Interest Rate Spread | 3.39% | 3.42% | | Net Interest Margin | 3.60% | 3.59% | - The increase in net interest income was primarily driven by higher loan volume (**+$315 thousand** impact), while rising interest rates on liabilities negatively impacted it (**-$308 thousand** impact)[151](index=151&type=chunk) [Comparison of Financial Condition](index=59&type=section&id=Comparison%20of%20Financial%20Condition) Total assets grew by **$8,800 thousand** to **$554,497 thousand** at March 31, 2019, driven by an **$8,600 thousand** increase in net loans, primarily commercial real estate and construction, while non-performing loans slightly increased Loan Portfolio Change (Q1 2019) | Loan Category | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | | Commercial Real Estate | +$4,729 | +3.1% | | Commercial Construction | +$5,183 | +23.3% | | Commercial (Other) | -$1,593 | -7.3% | | **Total Gross Loans** | **+$8,606** | **+2.2%** | - The company continues its strategic focus on originating shorter duration, adjustable-rate commercial real estate loans to diversify its asset mix and reduce interest rate risk[156](index=156&type=chunk) Asset Quality Ratios | Ratio | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Non-performing loans to total loans | 0.84% | 0.82% | | Non-performing assets to total assets | 0.74% | 0.71% | | Allowance for loan losses to total net loans | 0.88% | 0.91% | [Comparison of Results of Operations](index=64&type=section&id=Comparison%20of%20Results%20of%20Operations) Net income for Q1 2019 decreased by **4.1%** to **$898 thousand**, primarily due to a **6.5%** increase in non-interest expenses, notably salaries and benefits, which offset the growth in net interest income - Interest income grew **10.8%** to **$5,700 thousand**, driven by a **$26,000 thousand** increase in the average loan portfolio balance[163](index=163&type=chunk) - Interest expense increased **44.8%** to **$1,100 thousand**, primarily due to higher rates on time deposits and money market accounts amid increased competition and rising market rates[166](index=166&type=chunk) - Non-interest expenses rose **6.5%** to **$4,000 thousand**, mainly due to a **9.5%** increase in salaries and employee benefits from annual raises, new hires, and higher health insurance costs[173](index=173&type=chunk) [Liquidity and Capital Resources](index=68&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital, with **$111,200 thousand** in FHLBNY borrowing capacity and capital ratios significantly exceeding 'Well Capitalized' regulatory requirements - Primary sources of funds include deposits, loan and security amortization, and operations, supplemented by credit lines with FHLBNY (**$111,200 thousand** capacity) and correspondent banks (**$22,000 thousand** capacity)[175](index=175&type=chunk)[178](index=178&type=chunk) Bank Capital Ratios | Ratio (at March 31, 2019) | Actual | 'Well Capitalized' Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 19.29% | >= 6.50% | | Tier 1 Capital | 19.29% | >= 8.00% | | Total Capital | 20.16% | >= 10.00% | | Tier 1 Leverage | 14.15% | >= 5.00% | - The Bank's capital conservation buffer was **12.16%** as of March 31, 2019, exceeding the **2.50%** minimum requirement[188](index=188&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=72&type=section&id=Item%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not required for disclosure as the Company qualifies as a smaller reporting company - Disclosure is not required as the Company is a smaller reporting company[190](index=190&type=chunk) [Item 4. Controls and Procedures](index=72&type=section&id=Item%204%2E%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting - 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 reporting period[191](index=191&type=chunk)[192](index=192&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[193](index=193&type=chunk) [PART II](index=74&type=section&id=PART%20II) [Item 1A. Risk Factors](index=74&type=section&id=Item%201A%2E%20Risk%20Factors) There have been no material changes to the company's risk factors from those previously disclosed in its Annual Report on Form 10-K - There have been no material changes in the Company's risk factors from those disclosed in its Annual Report on Form 10-K[194](index=194&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 2019, the Company repurchased **7,300 shares** of common stock at an average price of **$15.14 per share**, with **60,890 shares** remaining available under the repurchase program Company Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2019 | 6,000 | $15.05 | | February 2019 | 1,300 | $15.55 | | March 2019 | - | - | | **Total** | **7,300** | **$15.14** | - As of March 31, 2019, **60,890 shares** may yet be purchased under the stock repurchase plan approved on May 16, 2018[195](index=195&type=chunk) [Item 6. Exhibits](index=75&type=section&id=Item%206%2E%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO/CFO certifications and XBRL Instance Documents[197](index=197&type=chunk)

