lsbk-20210930x10q

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

Commission File No.: 000-51821


LAKE SHORE BANCORP, INC.
(Exact name of registrant as specified in its charter)
United States			20-4729288
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)
31 East Fourth Street, Dunkirk, New York			14048
(Address of principal executive offices)			(Zip code)
(716) 366-4070
(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

LSBK

The Nasdaq Stock Market LLC

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

Yes [X]No [ ]

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

Yes [X]No [ ]

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


Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
Emerging growth company ¨

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

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

Yes [ ] No [X]

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

There were 5,693,024 shares of the registrant’s common stock, $0.01 par value per share, outstanding at November 10, 2021.


		TABLE OF CONTENTS

ITEM		PART I	PAGE

1	FINANCIAL STATEMENTS
	-	Consolidated Statements of Financial Condition as of September 30, 2021 (Unaudited) and December 31, 2020	1
	-	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	2
	-	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	3
	-	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, June 30 and September 30, 2021 and 2020 (Unaudited)	4
	-	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)	6
	-	Notes to Unaudited Consolidated Financial Statements	7
2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		32
3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		50
4	CONTROLS AND PROCEDURES		50

		PART II

1A	RISK FACTORS		50
2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		51
6	EXHIBITS		51
SIGNATURES			52

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary


Consolidated Statements of Financial Condition

	September 30,		December 31,
	2021		2020
	(Unaudited)
	(Dollars in thousands, except share data)

Assets
Cash and due from banks	$	10,682	$	7,867
Interest earning deposits		50,298		35,108
Cash and Cash Equivalents		60,980		42,975
Securities		83,698		79,285
Federal Home Loan Bank stock, at cost		1,606		1,905
Loans receivable, net of allowance for loan losses 2021 $6,125; 2020 $5,857		524,647		524,143
Premises and equipment, net		9,894		8,974
Accrued interest receivable		2,642		2,987
Bank owned life insurance		22,774		22,461
Other assets		3,067		3,470
Total Assets	$	709,308	$	686,200
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Interest bearing	$	475,979	$	468,313
Non-interest bearing		115,775		91,946
Total Deposits		591,754		560,259
Long-term debt		21,950		29,750
Advances from borrowers for taxes and insurance		1,756		3,183
Other liabilities		7,357		7,084
Total Liabilities		622,817		600,276
Stockholders' Equity
Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,836,514 shares issued and 5,703,024 shares outstanding at September 30, 2021 and 6,836,514 shares issued and 5,823,786 shares outstanding at December 31, 2020		68		68
Additional paid-in capital		31,317		31,201
Treasury stock, at cost (1,133,490 shares at September 30, 2021 and 1,012,728 shares at December 31, 2020)		(13,501)		(11,584)
Unearned shares held by ESOP		(1,215)		(1,279)
Unearned shares held by compensation plans		(193)		(118)
Retained earnings		69,032		65,488
Accumulated other comprehensive income		983		2,148
Total Stockholders' Equity		86,491		85,924
Total Liabilities and Stockholders' Equity	$	709,308	$	686,200

See notes to consolidated financial statements.


Lake Shore Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
	Three Months Ended September 30,				Nine Months Ended September 30,
	2021			2020	2021		2020
	(Unaudited)
	(Dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	5,997	$	5,366	$	17,274	$	16,637
Investment securities, taxable		188		239		550		746
Investment securities, tax-exempt		269		302		842		882
Other		11		15		25		92
Total Interest Income		6,465		5,922		18,691		18,357
Interest Expense
Deposits		494		833		1,704		2,950
Long-term debt		119		164		401		513
Other		15		17		48		52
Total Interest Expense		628		1,014		2,153		3,515
Net Interest Income		5,837		4,908		16,538		14,842
Provision for Loan Losses		-		300		650		1,125
Net Interest Income after Provision for Loan Losses		5,837		4,608		15,888		13,717
Non-Interest Income
Service charges and fees		265		201		765		644
Debit card fees		224		206		656		562
Earnings on bank owned life insurance		104		128		313		374
Unrealized loss on equity securities		(14)		(6)		(34)		(24)
Unrealized gain (loss) on interest rate swap		25		23		121		(156)
Recovery on previously impaired investment securities		18		20		50		48
Net gain on sale of loans		69		184		278		333
Other		16		15		61		53
Total Non-Interest Income		707		771		2,210		1,834
Non-Interest Expense
Salaries and employee benefits		2,375		2,172		6,719		6,311
Occupancy and equipment		708		647		2,048		1,921
Data processing		425		353		1,158		1,012
Professional services		454		245		1,203		741
Advertising		189		166		502		537
Postage and supplies		67		59		207		204
FDIC insurance		48		44		135		79
Other		228		236		870		850
Total Non-Interest Expense		4,494		3,922		12,842		11,655
Income before Income Taxes		2,050		1,457		5,256		3,896
Income Tax Expense		359		226		884		581
Net Income	$	1,691	$	1,231	$	4,372	$	3,315
Basic and diluted earnings per common share	$	0.29	$	0.21	$	0.74	$	0.56
Dividends declared per share	$	0.14	$	0.12	$	0.40	$	0.36

See notes to consolidated financial statements.

‎

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income


	Three Months Ended September 30,
	2021		2020
	(Unaudited)
	(Dollars in thousands)
Net Income	$	1,691	$	1,231
Other Comprehensive Loss, net of tax benefit
Unrealized holding losses on securities available for sale, net of tax benefit		(559)		(122)
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income, net of tax expense		(14)		(16)
Total Other Comprehensive Loss		(573)		(138)
Total Comprehensive Income	$	1,118	$	1,093


	Nine Months Ended September 30,
	2021		2020
	(Unaudited)
	(Dollars in thousands)
Net Income	$	4,372	$	3,315
Other Comprehensive (Loss) Income, net of tax benefit (expense):
Unrealized holding (losses) gains on securities, net of tax benefit (expense)		(1,126)		733
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income, net of tax expense		(39)		(38)
Total Other Comprehensive (Loss) Income		(1,165)		695
Total Comprehensive Income	$	3,207	$	4,010

See notes to consolidated financial statements.

‎

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, June 30 and September 30, 2021 and 2020 (Unaudited)


							Unearned		Unearned Shares				Accumulated
			Additional				Shares		Held by				Other
	Common		Paid-In		Treasury		Held by		Compensation		Retained		Comprehensive
	Stock		Capital		Stock		ESOP		Plans		Earnings		Income		Total
	(Dollars in thousands, except share and per share data)

Balance - January 1, 2020	$	68	$	31,078	$	(10,184)	$	(1,364)	$	(39)	$	61,950	$	1,331	$	82,840
Net income		-		-		-		-		-		731		-		731
Other comprehensive income, net of tax expense of $220		-		-		-		-		-		-		828		828
ESOP shares earned (1,984 shares)		-		7		-		21		-		-		-		28
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares granted (20,830 shares)		-		-		196		-		(196)		-		-		-
Compensation plan shares earned (1,889 shares)		-		9		-		-		20		-		-		29
Purchase of treasury stock, at cost (26,900 shares)		-		-		(377)		-		-		-		-		(377)
Cash dividends declared ($0.12 per share)		-		-		-		-		-		(259)		-		(259)
Balance - March 31, 2020	$	68	$	31,105	$	(10,365)	$	(1,343)	$	(215)	$	62,422	$	2,159	$	83,831

Balance - April 1, 2020	$	68	$	31,105	$	(10,365)	$	(1,343)	$	(215)	$	62,422	$	2,159	$	83,831
Net income		-		-		-		-		-		1,353		-		1,353
Other comprehensive income, net of tax expense of $2		-		-		-		-		-		-		5		5
ESOP shares earned (1,984 shares)		-		2		-		21		-		-		-		23
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares forfeited (332 shares)		-		-		(4)		-		4		-		-		-
Compensation plan shares earned (3,299 shares)		-		19		-		-		31		-		-		50
Purchase of treasury stock, at cost (40,600 shares)		-		-		(511)		-		-		-		-		(511)
Cash dividends declared ($0.12 per share)		-		-		-		-		-		(254)		-		(254)
Balance - June 30, 2020	$	68	$	31,137	$	(10,880)	$	(1,322)	$	(180)	$	63,521	$	2,164	$	84,508

Balance - July 1, 2020	$	68	$	31,137	$	(10,880)	$	(1,322)	$	(180)	$	63,521	$	2,164	$	84,508
Net income		-		-		-		-		-		1,231		-		1,231
Other comprehensive loss, net of tax benefit of $37		-		-		-		-		-		-		(138)		(138)
ESOP shares earned (1,984 shares)		-		3		-		22		-		-		-		25
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares earned (3,327 shares)		-		18		-		-		33		-		-		51
Purchase of treasury stock, at cost (42,100 shares)		-		-		(550)		-		-		-		-		(550)
Cash dividends declared ($0.12 per share)		-		-		-		-		-		(251)		-		(251)
Balance - September 30, 2020	$	68	$	31,169	$	(11,430)	$	(1,300)	$	(147)	$	64,501	$	2,026	$	84,887

							Unearned		Unearned Shares				Accumulated
			Additional				Shares		Held by				Other
	Common		Paid-In		Treasury		Held by		Compensation		Retained		Comprehensive
	Stock		Capital		Stock		ESOP		Plans		Earnings		Income		Total
	(Dollars in thousands, except share and per share data)
Balance - January 1, 2021	$	68	$	31,201	$	(11,584)	$	(1,279)	$	(118)	$	65,488	$	2,148	$	85,924
Net income		-		-		-		-		-		1,688		-		1,688
Other comprehensive loss, net of tax benefit of $213		-		-		-		-		-		-		(803)		(803)
ESOP shares earned (1,984 shares)		-		8		-		21		-		-		-		29
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares granted (20,958 shares)		-		-		196		-		(196)		-		-		-
Compensation plan shares forfeited (1,392 shares)		-		-		(13)		-		13		-		-		-
Compensation plan shares earned (2,057 shares)		-		10		-		-		21		-		-		31
Purchase of treasury stock, at cost (43,834 shares)		-		-		(652)		-		-		-		-		(652)
Cash dividends declared ($0.13 per share)		-		-		-		-		-		(268)		-		(268)
Balance - March 31, 2021	$	68	$	31,230	$	(12,053)	$	(1,258)	$	(280)	$	66,908	$	1,345	$	85,960

Balance - April 1, 2021	$	68	$	31,230	$	(12,053)	$	(1,258)	$	(280)	$	66,908	$	1,345	$	85,960
Net income		-		-		-		-		-		993		-		993
Other comprehensive income, net of tax expense of $55		-		-		-		-		-		-		211		211
ESOP shares earned (1,984 shares)		-		8		-		22		-		-		-		30
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares earned (4,375 shares)		-		24		-		-		42		-		-		66
Purchase of treasury stock, at cost (36,094 shares)		-		-		(547)		-		-		-		-		(547)
Cash dividends declared ($0.13 per share)		-		-		-		-		-		(280)		-		(280)
Balance - June 30, 2021	$	68	$	31,273	$	(12,600)	$	(1,236)	$	(238)	$	67,621	$	1,556	$	86,444

Balance - July 1, 2021	$	68	$	31,273	$	(12,600)	$	(1,236)	$	(238)	$	67,621	$	1,556	$	86,444
Net income		-		-		-		-		-		1,691		-		1,691
Other comprehensive loss, net of tax benefit of $152		-		-		-		-		-		-		(573)		(573)
ESOP shares earned (1,984 shares)		-		8		-		21		-		-		-		29
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares forfeited (400 shares)		-		-		(4)		-		4		-		-		-
Compensation plan shares earned (4,277 shares)		-		25		-		-		41		-		-		66
Purchase of treasury stock, at cost (60,000 shares)		-		-		(897)		-		-		-		-		(897)
Cash dividends declared ($0.14 per share)		-		-		-		-		-		(280)		-		(280)
Balance - September 30, 2021	$	68	$	31,317	$	(13,501)	$	(1,215)	$	(193)	$	69,032	$	983	$	86,491

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
	2021		2020
	(Unaudited)
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,372	$	3,315
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of investment securities		114		31
Net amortization of deferred loan costs		408		424
Provision for loan losses		650		1,125
Recovery on previously impaired investment securities		(50)		(48)
Unrealized loss on equity securities		34		24
Unrealized (gain) loss on interest rate swap		(121)		156
Originations of loans held for sale		(8,743)		(8,452)
Proceeds from sales of loans held for sale		9,021		8,785
Gain on sale of loans held for sale		(278)		(333)
Depreciation and amortization		652		629
Increase in bank owned life insurance, net		(313)		(374)
ESOP shares committed to be released		88		76
Stock based compensation expense		196		163
Decrease (Increase) in accrued interest receivable		345		(992)
(Increase) Decrease in other assets		(86)		36
Writedowns of foreclosed real estate		7		-
Gains from sale of foreclosed real estate		(4)		(16)
Increase (Decrease) in other liabilities		135		(109)
Net Cash Provided by Operating Activities		6,427		4,440
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in debt securities:
Maturities, prepayments and calls		15,354		13,118
Purchases		(21,340)		(20,330)
Purchases of Federal Home Loan Bank Stock		(54)		(93)
Redemptions of Federal Home Loan Bank Stock		353		171
Loan origination and principal collections, net		(1,659)		(22,001)
Proceeds from sale of foreclosed real estate		55		526
Additions to premises and equipment		(475)		(280)
Net Cash Used in Investing Activities		(7,766)		(28,889)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		31,495		72,062
Net decrease in advances from borrowers for taxes and insurance		(1,427)		(1,261)
Proceeds from issuance of long-term debt		-		1,200
Repayment of long-term debt		(7,800)		(4,500)
Purchase of treasury stock		(2,096)		(1,438)
Cash dividends paid		(828)		(764)
Net Cash Provided by Financing Activities		19,344		65,299
Net Increase in Cash and Cash Equivalents		18,005		40,850
CASH AND CASH EQUIVALENTS - BEGINNING		42,975		30,289
CASH AND CASH EQUIVALENTS - ENDING	$	60,980	$	71,139
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	2,169	$	3,523
Income taxes paid	$	1,075	$	800
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans	$	97	$	-
Securities purchased and not settled	$	-	$	2,355

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

The interim consolidated financial statements included herein as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all information or footnotes necessary for a complete presentation of the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated statement of financial condition at December 31, 2020 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The consolidated statements of income for the three and nine months ended September 30, 2021 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2021.

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

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition as of September 30, 2021 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Note 2 – New Accounting Standards

Accounting Standards to be Adopted

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

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

ASU 2016-13 was originally effective for the Company in 2020. In November 2019, the FASB issued guidance to defer the effective date for smaller reporting companies such as the Company until January 1, 2023.

Note 3 – COVID-19

During the first quarter of 2020, an outbreak of a novel strain of coronavirus (“COVID-19”) was originally identified in Wuhan, China, and has since spread to a number of countries around the world, including the United States. The World Health Organization declared COVID-19 to be a global pandemic. The direct and indirect effects of COVID-19 and its associated impacts on business activities, retail, travel, productivity and other economic activities have had, are currently having and may for some time continue to have a destabilizing effect on financial markets and economic activity. As a result, Federal and State, including New York State, governments have passed legislation to counteract the economic impact of the pandemic. The legislation had a direct impact on the banking industry and our financial operations, as described in Note 3 of the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. The Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”), in addition to providing financial assistance to both businesses and consumers, created a forbearance program for federally-backed mortgage loans and protected borrowers from negative credit reporting due to loan accommodations related to the national emergency. This legislation allowed the Company to provide loan payment deferrals to those borrowers that had incurred a significant economic impact as a result of the pandemic and allowed the Company to provide this relief without accounting for such loans as past due or as a troubled debt restructuring ("TDR)". New York State also passed legislation which prevented residential evictions, foreclosure proceedings, tax lien sales or foreclosures, credit discrimination and negative credit reporting related to the COVID-19 pandemic. These moratoriums were originally going to last until May 1, 2021, but were extended until January 15, 2022 by New York State legislation.

The Company implemented a loan modification program at the onset of the pandemic in the 2nd quarter of 2020 for impacted customers, in line with regulatory guidance, allowing customers to defer loan payments. The majority of loan deferrals were granted for deferral of principal and interest payments for 90 days, and up to 180 days in some instances, with the loan repayment period extended by the deferral period. The requests were evaluated individually and approved modifications were based on the unique circumstances of each borrower. At its maximum, the Company approved loan payment deferral requests of up to 90 days on 219 loans, representing $103.1 million, or 21.1% of the Bank’s loan portfolio during the nine months ended September 30, 2020. The number of loan payment deferral requests has decreased significantly and as of September 30, 2021, only one commercial real estate loan with a balance of $7.5 million, which represents 1.4% of the Bank’s loan portfolio, remained in the loan deferral program. This loan was current at the time of modification and was not considered a troubled debt restructuring based on the regulatory guidance and we have not accounted for this loan as a TDR, nor have we designated the loan as past due or non-accrual. At this time management has not downgraded its classification of this loan due to the strength of the collateral and guarantors. Management continues to carefully monitor the borrower for additional signs of distress that would result in a downgrade in loan classification.

On December 27, 2020, President Trump signed another COVID-19 relief bill that extended and modified several provisions of the Small Business Administration ("SBA") Paycheck Protection Program ("PPP”). The SBA reactivated the PPP on January 11, 2021. The Bank originated additional PPP loans from this modified program, which ended on May 31, 2021. In the nine months ended September 30, 2021, the Bank had originated and received SBA approval on 33 PPP loans totaling $11.4 million and received $188,000 in related net deferred PPP fees under the 2021 PPP authorization. Upon funding the loans, the net fees were deferred and will be

amortized over the life of the loans as an adjustment to yield. It is expected that most customers that received a PPP loan in 2021 will apply and receive PPP loan forgiveness during the next six months, upon which any unamortized deferred fees will be recognized as an adjustment to interest income. As of September 30, 2021, 8 PPP loans with a balance of $686,000, which had been originated during the nine months ended September 30, 2021, had been forgiven by the SBA.

The Company originated 86 commercial business loans representing $30.7 million under the PPP during 2020 to assist business customers who suffered from the economic impact of the pandemic. During the nine months ended September 30, 2021, a total of $153,000 in net PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP loan originations. As of September 30, 2021, all PPP loans which had been originated during the year ended December 31, 2020 have been forgiven by the SBA.

At September 30, 2021, there were $10.7 million in PPP loans outstanding and recorded as commercial business loans with $168,000 in loan fees remaining to be recognized. PPP loans are fully guaranteed by the SBA and are not considered when determining the allowance for loan losses. In addition, these loans are classified as pass and are reported as current when determining payment status.

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

Note 4 – Investment Securities

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


	September 30, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
		(Dollars in thousands)
SECURITIES
Debt Securities Available for Sale
U.S. government agencies	$	2,009	$	230	$	-	$	2,239
Municipal bonds		43,673		940		(277)		44,336
Mortgage-backed securities:
Collateralized mortgage obligations-private label		15		1		-		16
Collateralized mortgage obligations-government sponsored entities		20,066		324		(102)		20,288
Government National Mortgage Association		79		7		-		86
Federal National Mortgage Association		9,194		81		(71)		9,204
Federal Home Loan Mortgage Corporation		7,388		109		(115)		7,382
Asset-backed securities-private label		-		116		-		116
Asset-backed securities-government sponsored entities		12		1		-		13
Total Debt Securities Available for Sale	$	82,436	$	1,809	$	(565)	$	83,680
Equity Securities		22		-		(4)		18
Total Securities	$	82,458	$	1,809	$	(569)	$	83,698


	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
		(Dollars in thousands)
SECURITIES
Debt Securities Available for Sale
U.S. government agencies	$	2,010	$	327	$	-	$	2,337
Municipal bonds		43,466		1,430		(3)		44,893
Mortgage-backed securities:
Collateralized mortgage obligations-private label		16		-		-		16
Collateralized mortgage obligations-government sponsored entities		22,527		549		(25)		23,051
Government National Mortgage Association		116		11		-		127
Federal National Mortgage Association		4,209		130		-		4,339
Federal Home Loan Mortgage Corporation		4,143		152		(2)		4,293
Asset-backed securities-private label		-		147		-		147
Asset-backed securities-government sponsored entities		27		3		-		30
Total Debt Securities Available for Sale	$	76,514	$	2,749	$	(30)	$	79,233
Equity Securities		22		30		-		52
Total Securities	$	76,536	$	2,779	$	(30)	$	79,285

Debt Securities

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

At September 30, 2021, thirty municipal bonds with a cost of $11.0 million and fair value of $11.3 million were pledged under a collateral agreement with the Federal Reserve Bank (“FRB”) of New York for liquidity borrowing. At December 31, 2020, thirty-one municipal bonds with a cost of $10.8 million and fair value of $11.2 million were pledged with the FRB. In addition, at September 30, 2021, twenty municipal bonds with a cost of $6.0 million and fair value of $6.2 million were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2020, sixteen municipal bonds with a cost of $4.2 million and fair value of $4.4 million were pledged as collateral for customer deposits in excess of the FDIC insurance limits.