PART I [Business Overview](index=4&type=section&id=Item%201.%20Business) Lake Shore Bancorp, Inc. operates as a federally chartered savings and loan holding company, focusing on retail deposits and loans in Western New York, and is converting to a national bank to expand activities - Lake Shore Bancorp, Inc. is a mid-tier, federally chartered savings and loan holding company for Lake Shore Savings Bank; Lake Shore, MHC holds **60.6%** of Lake Shore Bancorp's common stock as of December 31, 2018[18](index=18&type=chunk)[20](index=20&type=chunk) - Lake Shore Savings Bank's principal business involves attracting retail deposits and investing them primarily in one- to four-family residential mortgage loans, commercial real estate loans, and home equity lines of credit[25](index=25&type=chunk) - On November 26, 2018, Lake Shore Savings Bank filed an application to convert its charter from a federal savings bank to a national bank, enabling it to engage in business activities authorized for national banks, including establishing deposit relationships with New York municipalities[27](index=27&type=chunk) - The Bank operates eleven branch offices in Western New York, primarily in Erie and Chautauqua Counties, which have a combined population of approximately **1.1 million** and a diversified economy with growth in healthcare and education sectors[32](index=32&type=chunk)[33](index=33&type=chunk)[35](index=35&type=chunk) - The Company faces intense competition from larger financial institutions and online service providers, but maintains competitiveness through personalized service, local market knowledge, local decision-making, and technological convenience[39](index=39&type=chunk)[40](index=40&type=chunk) Loan Portfolio Composition (2014-2018) | Loan Type | 2018 Amount ($ thousands) | 2018 % of Total | 2017 Amount ($ thousands) | 2017 % of Total | 2016 Amount ($ thousands) | 2016 % of Total | 2015 Amount ($ thousands) | 2015 % of Total | 2014 Amount ($ thousands) | 2014 % of Total | | :---------------------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | | Residential one to four-family | 155,024 | 39.49% | 144,614 | 39.60% | 149,982 | 45.98% | 157,575 | 53.21% | 168,289 | 59.30% | | Home equity | 41,830 | 10.66% | 38,078 | 10.43% | 35,534 | 10.89% | 32,770 | 11.07% | 32,337 | 11.39% | | Commercial | 150,475 | 38.33% | 122,747 | 33.61% | 107,243 | 32.87% | 83,967 | 28.35% | 68,238 | 24.04% | | Construction - Commercial | 22,252 | 5.67% | 30,802 | 8.43% | 11,712 | 3.59% | 4,581 | 1.55% | - | - | | **Total Real Estate Loans** | **369,581** | **94.15%** | **336,241** | **92.07%** | **304,471** | **93.33%** | **278,893** | **94.18%** | **268,864** | **94.73%** | | Commercial (Other) | 21,825 | 5.56% | 27,612 | 7.56% | 20,447 | 6.27% | 15,741 | 5.31% | 13,467 | 4.74% | | Consumer | 1,156 | 0.29% | 1,355 | 0.37% | 1,313 | 0.40% | 1,507 | 0.51% | 1,495 | 0.53% | | **Total Other Loans** | **22,981** | **5.85%** | **28,967** | **7.93%** | **21,760** | **6.67%** | **17,248** | **5.82%** | **14,962** | **5.27%** | | **Total Loans** | **392,562** | **100.00%** | **365,208** | **100.00%** | **326,231** | **100.00%** | **296,141** | **100.00%** | **283,826** | **100.00%** | Non-Performing Assets (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Total non-accrual loans | 3,044 | 3,833 | 5,704 | 4,506 | 4,719 | | Total non-performing loans | 3,218 | 3,833 | 5,866 | 4,668 | 4,729 | | Foreclosed real estate | 678 | 435 | 412 | 712 | 401 | | **Total non-performing assets** | **3,896** | **4,268** | **6,278** | **5,380** | **5,130** | | Non-performing loans as % of total loans | 0.82% | 1.05% | 1.80% | 1.57% | 1.66% | | Non-performing assets as % of total assets | 0.71% | 0.82% | 1.28% | 1.14% | 1.05% | Allowance for Loan Losses Activity (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :----------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Balance at beginning of year | 3,283 | 2,882 | 1,985 | 1,921 | 1,813 | | Provision for loan losses | 390 | 510 | 1,125 | 400 | 222 | | Total charge-offs | (255) | (139) | (257) | (415) | (134) | | Total recoveries | 30 | 30 | 29 | 79 | 20 | | Net charge-offs | (225) | (109) | (228) | (336) | (114) | | **Balance at end of year** | **3,448** | **3,283** | **2,882** | **1,985** | **1,921** | | Allowance for loan losses as % of total net loans | 0.88% | 0.90% | 0.88% | 0.67% | 0.67% | | Allowance for loan losses as % of non-performing loans | 107.15% | 85.65% | 49.13% | 42.52% | 40.62% | | Ratio of net charge-offs to average loans outstanding | 0.06% | 0.03% | 0.07% | 0.11% | 0.04% | - The provision for loan losses decreased by **$120,000 (23.5%)** to **$390,000** in 2018, primarily due to a higher provision in 2017 for downgraded commercial loan relationships that were performing and well-collateralized by December 31, 2018[99](index=99&type=chunk) Deposit Account Distribution (2016-2018) | Deposit Type | 2018 Amount ($ thousands) | 2018 % of Total | 2017 Amount ($ thousands) | 2017 % of Total | 2016 Amount ($ thousands) | 2016 % of Total | | :---------------------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | :------------------------ | :-------------- | | Savings | 52,050 | 12.04% | 52,922 | 13.06% | 52,404 | 13.58% | | Money market | 119,885 | 27.72% | 99,305 | 24.51% | 78,401 | 20.32% | | Interest bearing demand | 50,211 | 11.61% | 49,869 | 12.31% | 52,058 | 13.49% | | Non-interest bearing demand | 55,327 | 12.79% | 54,618 | 13.48% | 55,889 | 14.48% | | **Total core deposits** | **277,473** | **64.16%** | **256,714** | **63.36%** | **238,752** | **61.87%** | | Total time deposits | 154,985 | 35.84% | 148,439 | 36.64% | 147,141 | 38.13% | | **Total deposits** | **432,458** | **100.00%** | **405,153** | **100.00%** | **385,893** | **100.00%** | - The Company had **112 full-time** and **3 part-time employees** as of December 31, 2018, with good employee relations and no collective bargaining unit[134](index=134&type=chunk) - Lake Shore Savings Bank is regulated by the OCC, while Lake Shore Bancorp, Inc. and Lake Shore, MHC are regulated by the Federal Reserve Board; the Bank is also subject to FDIC and Federal Home Loan Bank System regulations[136](index=136&type=chunk) - The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (EGRRCPA) eased regulations for banks under **$10 billion** in assets, including exemptions from certain ability-to-repay requirements, appraisal rules, and simplified capital calculations[141](index=141&type=chunk) - As of December 31, 2018, Lake Shore Savings' capital exceeded all applicable minimal capital requirements, and it was categorized as '**well-capitalized**' under prompt corrective action regulations[151](index=151&type=chunk)[170](index=170&type=chunk) - Lake Shore, MHC, the majority shareholder, has historically waived its right to receive dividends from Lake Shore Bancorp, which requires Federal Reserve Board approval and member consent, allowing more cash resources for public shareholders and stock repurchases[191](index=191&type=chunk)[235](index=235&type=chunk)[237](index=237&type=chunk) [Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) The Company faces credit risk from its commercial loan portfolio, economic downturns, interest rate fluctuations, liquidity challenges, cybersecurity threats, and regulatory changes like CECL - The loan portfolio, with **50.0%** in commercial real estate, commercial business, and consumer loans as of December 31, 2018, carries higher credit risk due to less liquid collateral and dependence on business operations[199](index=199&type=chunk)[202](index=202&type=chunk) - Deterioration in economic conditions in Western New York could negatively affect loan portfolio performance, real estate values, and increase non-performing loans[200](index=200&type=chunk) - The allowance for loan losses may be insufficient if actual losses exceed estimates, potentially decreasing net income, and bank regulators can also require increases to the allowance[201](index=201&type=chunk)[202](index=202&type=chunk) - The Company is generally liability-sensitive, meaning rising interest rates could increase interest expense faster than interest income, adversely affecting net interest income and potentially reducing the fair value of available-for-sale securities[206](index=206&type=chunk)[207](index=207&type=chunk)[208](index=208&type=chunk) - Liquidity risk exists if the Company cannot raise sufficient funds through deposits, borrowings, or asset sales, which could impair strategic plans and dividend payments; core deposits comprised approximately **93.0%** of total deposits at December 31, 2018[212](index=212&type=chunk)[213](index=213&type=chunk)[215](index=215&type=chunk) - The Company relies heavily on executive officers and key personnel; the loss of their services could impair business strategy implementation[216](index=216&type=chunk) - Information systems are vulnerable to interruptions or security breaches (cyber-attacks), which could damage reputation, lead to customer loss, regulatory scrutiny, and financial liability[217](index=217&type=chunk)[218](index=218&type=chunk) - A new accounting standard, Current Expected Credit Loss (CECL), effective after December 15, 2019, will require estimating lifetime expected credit losses on loans, likely increasing the allowance for loan losses and impacting financial condition[231](index=231&type=chunk) - Changes in U.S. tax laws, such as the Tax Cuts and Jobs Act of 2017, could adversely affect the market for residential properties, demand for mortgage loans, and borrowers' ability to make payments, potentially increasing loan loss provisions[248](index=248&type=chunk) [Unresolved Staff Comments](index=69&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report - No unresolved staff comments[249](index=249&type=chunk) [Properties](index=70&type=section&id=Item%202.%20Properties) The Company operates through a corporate headquarters and eleven branch offices, with most properties owned and a net book value of $9.4 million for buildings and equipment - The Company operates through its corporate headquarters, administrative offices, and eleven branch offices[251](index=251&type=chunk) Net Book Value of Properties and Equipment (December 31, 2018) | Asset Category | Amount ($ millions) | | :----------------------------- | :------------------ | | Buildings and premises, net | 8.3 | | Computer equipment and other | 1.1 | | **Total** | **9.4** | - The majority of branch and administrative offices are owned, with some locations having leased land or parking lots, with lease expiration dates ranging from 2019 to 2028[252](index=252&type=chunk)[253](index=253&type=chunk) [Legal Proceedings](index=71&type=section&id=Item%203.