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


	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars in thousands)
September 30, 2021
Municipal bonds	$	12,350		(268)	$	530	$	(9)	$	12,880	$	(277)
Mortgage-backed securities		18,846		(210)		1,448		(78)		20,294		(288)
	$	31,196	$	(478)	$	1,978	$	(87)	$	33,174	$	(565)


December 31, 2020
Municipal bonds	$	539		(3)	$	-	$	-	$	539	$	(3)
Mortgage-backed securities		7,166		(26)		76		(1)		7,242		(27)
	$	7,705	$	(29)	$	76	$	(1)	$	7,781	$	(30)

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

At September 30, 2021, the Company’s investment portfolio included fifty-six securities in the “unrealized losses less than twelve months” category and three securities in the “unrealized losses twelve months or more” category. Management has the intent and ability to hold these securities until maturity. Management believes the temporary impairments were due to declines in fair value resulting from changes in interest rates and/or increased credit liquidity spreads since the securities were purchased. The unrealized losses on debt securities shown in the previous tables were recorded as a component of other comprehensive income (loss), net of tax expense (benefit) on the Company’s consolidated statements of stockholders’ equity.

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


	For The Nine Months Ended September 30,
	2021		2020
	(Dollars in thousands)
Beginning balance	$	221	$	294
Additions:
Credit loss not previously recognized		-		-
Reductions:
Losses realized during the period on OTTI previously recognized		-		-
Receipt of cash flows on previously recorded OTTI		(50)		(48)
Ending balance	$	171	$	246

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

During the nine months ended September 30, 2021 and 2020, the Company did not sell any debt securities.

Scheduled contractual maturities of debt securities are as follows:


	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
September 30, 2021:
Less than one year	$	665	$	669
After one year through five years		3,882		3,893
After five years through ten years		9,416		9,777
After ten years		31,719		32,236
Mortgage-backed securities		36,742		36,976
Asset-backed securities		12		129
	$	82,436	$	83,680

Equity Securities

At September 30, 2021 and December 31, 2020, equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock. During the three months ended September 30, 2021 and 2020, the Company recognized an unrealized loss of $14,000 and $6,000, respectively, on the equity securities, which was recorded in non-interest income in the consolidated statements of income. During the nine months ended September 30, 2021 and 2020, the Company recognized an unrealized loss of $34,000 and $24,000, respectively, on the equity securities. There were no sales of equity securities during the nine months ended September 30, 2021 and 2020.

Note 5 - Allowance for Loan Losses

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

Real Estate Loans:

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

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

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

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

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

Other Loans:

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

Consumer – consist of loans secured by collateral such as an automobile or a deposit account, unsecured loans and lines of credit. Consumer loans tend to have a higher credit risk due to the loans being either unsecured or secured by rapidly depreciable assets. Furthermore, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

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

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

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

The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of September 30, 2021 and December 31, 2020:


	Real Estate Loans								Other Loans
	One- to Four-Family⁽²⁾		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)
September 30, 2021
Allowance for Loan Losses:
Balance – July 1, 2021	$	325	$	169	$	4,800	$	495	$	561	$	35	$	106	$	6,491
Charge-offs		-		-		(426)		-		-		(18)		-		(444)
Recoveries		49		1		4		-		23		1		-		78
Provision (credit)		43		50		(3)		(165)		(29)		18		86		-
Balance – September 30, 2021	$	417	$	220	$	4,375	$	330	$	555	$	36	$	192	$	6,125

Balance – January 1, 2021	$	346	$	172	$	4,052	$	434	$	676	$	27	$	150	$	5,857
Charge-offs		(12)		-		(429)		-		-		(26)		-		(467)
Recoveries		49		1		6		-		23		6		-		85
Provision (credit)		34		47		746		(104)		(144)		29		42		650
Balance – September 30, 2021	$	417	$	220	$	4,375	$	330	$	555	$	36	$	192	$	6,125
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment	$	417	$	220	$	4,375	$	330	$	555	$	36	$	192	$	6,125

Gross Loans Receivable ⁽¹⁾:
Ending balance	$	159,286	$	50,064	$	267,000	$	20,015	$	29,545	$	1,346	$	-	$	527,256
Ending balance: individually evaluated for impairment	$	265	$	24	$	7,057	$	-	$	-	$	-	$	-	$	7,346
Ending balance: collectively evaluated for impairment	$	159,021	$	50,040	$	259,943	$	20,015	$	29,545	$	1,346	$	-	$	519,910

⁽¹⁾ Gross Loans Receivable does not include allowance for loan losses of $(6,125) or deferred loan costs of $3,516.

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


	Real Estate Loans								Other Loans
	One- to Four-Family⁽¹⁾		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)
September 30, 2020
Allowance for Loan Losses:
Balance – July 1, 2020	$	426	$	169	$	3,377	$	554	$	481	$	34	$	23	$	5,064
Charge-offs		-		(6)		-		-		-		(17)		-		(23)
Recoveries		-		-		-		-		-		6		-		6
Provision (credit)		(23)		-		67		6		179		1		70		300
Balance – September 30, 2020	$	403	$	163	$	3,444	$	560	$	660	$	24	$	93	$	5,347

Balance – January 1, 2020	$	436	$	129	$	2,682	$	388	$	478	$	26	$	128	$	4,267
Charge-offs		(26)		(6)		-		-		(5)		(27)		-		(64)
Recoveries		-		1		1		-		4		13		-		19
Provision (credit)		(7)		39		761		172		183		12		(35)		1,125
Balance – September 30, 2020	$	403	$	163	$	3,444	$	560	$	660	$	24	$	93	$	5,347

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


	Real Estate Loans									Other Loans
	One- to Four-Family⁽²⁾		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)

December 31, 2020
Allowance for Loan Losses:
Balance – December 31, 2020	$	346	$	172	$	4,052	$	434	$	676	$	27	$	150	$	5,857
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment	$	346	$	172	$	4,052	$	434	$	676	$	27	$	150	$	5,857

Gross Loans Receivable ⁽¹⁾:
Ending Balance	$	150,660	$	47,603	$	257,321	$	28,923	$	40,772	$	1,353	$	-	$	526,632
Ending balance: individually evaluated for impairment	$	238	$	15	$	-	$	-	$	-	$	-	$	-	$	253
Ending balance: collectively evaluated for impairment	$	150,422	$	47,588	$	257,321	$	28,923	$	40,772	$	1,353	$	-	$	526,379

⁽¹⁾ Gross Loans Receivable does not include allowance for loan losses of $(5,857) or deferred loan costs of $3,368.

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

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

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

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


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
							For the Nine Months Ended
	At September 30, 2021						September 30, 2021
	(Dollars in thousands)
With no related allowance recorded:
Residential, one- to four-family	$	265	$	265	$	-	$	271	$	10
Home equity		24		24		-		25		1
Commercial real estate		7,057		7,057		-		9,381		219
Total impaired loans with no related allowance		7,346		7,346		-		9,677		230


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
							For the Year Ended
	At December 31, 2020						December 31, 2020
	(Dollars in thousands)
With no related allowance recorded:
Residential, one- to four-family	$	238	$	238	$	-	$	306	$	15
Home equity		15		15		-		16		1
Total impaired loans		253		253		-		322		16

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


	30-59 Days		60-89 Days		90 Days or More		Total Past			Current	Total Loans		Loans on Non-
	Past Due		Past Due		Past Due		Due			Due	Receivable		Accrual
	(Dollars in thousands)
September 30, 2021:
Real Estate Loans:
Residential, one- to four-family⁽¹⁾	$	735	$	159	$	1,420	$	2,314	$	156,972	$	159,286	$	2,135
Home equity		231		27		553		811		49,253		50,064		656
Commercial⁽²⁾		-		-		-		-		267,000		267,000		7,057
Construction - commercial		-		-		-		-		20,015		20,015		-
Other Loans:
Commercial⁽³⁾		-		-		-		-		29,545		29,545		-
Consumer		3		4		5		12		1,334		1,346		7
Total	$	969	$	190	$	1,978	$	3,137	$	524,119	$	527,256	$	9,855

	30-59 Days		60-89 Days		90 Days or More		Total Past			Current	Total Loans		Loans on Non-
	Past Due		Past Due		Past Due		Due			Due	Receivable		Accrual
	(Dollars in thousands)
December 31, 2020:
Real Estate Loans:
Residential, one- to four-family⁽¹⁾	$	920	$	552	$	1,361	$	2,833	$	147,827	$	150,660	$	2,392
Home equity		173		64		645		882		46,721		47,603		706
Commercial		-		-		-		-		257,321		257,321		-
Construction - commercial		-		-		-		-		28,923		28,923		-
Other Loans:
Commercial⁽³⁾		-		-		-		-		40,772		40,772		-
Consumer		12		4		4		20		1,333		1,353		3
Total	$	1,105	$	620	$	2,010	$	3,735	$	522,897	$	526,632	$	3,101

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

⁽²⁾Commercial Real Estate loans on non-accrual consists of one $7.1 million loan relationship which was moved to non-accrual status during the nine months ended September 30, 2021.

⁽³⁾Includes $10.7 million and $18.1 million of PPP loans at September 30, 2021 and December 31, 2020, respectively, which do not require payments for a certain amount of time under the CARES Act and are 100% guaranteed by SBA.