%20Legal%20Proceedings) As of December 31, 2018, the Company was not involved in any material legal proceedings beyond routine business matters - At December 31, 2018, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which are considered immaterial to its financial condition and results of operations[254](index=254&type=chunk) [Mine Safety Disclosures](index=71&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to the Company - Mine Safety Disclosures are not applicable[255](index=255&type=chunk) PART II [Market for Registrant's Common Equity and Related Stockholder Matters](index=71&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%20and%20Related%20Stockholder%20Matters) Lake Shore Bancorp, Inc. common stock trades on Nasdaq, with the Board intending to maintain quarterly dividends, and the Company repurchased 42,155 shares in Q4 2018 - Lake Shore Bancorp, Inc. common stock trades on the Nasdaq Global Market under the symbol '**LSBK**'[257](index=257&type=chunk) - The Board of Directors plans to continue a regular quarterly dividend, dependent on earnings, financial condition, capital requirements, and regulatory limitations[258](index=258&type=chunk) - As of March 21, 2019, there were **751 stockholders of record**[259](index=259&type=chunk) Common Stock Repurchases (Q4 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (thousands) | | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------- | | October 1 through October 31, 2018 | 26,900 | 16.14 | 26,900 | 81,190 | | November 1 through November 30, 2018 | - | - | - | 81,190 | | December 1 through December 31, 2018 | 15,255 | 15.30 | 13,000 | 68,190 | | **Total** | **42,155** | **15.84** | **39,900** | **68,190** | [Selected Financial Data](index=73&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of key financial and operational data, showing asset growth, increased net income, strong capital ratios, and improved asset quality Selected Financial Condition Data (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :---------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Total assets | 545,708 | 518,977 | 489,174 | 473,385 | 487,471 | | Loans, net | 392,471 | 365,063 | 326,365 | 297,101 | 284,853 | | Securities available for sale | 86,193 | 80,421 | 86,335 | 113,213 | 138,202 | | Total deposits | 432,458 | 405,153 | 385,893 | 369,155 | 386,939 | | Total stockholders' equity | 79,804 | 78,375 | 76,030 | 73,876 | 71,630 | | Allowance for loan losses | 3,448 | 3,283 | 2,882 | 1,985 | 1,921 | | Non-performing loans | 3,218 | 3,833 | 5,866 | 4,668 | 4,729 | | Non-performing assets | 3,896 | 4,268 | 6,278 | 5,380 | 5,130 | Selected Operating Data (2014-2018) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Interest income | 21,536 | 19,408 | 17,518 | 17,587 | 17,879 | | Interest expense | 3,602 | 2,630 | 2,294 | 2,757 | 3,348 | | Net interest income | 17,934 | 16,778 | 15,224 | 14,830 | 14,531 | | Provision for loan losses | 390 | 510 | 1,125 | 400 | 222 | | Total non-interest income | 2,474 | 2,655 | 4,070 | 2,707 | 2,235 | | Total non-interest expense | 15,433 | 14,360 | 13,879 | 13,083 | 12,819 | | Income before income taxes | 4,585 | 4,563 | 4,290 | 4,054 | 3,725 | | Income taxes | 585 | 1,185 | 775 | 716 | 567 | | **Net income** | **4,000** | **3,378** | **3,515** | **3,338** | **3,158** | | Basic earnings per common share ($) | 0.66 | 0.55 | 0.58 | 0.57 | 0.55 | | Diluted earnings per common share ($) | 0.66 | 0.55 | 0.58 | 0.56 | 0.55 | | Dividends declared per share ($) | 0.40 | 0.32 | 0.28 | 0.28 | 0.28 | Selected Financial Ratios and Other Data (2014-2018) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :----------------------------------------- | :------ | :------ | :------ | :------ | :------ | | Return on average assets | 0.75% | 0.67% | 0.74% | 0.70% | 0.65% | | Return on average equity | 5.07% | 4.34% | 4.58% | 4.57% | 4.58% | | Interest rate spread | 3.43% | 3.45% | 3.29% | 3.18% | 3.06% | | Net interest margin | 3.61% | 3.61% | 3.44% | 3.34% | 3.21% | | Efficiency ratio | 75.62% | 73.89% | 71.93% | 74.60% | 76.46% | | Common Equity Tier 1 capital to risk-weighted assets | 19.70% | 20.82% | 22.23% | 24.21% | n/a | | Total risk-based capital to risk-weighted assets | 20.59% | 21.75% | 23.15% | 24.93% | 25.71% | | Non-performing loans as a percent of total net loans | 0.82% | 1.05% | 1.80% | 1.57% | 1.66% | | Allowance for loan losses as a percent of non-performing loans | 107.15% | 85.65% | 49.13% | 42.52% | 40.62% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=75&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the Company's financial condition and results, focusing on net interest income, strategic objectives, risk management, and the impact of tax law changes on performance - The Company's results depend primarily on net interest income, influenced by interest-earning assets, interest-bearing liabilities, and their respective rates[268](index=268&type=chunk) - Management's strategy focuses on maintaining its position as an authentic community bank in Western New York, emphasizing individualized customer service, financial strength, community involvement, effective risk management, strong capital, and technological services[275](index=275&type=chunk) - A key strategic objective is to enhance technology supporting customer service, with a five-year plan for cost-effective digital services to attract new customers and improve operational efficiencies[277](index=277&type=chunk) - Lending strategy prioritizes growth in short-term adjustable rate commercial real estate, commercial business, and home equity loans to diversify the asset mix and reduce interest rate risk[279](index=279&type=chunk)[280](index=280&type=chunk) - Asset quality is maintained through prudent underwriting standards and aggressive monitoring, resulting in a non-performing loans to total net loans ratio of **0.82%** at December 31, 2018, down from **1.05%** in 2017[282](index=282&type=chunk) - The investment policy aims to complement lending and deposit activities, provide liquidity, generate favorable returns, and manage interest rate and credit risk; the portfolio primarily consists of agency collateralized mortgage obligations, agency mortgage-backed securities, and municipal securities[283](index=283&type=chunk)[284](index=284&type=chunk) - The Company is exposed to interest rate risk as interest-bearing liabilities re-price more quickly than interest-earning assets in a rising rate environment; strategies include increasing adjustable-rate commercial loans and building lower-cost core deposits[287](index=287&type=chunk)[288](index=288&type=chunk)[289](index=289&type=chunk) - Net income increased by **$662,000 (18.4%)** to **$4.0 million** in 2018, driven by a **$1.2 million** increase in net interest income and a **$600,000** decrease in income tax expense, partially offset by higher non-interest expenses[312](index=312&type=chunk) - Interest income rose by **$2.1 million (11.0%)** in 2018, primarily from a **$1.6 million** increase in loan interest income due to a **7.8%** increase in average loan balances and a higher average yield (**4.83%** in 2018 vs. **4.74%** in 2017)[314](index=314&type=chunk) - Interest expense increased by **$972,000 (37.0%)** in 2018, mainly due to a **$897,000 (43.1%)** rise in interest paid on deposits, reflecting higher market interest rates and growth in money market and time deposit balances[318](index=318&type=chunk) - Income tax expense decreased by **$600,000 (50.6%)** in 2018, primarily due to the reduction in the federal corporate tax rate from **34% to 21%** under the Tax Cuts and Jobs Act[326](index=326&type=chunk) - Total assets increased by **$26.7 million (5.2%)** to **$545.7 million** at December 31, 2018, mainly due to a **$27.4 million** increase in net loans receivable and a **$5.8 million** increase in securities available for sale[303](index=303&type=chunk) - Total deposits increased by **$27.3 million (6.7%)** to **$432.5 million** at December 31, 2018, driven by growth in core deposits, particularly money market accounts, as the Company offered competitive rates to fund loan growth[308](index=308&type=chunk)[309](index=309&type=chunk) - The Company maintains strong liquidity, with available borrowing capacity from FHLBNY (**$107.8 million**) and Federal Reserve Bank (**$11.0 million**), and correspondent bank lines of credit (**$22.0 million**)[345](index=345&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=101&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Disclosure on quantitative and qualitative market risk is not required for smaller reporting companies - Disclosure not required for smaller reporting companies[354](index=354&type=chunk) [Financial Statements and Supplementary Data](index=101&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item refers to the audited consolidated financial statements and supplementary data presented separately from pages F-1 through F-54 - The audited consolidated financial statements and supplementary data are located on pages **F-1 through F-54** of this Annual Report on Form 10-K[355](index=355&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=101&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[356](index=356&type=chunk) [Controls and Procedures](index=101&type=section&id=Item%209A.%20Controls%20and%20Procedures) The Company maintains effective disclosure controls and procedures, with management concluding internal control over financial reporting was effective as of December 31, 2018 - The Company's disclosure controls and procedures were evaluated and deemed effective as of December 31, 2018[357](index=357&type=chunk) - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO Internal Control-Integrated Framework (2013)[360](index=360&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2018[362](index=362&type=chunk) [Other Information](index=102&type=section&id=Item%209B.