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

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

Pass/Performing;

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

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

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

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

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

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

The following tables summarize the internal loan grades applied to the Company’s loan portfolio as of September 30, 2021 and December 31, 2020:


	Pass/Performing		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
September 30, 2021
Real Estate Loans:
Residential, one- to four-family⁽¹⁾	$	157,046	$	-	$	2,240	$	-	$	-	$	159,286
Home equity		49,122		-		942		-		-		50,064
Commercial⁽²⁾		253,914		5,569		7,517		-		-		267,000
Construction - commercial		20,015		-		-		-		-		20,015
Other Loans:
Commercial⁽³⁾		24,698		1,386		3,461		-		-		29,545
Consumer		1,334		-		7		-		5		1,346
Total	$	506,129	$	6,955	$	14,167	$	-	$	5	$	527,256


	Pass/Performing		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
December 31, 2020
Real Estate Loans:
Residential, one- to four-family⁽¹⁾	$	148,291	$	-	$	2,369	$	-	$	-	$	150,660
Home equity		46,543		-		1,060		-		-		47,603
Commercial		242,527		14,202		592		-		-		257,321
Construction - commercial		28,923		-		-		-		-		28,923
Other Loans:
Commercial⁽³⁾		35,507		1,022		4243		-		-		40,772
Consumer		1,350		-		3		-		-		1,353
Total	$	503,141	$	15,224	$	8,267	$	-	$	-	$	526,632

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

⁽²⁾The Substandard classification category for Commercial Real Estate loans includes one $7.1 million loan relationship that was deemed to be impaired during the nine months ended September 30, 2021.

⁽³⁾The Pass/Performing category for Commercial Loans includes $10.7 million and $18.1 million of PPP loans at September 30, 2021 and December 31, 2020, respectively, which do not require payments for a certain amount of time under the CARES Act and are 100% guaranteed by SBA.

TDRs occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. A concession is made when the terms of the loan modification are more favorable than the terms the borrower would have received in the current market under similar financial difficulties. These concessions may include, but are not limited to, modifications of the terms of the debt, the transfer of assets or the issuance of an equity interest by the borrower to satisfy all or part of the

debt, or the addition of borrower(s). The Company identifies loans for potential TDRs primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. Generally, we will not return a TDR to accrual status until the borrower has demonstrated the ability to make principal and interest payments under the restructured terms for at least six consecutive months. The Company’s TDRs are impaired loans, which may result in specific allocations and subsequent charge-offs if appropriate.

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

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


					Non-Accruing				Accruing				TDRs That Have Defaulted on Modified Terms Year to Date
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(Dollars in thousands)
At September 30, 2021
Real Estate Loans:
Residential, one- to four-family		7	$	265		1	$	15		6	$	252		-	$	-
Home equity		2		24		-		-		2		24		-		-
Commercial		1		7,057		1		7,057		-		-		-		-
Total		10	$	7,346		2	$	7,072		8	$	276		-	$	-


At December 31, 2020
Real Estate Loans:
Residential, one- to four-family		6	$	238		1	$	18		5	$	220		-	$	-
Home equity		1		15		-		-		1		15		-		-
Total		7	$	253		1	$	18		6	$	235		-	$	-

No additional loan commitments were outstanding to these borrowers at September 30, 2021 and December 31, 2020.

The following table details the activity in loans which were first deemed to be TDRs during the three and nine months ended September 30, 2021 and 2020.



	For the Three Months Ended September 30, 2021						For The Three Months Ended September 30, 2020
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
		(Dollars in thousands)
Real Estate Loans:
Commercial		1	$	7,483	$	7,057		-		-		-

	For the Nine Months September 30, 2021						For the Nine Months September 30, 2020
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family		1	$	38	$	38		3	$	150	$	150
Home equity		1		10		10		1		16		16
Commercial		1		7,483		7,057		-		-		-
Total		3	$	7,531	$	7,105		4	$	166	$	166

Foreclosed real estate consists of property acquired in settlement of loans which is carried at its fair value less estimated selling costs. Write-downs from cost to fair value less estimated selling costs are recorded at the date of acquisition or repossession and are charged to the allowance for loan losses. Foreclosed real estate was $97,000 and $58,000 at September 30, 2021 and December 31, 2020, respectively, and was included as a component of other assets on the consolidated statements of financial condition. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $1.8 million at September 30, 2021 and December 31, 2020.

Note 6 – Borrowings

At September 30, 2021 and December 31, 2020, the Company had no short-term borrowings.

At September 30, 2021 and December 31, 2020, the Company had written agreements with the Federal Home Loan Bank of New York (“FHLBNY”) which allows it to borrow up to the maximum lending values designated by the type of collateral pledged. There have been no significant changes to these agreements since December 31, 2020.

Long-term debt from the FHLBNY and related contractual maturities consisted of the following:



	At September 30, 2021					At December 31, 2020
Maturity	Amount		Weighted Average Interest Rate		Amount		Weighted Average Interest Rate
(Dollars in thousands)

In one year	$	2,000	2.18	%	$	7,800	2.30	%
In two years		4,950	2.31	%		2,000	2.18	%
In three years		13,000	1.73	%		4,950	2.31	%
In four years		2,000	1.94	%		13,000	1.73	%
In five years		-	-	%		2,000	1.94	%
	$	21,950	1.92	%	$	29,750	2.02	%

Note 7 – Earnings per Share

Earnings per share was calculated for the three and nine months ended September 30, 2021 and 2020, respectively. Basic earnings per share is based upon the weighted average number of common shares outstanding, exclusive of unearned shares held by the Employee Stock Ownership Plan of Lake Shore Bancorp, Inc. (the “ESOP”), by the Lake Shore Bancorp, Inc. 2006 Recognition and Retention Plan (“RRP”), and by the Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan (“EIP”). Diluted earnings per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. Stock options are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would be dilutive and computed using the treasury stock method.

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


	Three Months Ended September 30,
	2021		2020
Numerator – net income	$	1,691,000	$	1,231,000
Denominator:
Basic weighted average shares outstanding		5,881,457		5,941,540
Increase in weighted average shares outstanding due to:
Stock options		2,962		-
Diluted weighted average shares outstanding ⁽¹⁾		5,884,419		5,941,540

Earnings per share:
Basic	$	0.29	$	0.21
Diluted	$	0.29	$	0.21

	Nine Months Ended September 30,
	2021		2020
Numerator – net income	$	4,372,000	$	3,315,000
Denominator:
Basic weighted average shares outstanding		5,904,475		5,968,348
Increase in weighted average shares outstanding due to:
Stock options		2,377		-
Diluted weighted average shares outstanding ⁽¹⁾		5,906,852		5,968,348

Earnings per share:
Basic	$	0.74	$	0.56
Diluted	$	0.74	$	0.56

⁽¹⁾Stock options to purchase 64,547 shares under the Company’s 2006 Stock Option Plan and 20,000 shares under the EIP at $14.38 per share were outstanding during the three and nine month period ended September 30, 2020, but were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.

Note 8 – Commitments to Extend Credit

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

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. There were no loss reserves associated with these commitments at September 30, 2021 and December 31, 2020. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

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


	Contract Amount
	September 30,		December 31,
	2021		2020
	(Dollars in thousands)

Commitments to grant loans	$	50,872	$	47,065
Unfunded commitments under lines of credit		72,665		66,134

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

Note 9 – Stock-based Compensation

As of September 30, 2021, the Company had four stock-based compensation plans, which are described below. The compensation cost that has been recorded under salary and benefits expense in the non-interest expense section of the consolidated statements of income for these plans was $106,000 and $87,000 for the three months ended September 30, 2021 and 2020, respectively. The compensation cost that has been recorded for the nine months ended September 30, 2021 and 2020 was $284,000 and $239,000, respectively.

2006 Stock Option Plan

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

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

A summary of the status of the Stock Option Plan during the nine months ended September 30, 2021 and 2020 is presented below:


	2021				2020
	Options		Weighted Average Exercise Price	Remaining Contractual Life	Options		Weighted Average Exercise Price	Remaining Contractual Life
Outstanding at beginning of year	64,548	$	14.38		64,548	$	14.38
Granted	-		-		-		-
Exercised	-		-		-		-
Outstanding at end of period	64,548	$	14.38	5.0 years	64,548	$	14.38	6.0 years

Options exercisable at end of period	51,636	$	14.38	5.0 years	38,726	$	14.38	6.0 years

Fair value of options granted	-	$	-		-	$	-

At September 30, 2021, stock options had an intrinsic value of $35,000 and there were no remaining options available for grant under the Stock Option Plan. There were no stock options exercised during the three and nine months ended September 30, 2021 and 2020. Compensation expense related to the Stock Option Plan amounted to $8,000 for the three month periods ended September 30, 2021 and 2020. Compensation expense

related to the Stock Option Plan for the nine month periods ended September 30, 2021 and 2020 was $25,000. At September 30, 2021, $2,000 of unrecognized compensation cost related to the Stock Option Plan is expected to be recognized over a period of one month.

2006 Recognition and Retention Plan

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

As of September 30, 2021, there were 117,407 shares vested or distributed to eligible participants under the RRP. Compensation expense amounted to $6,000 for the three months ended September 30, 2021 and 2020. Compensation expense amounted to $17,000 and $18,000 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, $1,000 of unrecognized compensation cost related to the RRP is expected to be recognized over a period of one month.

A summary of the status of unvested shares under the RRP for the nine months ended September 30, 2021 and 2020 is as follows:


	At September 30, 2021		Weighted Average Grant Price (per Share)	At September 30, 2020		Weighted Average Grant Price (per Share)
Unvested shares outstanding at beginning of year	1,618	$	14.38	3,255	$	14.37
Granted	-		-	-		-
Vested	-		-	(20)		13.42
Unvested shares outstanding at end of period	1,618	$	14.38	3,235	$	14.38

2012 Equity Incentive Plan

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

The Board of Directors granted restricted stock awards under the EIP during the nine months ended September 30, 2021 as follows:


Grant Date	Number of Restricted Stock Awards	Vesting		Fair Value per Share of Award on Grant Date	Awardees

February 24, 2021	4,656	100% on December 10, 2021	$	15.65	Non-employee directors
March 24, 2021	16,302	100% on February 24, 2024 if three year performance metric is achieved		15.10	Employees

A summary of the status of unvested restricted stock awards under the EIP for the nine months ended September 30, 2021 and 2020 is as follows:


	At September 30, 2021		Weighted Average Grant Price (per Share)	At September 30, 2020		Weighted Average Grant Price (per Share)
Unvested shares outstanding at beginning of year	14,986	$	15.39	-	$	-
Granted	20,958		15.22	20,830		15.42
Forfeited	(1,792)		15.25	(332)		15.39
Unvested shares outstanding at end of period	34,152	$	15.29	20,498	$	15.42

As of September 30, 2021, there were 89,085 shares of restricted stock that vested or was distributed to eligible participants under the EIP. Compensation expense related to unvested restricted stock awards under the EIP amounted to $60,000 and $45,000 for the three months ended September 30, 2021 and 2020, respectively. Compensation expense related to unvested restricted stock awards under the EIP amounted to $146,000 and $112,000 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, $311,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 29 months.