%20Other%20Information) There is no other information to report in this item - None[363](index=363&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=102&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[365](index=365&type=chunk) [Executive Compensation](index=102&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[366](index=366&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=102&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership and related stockholder matters is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[367](index=367&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=103&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related transactions and director independence is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[368](index=368&type=chunk) [Principal Accounting Fees and Services](index=103&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the 2019 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference to the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders[369](index=369&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=103&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements included in Item 8 and details the various exhibits filed as part of the Annual Report on Form 10-K - Financial statements included in Item 8 of Part II are listed, comprising the Report of Independent Registered Public Accounting Firm, Consolidated Statements of Financial Condition, Income, Comprehensive Income, Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[371](index=371&type=chunk)[373](index=373&type=chunk) - Various exhibits are filed or incorporated by reference, including the Company's charter, bylaws, stock certificates, stock award notices, stock option certificates, employment and change in control agreements, supplemental benefit plans, equity incentive plans, and certifications by the CEO and CFO[374](index=374&type=chunk) [Item 16. Form 10-K Summary](index=106&type=section&id=Item%2016.%20Form%2010-K%20Summary) There is no Form 10-K Summary provided in this report - None[378](index=378&type=chunk) [SIGNATURES](index=107&type=section&id=SIGNATURES) The report is duly signed on behalf of Lake Shore Bancorp, Inc. by its President and CEO and other officers and directors as of March 27, 2019 - The report was signed on March 27, 2019, by Daniel P. Reininga, President and Chief Executive Officer, and other directors and officers, including Rachel A. Foley (Chief Financial Officer and Treasurer) and Steven W. Schiavone (Principal Accounting Officer)[381](index=381&type=chunk)[382](index=382&type=chunk)[383](index=383&type=chunk) Financial Statements [Report of Independent Registered Public Accounting Firm](index=109&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Baker Tilly Virchow Krause, LLP issued an unqualified opinion on the consolidated financial statements, affirming fair presentation in conformity with GAAP for the periods ended December 31, 2018 - Baker Tilly Virchow Krause, LLP provided an unqualified opinion on the consolidated financial statements for Lake Shore Bancorp, Inc. and subsidiary[386](index=386&type=chunk) - The audit confirmed that the financial statements present fairly, in all material respects, the financial position as of December 31, 2018 and 2017, and the results of operations and cash flows for the three years ended December 31, 2018, in conformity with GAAP[386](index=386&type=chunk) - The Company is exempt from an audit of its internal control over financial reporting, and the auditors did not perform one for the purpose of expressing an opinion on its effectiveness[388](index=388&type=chunk) [Consolidated Statements of Financial Condition](index=110&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) The consolidated statements show an increase in total assets and liabilities from 2017 to 2018, driven by growth in net loans receivable and total deposits Consolidated Statements of Financial Condition (December 31, 2018 vs. 2017) | Metric | December 31, 2018 ($ thousands) | December 31, 2017 ($ thousands) | | :-------------------------------------- | :------------------------------ | :------------------------------ | | **Assets** | | | | Cash and Cash Equivalents | 30,751 | 40,913 | | Securities available for sale | 86,193 | 80,421 | | Loans receivable, net | 392,471 | 365,063 | | Bank owned life insurance | 21,469 | 18,077 | | **Total Assets** | **545,708** | **518,977** | | **Liabilities** | | | | Total Deposits | 432,458 | 405,153 | | Long-term debt | 24,650 | 26,950 | | **Total Liabilities** | **465,904** | **440,602** | | **Stockholders' Equity** | | | | Total Stockholders' Equity | 79,804 | 78,375 | | **Total Liabilities and Stockholders' Equity** | **545,708** | **518,977** | - Total assets increased by **$26.7 million (5.2%)** from December 31, 2017, to December 31, 2018[391](index=391&type=chunk) - Loans receivable, net, increased by **$27.4 million (7.5%)** from **$365.1 million** in 2017 to **$392.5 million** in 2018[391](index=391&type=chunk) - Total deposits increased by **$27.3 million (6.7%)** from **$405.2 million** in 2017 to **$432.5 million** in 2018[391](index=391&type=chunk) [Consolidated Statements of Income](index=111&type=section&id=Consolidated%20Statements%20of%20Income) The consolidated statements reflect an increase in net income for 2018, primarily due to higher net interest income and a significant decrease in income tax expense Consolidated Statements of Income (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Total Interest Income | 21,536 | 19,408 | 17,518 | | Total Interest Expense | 3,602 | 2,630 | 2,294 | | **Net Interest Income** | **17,934** | **16,778** | **15,224** | | Provision for Loan Losses | 390 | 510 | 1,125 | | Net Interest Income after Provision for Loan Losses | 17,544 | 16,268 | 14,099 | | Total Non-Interest Income | 2,474 | 2,655 | 4,070 | | Total Non-Interest Expenses | 15,433 | 14,360 | 13,879 | | Income before Income Taxes | 4,585 | 4,563 | 4,290 | | Income Tax Expense | 585 | 1,185 | 775 | | **Net Income** | **4,000** | **3,378** | **3,515** | | Basic and diluted earnings per common share ($) | 0.66 | 0.55 | 0.58 | | Dividends declared per share ($) | 0.40 | 0.32 | 0.28 | - Net income increased by **$622,000 (18.4%)** from **$3.378 million** in 2017 to **$4.000 million** in 2018[393](index=393&type=chunk) - Net interest income increased by **$1.156 million (6.9%)** from **$16.778 million** in 2017 to **$17.934 million** in 2018[393](index=393&type=chunk) - Income tax expense decreased by **$600,000 (50.6%)** from **$1.185 million** in 2017 to **$585,000** in 2018[393](index=393&type=chunk) [Consolidated Statements of Comprehensive Income](index=112&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income increased from 2017 to 2018, despite higher net unrealized losses on securities available for sale, reflecting the overall financial performance Consolidated Statements of Comprehensive Income (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :------------------------------------------------------------------ | :----------------- | :----------------- | :----------------- | | Net Income | 4,000 | 3,378 | 3,515 | | Unrealized holding losses on securities available for sale, net of tax benefit | (703) | (341) | (287) | | Reclassification adjustments related to: Recovery on previously impaired investment securities included in net income, net of tax expense | (115) | (89) | (94) | | Reclassification adjustments related to: Net gain on sale of securities included in net income, net of tax expense | - | (161) | (1,080) | | **Total Other Comprehensive Loss** | **(818)** | **(591)** | **(1,461)** | | **Total Comprehensive Income** | **3,182** | **2,787** | **2,054** | - Total Comprehensive Income increased from **$2.787 million** in 2017 to **$3.182 million** in 2018[395](index=395&type=chunk) - Net unrealized losses on securities available for sale, net of tax benefit, increased from **$(341) thousand** in 2017 to **$(703) thousand** in 2018[395](index=395&type=chunk) [Consolidated Statements of Stockholders' Equity](index=113&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) Total stockholders' equity increased from 2017 to 2018, driven by net income and ESOP contributions, partially offset by treasury stock repurchases and cash dividends Consolidated Statements of Stockholders' Equity (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Balance - January 1 | 78,375 | 76,030 | 73,876 | | Net income | 4,000 | 3,378 | 3,515 | | Other comprehensive loss, net | (818) | (591) | (1,461) | | ESOP shares earned | 130 | 126 | 108 | | Stock based compensation | 45 | 44 | 9 | | Purchase of treasury stock, at cost | (1,448) | (269) | (455) | | Cash dividends declared | (880) | (743) | (888) | | **Balance - December 31** | **79,804** | **78,375** | **76,030** | - Total Stockholders' Equity increased by **$1.429 million (1.8%)** from **$78.375 million** in 2017 to **$79.804 million** in 2018[397](index=397&type=chunk) - Treasury stock purchases amounted to **$1.448 million** in 2018, compared to **$269 thousand** in 2017[397](index=397&type=chunk) - Cash dividends declared increased to **$880 thousand** in 2018 from **$743 thousand** in 2017[397](index=397&type=chunk) [Consolidated Statements of Cash Flows](index=114&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The statements indicate a net decrease in cash and cash equivalents in 2018, with operating activities providing cash, investing activities using cash, and financing activities providing cash from deposits Consolidated Statements of Cash Flows (Years Ended December 31, 2018, 2017, 2016) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Net Cash Provided by Operating Activities | 6,114 | 5,827 | 4,294 | | Net Cash Used in Investing Activities | (39,087) | (36,462) | (7,253) | | Net Cash Provided by Financing Activities | 22,811 | 26,069 | 14,211 | | **Net (Decrease) Increase in Cash and Cash Equivalents** | **(10,162)** | **(4,566)** | **11,252** | | Cash and Cash Equivalents - Beginning | 40,913 | 45,479 | 34,227 | | **Cash and Cash Equivalents - Ending** | **30,751** | **40,913** | **45,479** | - Net cash used in investing activities increased to **$39.087 million** in 2018, primarily due to net loan originations and principal collections of **$(30.122) million** and purchases of securities of **$(16.169) million**[398](index=398&type=chunk) - Net cash provided by financing activities decreased to **$22.811 million** in 2018 from **$26.069 million** in 2017, mainly due to lower net increase in deposits and higher treasury stock purchases[398](index=398&type=chunk) [Notes to Consolidated Financial Statements](index=116&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on the Company's organizational structure, significant accounting policies, financial statement line items, and recent accounting standard adoptions - Lake Shore Bancorp, Inc. and Lake Shore, MHC were formed in 2006; The