A summary of the status of stock options under the EIP for the nine months ended September 30, 2021 and 2020 is presented below:


	2021				2020
	Options		Exercise Price	Remaining Contractual Life	Options		Exercise Price	Remaining Contractual Life
Outstanding at beginning of year	20,000	$	14.38		20,000	$	14.38
Granted	-		-		-		-
Exercised	-		-		-		-
Forfeited	-		-		-		-
Outstanding at end of period	20,000	$	14.38	5.0 years	20,000	$	14.38	6.0 years

Options exercisable at end of period	15,998	$	14.38	5.0 years	11,999	$	14.38	6.0 years

Fair value of options granted	-		-		-		-

At September 30, 2021, stock options had an intrinsic value of $11,000 and there were no remaining options available for grant under the EIP. Compensation expense related to stock options outstanding under the EIP amounted to $3,000 for the three months ended September 30, 2021 and 2020. Compensation expense related to stock options outstanding under the EIP amounted to $8,000 for the nine months ended September 30, 2021 and 2020. At September 30, 2021, $1,000 of unrecognized compensation cost related to unvested stock options is expected to be recognized over a period of one month.

Employee Stock Ownership Plan (“ESOP”)

The Company established the ESOP for the benefit of eligible employees of the Company and Bank. All Company and Bank employees meeting certain age and service requirements are eligible to participate in the ESOP. Participants’ benefits become fully vested after five years of service once the employee is eligible to participate in the ESOP. The Company utilized $2.6 million of the proceeds of its 2006 stock offering to extend a loan to the ESOP and the ESOP used such proceeds to purchase 238,050 shares of stock on the open market at an average price of $10.70 per share, plus commission expenses. As a result of the purchase of shares by the ESOP, total stockholders’ equity of the Company was reduced by $2.6 million. As of September 30, 2021, the balance of the loan to the ESOP was $1.5 million and the fair value of unallocated shares was $1.7 million. As of September 30, 2021, there were 77,614 allocated shares and 119,024 unallocated shares compared to 76,462

allocated shares and 126,958 unallocated shares at September 30, 2020. The ESOP compensation expense was $29,000 for the three months ended September 30, 2021 and $25,000 for the three months ended September 30, 2020 based on 1,984 shares earned in each of those quarters. The ESOP compensation expense was $88,000 for the nine months ended September 30, 2021 and $76,000 for the nine months ended September 30, 2020 based on 5,952 shares earned during the respective nine-month period.

Note 10 - Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of September 30, 2021 and December 31, 2020 and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. The estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported here.

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

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

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

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

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

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

on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 were as follows:


	Fair Value Measurements at September 30, 2021
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities:
Debt Securities Available for Sale
U.S. government agencies	$	2,239	$	2,239	$	-	$	-
Municipal bonds		44,336		-		44,336		-
Mortgage-backed securities:
Collateralized mortgage obligations-private label		16		-		16		-
Collateralized mortgage obligations-government sponsored entities		20,288		-		20,288		-
Government National Mortgage Association		86		-		86		-
Federal National Mortgage Association		9,204		-		9,204		-
Federal Home Loan Mortgage Corporation		7,382		-		7,382		-
Asset-backed securities:
Private label		116		-		116		-
Government sponsored entities		13		-		13		-
Total Debt Securities Available for Sale	$	83,680	$	2,239	$	81,441	$	-
Equity securities		18		18		-		-
Total Securities	$	83,698	$	2,257	$	81,441	$	-
Interest Rate Swap⁽¹⁾	$	(138)	$	-	$	(138)	$	-

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


	Fair Value Measurements at December 31, 2020
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities:
Debt Securities Available for Sale
U.S. government agencies	$	2,337	$	2,337	$	-	$	-
Municipal bonds		44,893		-		44,893		-
Mortgage-backed securities:
Collateralized mortgage obligations-private label		16		-		16		-
Collateralized mortgage obligations-government sponsored entities		23,051		-		23,051		-
Government National Mortgage Association		127		-		127		-
Federal National Mortgage Association		4,339		-		4,339		-
Federal Home Loan Mortgage Corporation		4,293		-		4,293		-
Asset-backed securities:						-
Private label		147		-		147		-
Government sponsored entities		30		-		30		-
Total Debt Securities Available for Sale	$	79,233	$	2,337	$	76,896	$	-
Equity securities		52		52		-		-
Total Securities	$	79,285	$	2,389	$	76,896	$	-
Interest Rate Swap⁽¹⁾	$	(259)	$	-	$	(259)	$	-

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

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

Investment securities – the fair values are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment projections, credit information and the security’ terms and conditions, among other things. Level 2 securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, who use third party data service providers.

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

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

The Company did not have any assets or liabilities that required a fair value measurement on a non-recurring basis at September 30, 2021. For assets measured at fair value on a non-recurring basis at December 31, 2020, the fair value measurements by level within the fair value hierarchy were as follows:


	Fair Value Measurements
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a non-recurring basis:

At December 31, 2020
Foreclosed real estate	$	58	$	-	$	-	$	58

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


	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)	Fair Value Estimate		Valuation Technique	Unobservable Input	Range	Weighted Average
At December 31, 2020
Foreclosed real estate	$	58	Market valuation of property ⁽¹⁾	Direct Disposal Costs ⁽²⁾	7.00%	7.00%

⁽¹⁾Fair value is generally determined through independent third-party appraisals or purchase offer of the underlying collateral, which generally includes various Level 3 inputs which are not observable.

⁽²⁾The fair value basis of foreclosed real estate may be adjusted to reflect management estimates of disposal costs including, but not necessarily limited to, real estate brokerage commissions, legal fees, and delinquent property taxes.

At December 31, 2020, foreclosed real estate valued using Level 3 inputs had a carrying amount of $67,000 and a valuation allowance of $9,000.

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


	Fair Value Measurements at September 30, 2021
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	60,980	$	60,980	$	60,980	$	-	$	-
Securities		83,698		83,698		2,257		81,441		-
Federal Home Loan Bank stock		1,606		1,606		-		1,606		-
Loans receivable, net		524,647		514,174		-		-		514,174
Accrued interest receivable		2,642		2,642		-		2,642		-
Financial liabilities:
Deposits		591,754		595,245		-		595,245		-
Long-term debt		21,950		22,422		-		22,422		-
Accrued interest payable		54		54		-		54		-
Interest rate swap		138		138		-		138		-
Off-balance-sheet financial instruments		-		-		-		-		-


	Fair Value Measurements at December 31, 2020
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	42,975	$	42,975	$	42,975	$	-	$	-
Securities		79,285		79,285		2,389		76,896		-
Federal Home Loan Bank stock		1,905		1,905		-		1,905		-
Loans receivable, net		524,143		519,551		-		-		519,551
Accrued interest receivable		2,987		2,987		-		2,987		-
Financial liabilities:
Deposits		560,259		565,655		-		565,655		-
Long-term debt		29,750		30,811		-		30,811		-
Accrued interest payable		70		70		-		70		-
Interest rate swap		259		259		-		259		-
Off-balance-sheet financial instruments		-		-		-		-		-

Note 11 – Treasury Stock

During the three months ended September 30, 2021, the Company repurchased 60,000 shares of common stock at an average cost of $14.95 per share. During the nine months ended September 30, 2021, the Company repurchased 139,928 shares of common stock at an average cost of $14.98 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase programs. As of September 30, 2021, there were 46,327 shares remaining to be repurchased under the existing stock repurchase program. During the nine months ended September 30, 2021, the Company transferred 20,958 shares of common stock out of treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per share to fund awards that had been granted under the plan. During the nine months ended September 30, 2021,

there were 1,792 shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per share due to forfeitures.

During the three months ended September 30, 2020, the Company repurchased 42,100 shares of common stock at an average cost of $13.06 per share. During the nine months ended September 30, 2020, the Company repurchased 109,600 shares of common stock at an average cost of $13.12 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase program. As of September 30, 2020, there were 91,158 shares remaining to be repurchased under the existing stock repurchase program. During the nine months ended September 30, 2020, the Company transferred 20,830 shares of common stock out of treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.39 per share to fund awards that had been granted under the plan. During the nine months ended September 30, 2020, there were 332 shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.39 per share due to forfeitures.

Note 12 – Other Comprehensive Income (Loss)

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


	For the Three Months Ended September 30, 2021						For The Three Months Ended September 30, 2020
	Pre-Tax Amount		Tax Benefit		Net of Tax Amount		Pre-Tax Amount		Tax Benefit		Net of Tax Amount
	(Dollars in thousands)
Net unrealized losses on securities available for sale:
Net unrealized losses arising during the period	$	(707)	$	148	$	(559)	$	(155)	$	33	$	(122)
Less: reclassification adjustment related to:
Recovery on previously impaired investment securities included in net income		(18)		4		(14)		(20)		4		(16)
Total Other Comprehensive Loss	$	(725)	$	152	$	(573)	$	(175)	$	37	$	(138)


	For the Nine Months Ended September 30, 2021						For The Nine Months Ended September 30, 2020
	Pre-Tax Amount		Tax Benefit		Net of Tax Amount		Pre-Tax Amount		Tax Expense			Net of Tax Amount
	(Dollars in thousands)
Net unrealized (losses) gains on securities:
Net unrealized (losses) gains arising during the period	$	(1,425)	$	299	$	(1,126)	$	928	$	(195)	$	733
Less: reclassification adjustment related to:
Recovery on previously impaired investment securities included in net income		(50)		11		(39)		(48)		10		(38)
Total Other Comprehensive (Loss) Income	$	(1,475)	$	310	$	(1,165)	$	880	$	(185)	$	695

The following tables present the amounts reclassified out of the single component of the Company’s accumulated other comprehensive income for the indicated periods:


	Amounts Reclassified from Accumulated
Details about Accumulated Other	Other Comprehensive Income				Affected Line Item
Comprehensive Income	for the three months ended September 30,				on the Consolidated
Components	2021		2020		Statements of Income
	(Dollars in thousands)
Net unrealized losses on securities available for sale:
Recovery on previously impaired investment securities	$	(18)	$	(20)	Recovery on previously impaired investment securities
Provision for income tax expense		4		4	Income Tax Expense
Total reclassification for the period	$	(14)	$	(16)	Net Income


	Amounts Reclassified from Accumulated
Details about Accumulated Other	Other Comprehensive Income				Affected Line Item
Comprehensive Income	for the nine months ended September 30,				on the Consolidated
Components	2021		2020		Statements of Income
	(Dollars in thousands)
Net unrealized (losses) gains on securities available for sale:
Recovery on previously impaired investment securities	$	(50)	$	(48)	Recovery on previously impaired investment securities
Provision for income tax expense		11		10	Income Tax Expense
Total reclassification for the period	$	(39)	$	(38)	Net Income

Note 13 – Subsequent Events

On October 27, 2021, the Board of Directors declared a quarterly cash dividend of $0.14 per share on the Company’s common stock, payable on November 19, 2021 to shareholders of record as of November 9, 2021. Lake Shore, MHC (the “MHC”), which holds 3,636,875 shares, or approximately 63.9% of the Company’s total outstanding stock, has elected to waive receipt of the dividend on its shares. On March 4, 2021, the MHC received the non-objection of the Federal Reserve Bank of Philadelphia to waive its right to receive dividends paid by the Company during the twelve months ending February 3, 2022, aggregating up to $0.54 per share. The MHC waived $509,000 and $1.5 million of dividends during the three and nine months ended September 30, 2021, respectively. Cumulatively the MHC has waived approximately $15.6 million of cash dividends as of September 30, 2021. The dividends waived by the MHC are considered a restriction on the retained earnings of the Company.