MHC held **60.6%** of the Company's outstanding common stock as of December 31, 2018[401](index=401&type=chunk)[402](index=402&type=chunk) - The MHC's waiver of dividends, approved by members on February 6, 2019, and non-objected by the Federal Reserve Board as of March 7, 2019, allows the Company to retain resources for stock repurchases, dividends to minority stockholders, and investments[404](index=404&type=chunk)[601](index=601&type=chunk) - All investment securities are classified as available for sale and carried at fair value; the Company performs quarterly reviews for other-than-temporary impairment (OTTI)[409](index=409&type=chunk)[410](index=410&type=chunk) - The allowance for loan losses is estimated based on historical loss factors, environmental factors, and individual loan reviews, with specific allocations for classified loans and a general component for non-classified loans[415](index=415&type=chunk)[416](index=416&type=chunk)[469](index=469&type=chunk) Allowance for Loan Losses by Loan Type (December 31, 2018) | Loan Type | Allowance for Loan Losses ($ thousands) | Gross Loans Receivable ($ thousands) | | :---------------------------- | :-------------------------------------- | :----------------------------------- | | Residential one to four-family | 91 | 155,024 | | Home equity | 471 | 41,830 | | Commercial Real Estate | 2,020 | 150,475 | | Construction - Commercial | 250 | 22,252 | | Commercial (Other) | 507 | 21,825 | | Consumer | 25 | 1,156 | | Unallocated | 84 | - | | **Total** | **3,448** | **392,562** | - Total deposits increased to **$432.458 million** at December 31, 2018, with a weighted average interest rate of **0.87%**, up from **0.59%** in 2017[494](index=494&type=chunk) - Long-term debt, primarily FHLBNY advances, totaled **$24.650 million** at December 31, 2018, with a weighted average interest rate of **2.16%**[500](index=500&type=chunk) - The Tax Cuts and Jobs Act of 2017 reduced the federal corporate income tax rate from **34% to 21%**, resulting in a **$262,000** net tax expense from revaluing deferred tax assets in 2017[505](index=505&type=chunk)[506](index=506&type=chunk) - The Company adopted ASU 2014-09 (Revenue from Contracts with Customers) and ASU 2016-01 (Financial Instruments) on January 1, 2018, with no material impact on financial statements; ASU 2018-02 (Reclassification of Tax Effects) resulted in a **$156,000** reclassification from AOCI to retained earnings[442](index=442&type=chunk)[443](index=443&type=chunk)[444](index=444&type=chunk)[446](index=446&type=chunk) - New accounting standards, including ASU 2016-02 (Leases) and ASU 2016-13 (CECL), are pending adoption, with CECL expected to increase the allowance for loan losses[447](index=447&type=chunk)[448](index=448&type=chunk) [Note 1 - Organization and Nature of Operations](index=116&type=section&id=Note%201%20-%20Organization%20and%20Nature%20of%20Operations) [Note 2 - Summary of Significant Accounting Policies](index=116&type=section&id=Note%202%20-%20Summary%20of%20Significant%20Accounting%20Policies) [Note 3 – Investment Securities](index=128&type=section&id=Note%203%20%E2%80%93%20Investment%20Securities) [Note 4 - Loans Receivable](index=132&type=section&id=Note%204%20-%20Loans%20Receivable) [Note 5 - Allowance for Loan Losses](index=132&type=section&id=Note%205%20-%20Allowance%20for%20Loan%20Losses) [Note 6 - Premises and Equipment](index=144&type=section&id=Note%206%20-%20Premises%20and%20Equipment) [Note 7 - Deposits](index=144&type=section&id=Note%207%20-%20Deposits) [Note 8 - Borrowings](index=145&type=section&id=Note%208%20-%20Borrowings) [Note 9 - Lease Obligations](index=146&type=section&id=Note%209%20-%20Lease%20Obligations) [Note 10- Income Taxes](index=146&type=section&id=Note%2010-%20Income%20Taxes) [Note 11 - Employee and Director Benefit Plans](index=150&type=section&id=Note%2011%20-%20Employee%20and%20Director%20Benefit%20Plans) [Note 12 – Stock-based Compensation](index=153&type=section&id=Note%2012%20%E2%80%93%20Stock-based%20Compensation) [Note 13 - Fair Value of Financial Instruments](index=156&type=section&id=Note%2013%20-%20Fair%20Value%20of%20Financial%20Instruments) [Note 14 - Regulatory Capital Requirements](index=164&type=section&id=Note%2014%20-%20Regulatory%20Capital%20Requirements) [Note 15 – Earnings per Share](index=166&type=section&id=Note%2015%20%E2%80%93%20Earnings%20per%20Share) [Note 16 – Commitments to Extend Credit](index=167&type=section&id=Note%2016%20%E2%80%93%20Commitments%20to%20Extend%20Credit) [Note 17 – Parent Company Only Financial Information](index=168&type=section&id=Note%2017%20%E2%80%93%20Parent%20Company%20Only%20Financial%20Information) [Note 18 – Quarterly Financial Data – Unaudited](index=170&type=section&id=Note%2018%20%E2%80%93%20Quarterly%20Financial%20Data%20%E2%80%93%20Unaudited) [Note 19 – Treasury Stock](index=170&type=section&id=Note%2019%20%E2%80%93%20Treasury%20Stock) [Note 20 – Other Comprehensive Loss](index=171&type=section&id=Note%2020%20%E2%80%93%20Other%20Comprehensive%20Loss) [Note 21 – Revenue Recognition](index=172&type=section&id=Note%2021%20%E2%80%93%20Revenue%20Recognition) [Note 22 – Subsequent Events](index=175&type=section&id=Note%2022%20%E2%80%93%20Subsequent%20Events)