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

Forward-Looking Statements

Safe-Harbor

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

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

Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and the following:

risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues, the effectiveness of vaccination programs, vaccination mandates and their effects on our workforce, the effect of the pandemic on the general economy and on the businesses of our borrowers; and the inability of employees to work due to illness or quarantine;

general and local economic conditions;

changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values and competition;

the ability of our customers to make loan payments;

the effect of competition on rates of deposit and loan growth and net interest margin;

our ability to continue to control costs and expenses;

changes in accounting principles, policies, or guidelines;

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

inflation, and market and monetary fluctuations;

reputational risks relating to the Company’s participation in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), the end of federal foreclosure moratorium and other pandemic-related legislative and regulatory initiatives and programs;

the impact of more stringent capital requirements being imposed by banking regulators;

changes in legislation or regulation; and

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

Any and all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may differ from actual outcomes. They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of September 30, 2021 compared to the consolidated financial condition as of December 31, 2020 and the consolidated results of operations for the three and nine months ended September 30, 2021 and 2020.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on loans and investments and the interest expense we pay on deposits, borrowings and other interest-bearing liabilities. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on these balances.

Our operations are also affected by non-interest income, such as service charges and fees, debit card fees, earnings on bank owned life insurance, and gains and losses on interest rate swaps and the sales of securities and loans, our provision for loan losses and non-interest expenses which include salaries and employee benefits, occupancy and equipment costs, data processing, professional services, advertising and other general and administrative expenses.

Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing and commercial real estate, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in the Western New York area, and our operations and earnings are influenced by local economic conditions. Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences, and levels of personal income and savings in our primary market area. Operations are also significantly impacted by government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact the Company.

To operate successfully, we must manage various types of risk, including but not limited to, interest rate risk, credit risk, liquidity risk, operational and information technology risks, strategic risk, reputation risk and compliance risk. A significant form of market risk for the Company is interest rate risk, as the Company’s assets and liabilities are sensitive to changes in interest rates. Interest rate risk is the exposure of our net interest income to adverse movements in interest rates. Net interest income is our primary source of revenue and interest rate risk is a significant non-credit related risk to which our Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of our assets and liabilities. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancing, the flow and mix of deposits and the fair value of securities. In recent years, the Company has adjusted its strategies to manage interest rate risk by originating a greater volume of shorter-term, adjustable rate commercial real estate and commercial business loans and increasing its concentration of core deposits, which are less interest rate sensitive. In the third quarter of 2018 and the first quarter of 2020, the Company entered into interest rate swap arrangements with a total notional amount of $6.0 million to convert portions of its interest earning assets into fixed or adjustable rate interest-earning assets, as applicable, to manage its exposure to movements in interest rates.

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

RECENT MARKET CONDITIONS, RELATED RISKS AND UNCERTAINTIES

The Company quickly responded to the changing environment at the onset of the pandemic by successfully executing its business continuity plan, including implementing work from home arrangements and limiting branch activities. Once the branches received the tools and services necessary to implement appropriate social distancing protocols and enhanced cleaning services, in-person customer service activities resumed. As of September 30, 2021, all branches were fully open with adherence to health and safety requirements, including, among other things, face mask requirements and social distancing measures.

The direct and indirect effects of COVID-19 and its associated impacts on business activities, retail, restaurants and bars, travel, productivity and other activities have had, are currently having and may for some time continue

to impact financial markets and economic activity. The extent of the impact of the ongoing COVID-19 pandemic on our operational and financial performance remains uncertain, cannot be predicted and will depend on certain developments, including, among others, the effectiveness of vaccination and achievement of herd immunity, the ability to sustainably limit the spread of COVID-19 and/or its variants, improvement in employment rates and the recovery of economic activity in our market areas as pandemic restrictions are relaxed. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, specifically Part I. Item 1. Business and Part I. Item 1A. Risk Factors, for additional details on the related risks and the impact of the pandemic, along with a description of Company’s actions taken to address the pandemic during 2020, which includes the origination of PPP loans under a program authorized by the Small Business Administration and a loan modification program in line with regulatory guidance which allowed impacted customers to defer loan payments.

The Federal Reserve’s actions and other effects of the COVID-19 pandemic may negatively impact our interest income and, therefore, our earnings, financial condition and results of operations. As a result of the spread of COVID-19, economic uncertainties have arisen which are likely to negatively impact our provision for loan losses. As restrictions on foreclosure activity are lifted, the Company may incur potential losses and increased expenses to restart collection activities on past due loans. Other financial impacts could occur though such potential impact is unknown at this time. Refer to Note 3 – COVID 19 in this Form 10-Q for a description of actions taken by the Company to assist borrowers that have been impacted by the pandemic.

As of September 30, 2021, the Bank’s capital ratios were in excess of all regulatory requirements. While management believes we have sufficient capital to withstand potential losses that may occur as a result of the COVID-19 pandemic, our regulatory capital ratios could be adversely impacted by further credit losses. The Company maintains access to multiple sources of liquidity which could be used to support capital ratios.

Management Strategy

There have been no material changes in the Company’s management strategy from what was disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies

Disclosure of the Company’s significant accounting policies is included in the notes to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Some of these policies require significant judgment, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses, as well as management’s evaluation of securities valuation, impairment of securities and income taxes. There have been no material changes in critical accounting policies since December 31, 2020.

Analysis of Net Interest Income

Net interest income represents the difference between the interest we earn on our interest-earning assets, such as commercial and residential mortgage loans and investment securities, and the expense we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on them.

Average Balances, Interest and Average Yields. The following tables set forth certain information relating to our average balance sheets and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses, but include non-accrual loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. Interest income on securities does not include a tax equivalent adjustment for tax exempt securities.

	For the Three Months Ended					For the Three Months Ended
	September 30, 2021					September 30, 2020
	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/
	Balance		Expense		Rate⁽²⁾	Balance		Expense		Rate⁽²⁾
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	54,339	$	11	0.08%	$	69,561	$	15	0.09%
Securities⁽¹⁾		80,410		457	2.27%		79,275		541	2.73%
Loans		535,823		5,997	4.48%		487,896		5,366	4.40%
Total interest-earning assets		670,572		6,465	3.86%		636,732		5,922	3.72%
Other assets		46,782					43,847
Total assets	$	717,354				$	680,579

Interest-bearing liabilities
Demand & NOW accounts	$	87,708	$	18	0.08%	$	85,413	$	34	0.16%
Money market accounts		166,352		87	0.21%		152,812		163	0.43%
Savings accounts		75,017		11	0.06%		62,842		9	0.06%
Time deposits		148,928		378	1.02%		161,928		627	1.55%
Borrowed funds & other interest-bearing liabilities		24,825		134	2.16%		33,037		181	2.19%
Total interest-bearing liabilities		502,830		628	0.50%		496,032		1,014	0.82%
Other non-interest bearing liabilities		127,194					99,356
Stockholders' equity		87,330					85,191
Total liabilities & stockholders' equity	$	717,354				$	680,579
Net interest income			$	5,837				$	4,908
Interest rate spread					3.36%					2.90%
Net interest margin					3.48%					3.08%

⁽¹⁾The tax equivalent adjustment for tax exempt securities results in rates of 2.63% and 3.13% for the three months ended September 30, 2021 and 2020, respectively.

⁽²⁾Annualized


	For the Nine Months Ended					For the Nine Months Ended
	September 30, 2021					September 30, 2020
	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/
	Balance		Expense		Rate⁽²⁾	Balance		Expense		Rate⁽²⁾
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	43,677	$	25	0.08%	$	51,428	$	92	0.24%
Securities⁽¹⁾		78,780		1,392	2.36%		75,102		1,628	2.89%
Loans		535,899		17,274	4.30%		482,448		16,637	4.60%
Total interest-earning assets		658,356		18,691	3.79%		608,978		18,357	4.02%
Other assets		46,200					43,833
Total assets	$	704,556				$	652,811

Interest-bearing liabilities
Demand & NOW accounts	$	84,059	$	56	0.09%	$	73,460	$	77	0.14%
Money market accounts		163,587		257	0.21%		151,012		809	0.71%
Savings accounts		71,724		29	0.05%		59,024		26	0.06%
Time deposits		153,872		1,362	1.18%		164,863		2,038	1.65%
Borrowed funds & other interest-bearing liabilities		27,690		449	2.16%		34,457		565	2.19%
Total interest-bearing liabilities		500,932		2,153	0.57%		482,816		3,515	0.97%
Other non-interest bearing liabilities		116,551					85,421
Stockholders' equity		87,073					84,574
Total liabilities & stockholders' equity	$	704,556				$	652,811
Net interest income			$	16,538				$	14,842
Interest rate spread					3.22%					3.05%
Net interest margin					3.35%					3.25%

⁽¹⁾The tax equivalent adjustment for tax exempt securities results in rates of 2.73% and 3.31% for the nine months ended September 30, 2021 and 2020, respectively.

⁽²⁾Annualized.

Rate Volume Analysis. The following tables analyze the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The tables show the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest rates. The effect of a change in volume is measured by applying the average rate during the first period to the volume change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period. Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.

	Three Months Ended September 30, 2021
	Compared to
	Three Months Ended September 30, 2020
	Rate		Volume		Net Change
		(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	(1)	$	(3)	$	(4)
Securities		(92)		8		(84)
Loans, including fees		96		535		631
Total interest-earning assets		3		540		543
Interest-bearing liabilities:
Demand & NOW accounts		(17)		1		(16)
Money market accounts		(89)		13		(76)
Savings accounts		(1)		3		2
Time deposits		(202)		(47)		(249)
Total deposits		(309)		(30)		(339)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities		(5)		(42)		(47)
Total interest-bearing liabilities		(314)		(72)		(386)
Total change in net interest income	$	317	$	612	$	929


	Nine Months Ended September 30, 2021
	Compared to
	Nine Months Ended September 30, 2020
	Rate		Volume			Net Change
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	(55)	$	(12)	$	(67)
Securities		(313)		77		(236)
Loans, including fees		(1,131)		1,768		637
Total interest-earning assets		(1,499)		1,833		334
Interest-bearing liabilities:
Demand & NOW accounts		(31)		10		(21)
Money market accounts		(614)		62		(552)
Savings accounts		(3)		6		3
Time deposits		(547)		(129)		(676)
Total deposits		(1,195)		(51)		(1,246)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities		(28)		(88)		(116)
Total interest-bearing liabilities		(1,223)		(139)		(1,362)
Total change in net interest income	$	(276)	$	1,972	$	1,696

As shown in the above tables, the increase in net interest income for third quarter 2021 was primarily due to an increase in the average yield on interest-earning assets and a decrease in the average cost of interest-bearing liabilities when compared to the prior year period. Net interest margin increased to 3.48% for the third quarter 2021 as compared to 3.08% for the third quarter 2020. The average yield on interest-earning assets for the 2021

third quarter increased by 14 basis points when compared to the prior year period primarily due to an increase of $363,000 in prepayment penalties received on commercial real estate loans which accounted for a 22 basis points increase in the average yield on interest-earnings assets during the third quarter 2021 when compared to the prior year period. The third quarter 2021 increase in average yield on interest earning assets was also due to an increase in the average balance of the loan portfolio. The average balance of the loan portfolio increased $47.9 million, or 9.8%, during the 2021 third quarter compared to the prior year quarter. The increase in the average balance of the loan portfolio was primarily due to an increase in the average balance of commercial real estate, commercial construction and one-to four-family real estate loans. These increases were partially offset by a decrease in market interest rates since the prior year period. The net interest margin was also positively impacted by a 32 basis points decrease in the average interest rate paid on interest-bearing liabilities, from 0.82% during third quarter 2020 to 0.50% during third quarter 2021. The decrease in the average interest rate paid on interest-bearing liabilities during third quarter 2021 was partially offset by a $15.0 million increase in the average balance of interest-bearing deposits in comparison to the prior year period. The increase in the average balance of interest-bearing deposits was primarily driven by organic growth, the deposit of PPP loan proceeds and government stimulus funds into our customers’ deposit accounts and the impact of COVID-19 on consumer and business spending and savings levels.

As shown in the above tables, the increase in net interest income for the nine months ended September 30, 2021 was primarily driven by a decrease in the average cost of interest bearing liabilities that was partially offset by a decrease in the average yield on interest earning assets. Net interest margin increased 10 basis points to 3.35% for the first nine months of 2021 as compared to the first nine months of 2020. The average interest rate paid on interest bearing liabilities decreased 40 basis points from 0.97% during the first nine months of 2020 to 0.57% during the first nine months of 2021 due to a decrease in market interest rates. The decrease in the average interest rate paid on interest bearing liabilities during the nine months ended September 30, 2021 was partially offset by a $24.9 million increase in the average balance of interest-bearing deposits in comparison to the nine months ended September 30, 2020. The increase in the average balance of interest-bearing deposits was primarily drive by organic growth, the deposit of PPP loan proceeds and government stimulus funds into our customers’ deposit accounts and the impact of COVID-19 on consumer and business spending and savings levels. The increase in net interest margin was partially offset by a 23 basis points decrease in the average yield on interest-earning assets during the first nine months of 2021 primarily due to a decrease in market rates and PPP loans, which have an interest rate of 1.00% as per the SBA guidelines, which was partially offset by an increase in the average balance of loans. The average balance of the loan portfolio increased $53.5 million, or 11.1%, during the nine months ended September 30, 2021 as compared to the same period in the prior year. The increase in the average balance of the loan portfolio was primarily due to an increase in the average balances of commercial real estate, commercial construction and PPP loans. Prepayment penalties increased $337,000 and PPP loan fees increased $148,000 which positively impacted the net interest margin by 10 basis points during the nine months ended September 30, 2021 when compared to the prior year period.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets at September 30, 2021 were $709.3 million, an increase of $23.1 million, or 3.4%, from $686.2 million at December 31, 2020. The increase in total assets was primarily due to an $18.0 million increase in cash and cash equivalents driven by deposit growth and a $4.4 million increase in securities available for sale.

Cash and cash equivalents increased by $18.0 million, or 41.9%, from $43.0 million at December 31, 2020 to $61.0 million at September 30, 2021. The increase was primarily due to a $31.5 million increase in deposits, partially offset by a $7.8 million cash outflow to pay down long-term debt and a $6.0 million cash outflow relating to net purchases of securities.

Securities increased by $4.4 million, or 5.6%, from $79.3 million at December 31, 2020 to $83.7 million at September 30, 2021. The increase was primarily due to $21.3 million of securities purchases, which was partially offset by $15.4 million in securities paydowns as a result of maturities, calls and prepayments, along with a $1.2 million, or 54.2%, decrease in unrealized mark to market gains during the nine months ended September 30, 2021.

Net loans receivable increased during the nine months ended September 30, 2021 as shown in the table below:


	At September 30,		At December 31,		Change
	2021		2020		$		%
	(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family⁽¹⁾	$	159,286	$	150,660	$	8,626	5.7	%
Home equity		50,064		47,603		2,461	5.2	%
Commercial		267,000		257,321		9,679	3.8	%
Construction - Commercial		20,015		28,923		(8,908)	(30.8)	%
Total real estate loans		496,365		484,507		11,858	2.4	%
Other Loans:
Commercial⁽²⁾		29,545		40,772		(11,227)	(27.5)	%
Consumer		1,346		1,353		(7)	(0.5)	%
Total gross loans		527,256		526,632		624	0.1	%
Allowance for loan losses		(6,125)		(5,857)		(268)	4.6	%
Net deferred loan costs		3,516		3,368		148	4.4	%
Loans receivable, net	$	524,647	$	524,143	$	504	0.1	%

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

⁽²⁾Includes PPP loans of $10.7 million at September 30, 2021 and $18.1 million as of December 31, 2020.

The loans receivable, net balance as of September 30, 2021 was impacted by an increase in commercial real estate, residential, one- to four-family and home equity loans which was nearly offset by a decrease in commercial business and commercial construction loans. During the nine month period ended September 30, 2021, $19.1 million of PPP loans originated during 2020 and 2021 were forgiven. The outstanding balance of PPP loans was $10.7 million at September 30, 2021 as compared to $18.1 million as of December 31, 2020. During the nine months ended September 30, 2021, loan originations of $109.1 million were offset by an increase in loan payoffs of $107.4 million due to the low interest rate environment. During the nine months ended September 30, 2021, we remained strategically focused on originating shorter duration, adjustable rate commercial real estate loans and commercial business loans to diversify our asset mix and to properly manage interest rate risk.

Loans Past Due and Non-Performing Assets. The following table presents information regarding our non-accrual loans, accruing loans delinquent 90 days or more, non-performing loans, foreclosed real estate, and non-performing and performing loans classified as troubled debt restructurings, as of the dates indicated.


	At September 30,			At December 31,
	2021			2020
	(Dollars in thousands)
Loans past due 90 days or more but still accruing:
Real estate loans:
Residential, one- to four-family	$	1		$	2
Home equity		-			-
Commercial		-			-
Construction – Commercial and Residential, one- to four-family
Other loans:
Commercial		-			-
Consumer		-			-
Total	$	1		$	2
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential, one- to four-family	$	2,135		$	2,392
Home equity		656			706
Commercial		7,057			-
Construction – Commercial and Residential, one- to four-family		-			-
Other loans:
Commercial		-			-
Consumer		7			3
Total non-accrual loans		9,855			3,101
Total non-performing loans		9,856			3,103
Foreclosed real estate		97			58
Total non-performing assets	$	9,953		$	3,161
Ratios:
Non-performing loans as a percent of total net loans:		1.88	%		0.59	%
Non-performing assets as a percent of total assets:		1.40	%		0.46	%
Troubled debt restructuring:
Loans accounted for on a non-accrual basis
Real estate loans:
Residential, one- to four-family	$	13		$	18
Commercial		7,057			-
Performing loans
Real estate loans:
Residential, one- to four-family	$	252		$	220
Home equity		24			15

Total non-performing assets increased by $6.8 million, or 214.9%, to $10.0 million at September 30, 2021 from $3.2 million at December 31, 2020, primarily due to one commercial real estate loan with a balance of $7.1 million being placed into non-accrual status during the first nine months of 2021. The loan was restructured and classified as a TDR during the nine months ending September 30, 2021, which resulted in a $426,000 charge-off as noted in the table below, as well as receipt of a significant payment by the borrower to reduce the

remaining outstanding principal balance. Management continues to closely monitor the performance of this loan, which is well supported by collateral.

The following table sets forth activity in our allowance for loan losses and other ratios at or for the dates indicated:


	At or for the Nine Months Ended September 30,
	2021		2020
	(Dollars in thousands)
Balance at beginning of year	$	5,857	$	4,267
Provision for loan losses		650		1,125
Charge-offs:
Real estate loans:
Residential, one- to four-family		(12)		(26)
Home equity		-		(6)
Commercial		(429)		-
Construction – Commercial and Residential, one- to four-family		-		-
Other loans:
Commercial		-		(5)
Consumer		(26)		(27)
Total charge-offs		(467)		(64)
Recoveries:
Real estate loans:
Residential, one- to four-family		49		-
Home equity		1		1
Commercial		6		1
Construction – Commercial and Residential, one- to four-family		-		-
Other loans:
Commercial		23		4
Consumer		6		13
Total recoveries		85		19
Net charge-offs		(382)		(45)
Balance at end of period	$	6,125	$	5,347
Average loans outstanding	$	535,899	$	482,448
Allowance for loan losses as a percent of total net loans		1.17%		1.09%
Allowance for loan losses as a percent of non-performing loans		62.14%		147.38%
Ratio of net charge-offs to average loans outstanding⁽¹⁾		(0.10)%		(0.01)%

⁽¹⁾Annualized

The table below shows changes in deposit balances by type of deposit account between September 30, 2021 and December 31, 2020:


	At September 30,		At December 31,		Change
	2021		2020		$		%
	(Dollars in thousands)
Core Deposits
Demand deposits and NOW accounts:
Non-interest bearing	$	115,775	$	91,946	$	23,829	25.9	%
Interest bearing		87,980		84,839		3,141	3.7	%
Money market		168,850		158,505		10,345	6.5	%
Savings		74,445		65,643		8,802	13.4	%
Total core deposits		447,050		400,933		46,117	11.5	%
Non-core Deposits
Time deposits		144,704		159,326		(14,622)	(9.2)	%
Total deposits	$	591,754	$	560,259	$	31,495	5.6	%

The increase in total deposits was primarily due to an overall increase in net core deposits, partially offset by a decrease in time deposits. A majority of the growth in core deposits during the nine months ended September 30, 2021 was primarily due to organic growth and the deposit of PPP funds and government stimulus payments into our customers’ deposit accounts. The Company’s strategic focus continues to be centered on organic growth of low-cost core deposits among its retail and commercial customers in an effort to manage interest expense and strengthen customer relationships.

Long-term debt consisting of advances from the Federal Home Loan Bank of New York (“FHLBNY”), decreased by $7.8 million, or 26.2%, from $29.8 million at December 31, 2020 to $22.0 million at September 30, 2021. The decrease was due to the Company paying off maturing debt with excess cash on hand.

Total stockholders’ equity increased $567,000, or 0.7%, to $86.5 million at September 30, 2021 from $85.9 million at December 31, 2020. Stockholders’ equity as of September 30, 2021 reflected net income of $4.4 million, which was partially offset by a decrease in accumulated other comprehensive income, an increase in treasury stock and by dividends paid during the nine months ended September 30, 2021.

Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020

General. Net income was $1.7 million for the three months ended September 30, 2021, or $0.29 per diluted share, an increase of $460,000, or 37.4%, compared to net income of $1.2 million, or $0.21 per diluted share, for the three months ended September 30, 2020. Net income for the three months ended September 30, 2021 reflected a $929,000 increase in net interest income and a $300,000 decrease in provision for loans losses, which was partially offset by a $572,000 increase in non-interest expense, a $133,000 increase in income tax expense and a $64,000 decrease in non-interest income when compared to the three months ended September 30, 2020.

Interest Income. Interest income increased by $543,000, or 9.2%, to $6.5 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020. Loan interest income increased by $631,000, or 11.8%, to $6.0 million for the three months ended September 30, 2021 as compared to the prior year period primarily due to an increase in the average balance of the loan portfolio of $47.9 million, or 9.8%, from $487.9 million for the three months ended September 30, 2020 to $535.8 million for the three months ended September 30, 2021. The increase in the average balance of loans was primarily due to increases in the average balance of commercial and residential real estate loans. The increase in loan interest income was also due to a eight basis points increase in the average yield on the loan portfolio. The average yield on loans was 4.48% for the three months ended September 30, 2021 as compared to 4.40% for the three months ended

September 30, 2020. The increase in the average yield was primarily due to a $363,000 increase in prepayment penalties received on commercial real estate loans and the recognition of $27,000 in PPP loan fees which was partially offset by a decrease in market interest rates.

Investment interest income decreased $84,000, or 15.5%, to $457,000 for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, due to a 46 basis points decrease in the average yield earned on the investment portfolio. The average yield was 2.73% for the three months ended September 30, 2020 as compared to 2.27% for the three months ended September 30, 2021. The decrease in the average yield was due to a decrease in market interest rates since September 30, 2020 and purchases of new securities at lower interest rates. The average balance of the investment portfolio increased from $79.3 million for the three months ended September 30, 2020 to $80.4 million for the three months ended September 30, 2021 primarily due to securities purchases which largely consisted of municipal bond and mortgage backed securities, partially offset by securities paydowns and redemptions of “callable” municipal bonds.

Interest Expense. Interest expense decreased $386,000, or 38.1%, to $628,000 for the three months ended September 30, 2021 compared to $1.0 million for the three months ended September 30, 2020 primarily due to a decrease in interest paid on deposits. Interest paid on deposits decreased by $339,000, or 40.7%, to $494,000 for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020. The decrease in interest expense on deposits was primarily due to a 31 basis points decrease in the average rate paid on deposits due to a decrease in market interest rates compared to the same period in 2020. The decrease was partially offset by a $15.0 million, or 3.2%, increase in average deposit balances for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The average balance of deposits for the three months ended September 30, 2021 was $478.0 million with an average rate of 0.41% compared to the average balance of deposits of $463.0 million and an average rate of 0.72% for the three months ended September 30, 2020. The increase in the average balance of interest-bearing deposits was due to an increase in core deposit accounts primarily through organic growth and the deposit of PPP funds and government stimulus payments into our customers’ deposit accounts.

Interest expense on long-term debt decreased by $45,000, or 27.4%, to $119,000 for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 primarily due to a decrease in the average balance of advances from the FHLBNY. The average balance of advances from the FHLBNY for the three months ended September 30, 2021 was $24.2 million with an average rate of 1.97% compared to an average balance of $32.3 million and an average rate of 2.02% for the three months ended September 30, 2020. The decrease in average balance was due to the Company paying off maturing debt with excess cash on hand since September 30, 2020.

Provision for Loan Losses. There was no provision to the allowance for loan losses recorded during the three months ended September 30, 2021 compared to $300,000 for the three months ended September 30, 2020. There was no provision for loan losses recorded during the third quarter 2021 primarily due to a net decrease in commercial real estate construction loans as a result of loan payoffs, along with the recovery of a reserve on a classified commercial real estate loan during the three months ended September 30, 2021, which was offset by an increase in general reserves associated with the existing loan portfolio. The third quarter 2020 provision expense was primarily due to specific reserves required for changes in classification for certain commercial business loans and general reserves for loan originations in the third quarter of 2020.

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

During the three months ended September 30, 2021, the Company recorded a net credit provision of $168,000 for commercial real estate and construction – commercial loans. This consisted of a $309,000 credit provision for one classified commercial real estate loan due to receipt of a partial curtailment on the principal balance. It also included a $252,000 decrease in general allowance due to the net payoff of commercial real estate construction loans during the three months ended September 30, 2021. These credit provisions were partially offset by a $393,000 provision related to adjustments to certain qualitative factors for commercial real estate and construction – commercial loans. A $111,000 net provision was recorded for one-to four-family, home

equity and consumer loans that primarily reflected adjustments to certain qualitative factors for these loan types, partially offset by net loan recoveries during the three months ended September 30, 2021. A $29,000 net credit provision was recorded for commercial business loans which primarily reflected adjustments to certain qualitative factors for this loan type. An $86,000 unallocated provision was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

During the three months ended September 30, 2020, the provision consisted of a $179,000 net provision recorded for commercial business loans. This included a $192,000 provision to reflect the $4.3 million increase in classified commercial business loans related to one borrower relationship, partially offset by a $13,000 credit related to a decrease in outstanding commercial business loans, excluding PPP loans. There was a $73,000 net provision for commercial real estate and construction – commercial loans during the three months ended September 30, 2020. This included a $104,000 provision to account for inherent losses in the commercial real estate and construction – commercial loan portfolio due to organic growth. This provision was partially offset by a $31,000 net credit related to changes in certain loss factors used in the model, offset by an increase in criticized and classified commercial real estate loans. A $22,000 net credit provision was recorded for one-to four-family, home equity and consumer loans primarily to reflect a decrease in classified loans during the three months ended September 30, 2020. During the three months ended September 30, 2020, a $70,000 unallocated provision for loan losses was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

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

Non-Interest Income. Non-interest income decreased by $64,000, or 8.3%, to $707,000 for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The decrease was primarily due to an $115,000 decrease in gains on the sale of residential mortgage loans due to the impact of increased market competition on the pricing of residential mortgage loan products in our market area, resulting in less income earned per loan at time of sale. The decrease was also impacted by a $24,000 decrease in earnings on bank owned life insurance during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The decrease in non-interest income was partially offset by a $64,000 increase in services charges and fees during the 2021 period when compared to the prior year period. During the prior year period, the Company waived certain ATM fees and other service charges to provide relief to customers during the onset of the COVID-19 pandemic. The decrease was also partially offset by an $18,000 increase in debit card interchange fee income.

Non-Interest Expense. Non-interest expense increased by $572,000, or 14.6%, to $4.5 million for the three months ended September 30, 2021 as compared to $3.9 million for the three months ended September 30, 2020. Professional services increased $209,000, or 85.3%, primarily due to one-time costs of $221,000 associated with the Company’s undertaking of a core processing system upgrade which was completed during the third quarter of 2021. Salary and employee benefits expense increased $203,000, or 9.3%, primarily due to a $108,000 decrease in deferred salaries associated with a decrease in loan originations during the third quarter of 2021 as compared to the third quarter of 2020 when a majority of PPP loans were originated. The increase was also due to annual salary increases. Data processing expenses increased $72,000, or 20.4%, primarily due to an increase in core system processing costs and activity. Occupancy and equipment expenses increased $61,000, or 9.4%, primarily due to increases in equipment maintenance, depreciation and repairs. Advertising expense increased $23,000, or 13.9%, primarily due to a change in the schedule and structure of our marketing activities.

Income Taxes Expense. Income tax expense was $359,000 for the three months ended September 30, 2021, an increase of $133,000, or 58.8%, as compared to $226,000 for the three months ended September 30, 2020. The increase in income tax expense was primarily due to an increase in income before taxes and an increase in the effective tax rate. The effective tax rate for the three months ended September 30, 2021 and 2020 was

17.5% and 15.5%, respectively. The increase in the effective tax rate was primarily due to a decrease in the mix of tax-exempt income derived from our municipal bond portfolio in relation to our pre-tax income.

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020

General. Net income was $4.4 million for the nine months ended September 30, 2021, or $0.74 per diluted share, an increase of $1.1 million, or 31.9%, compared to net income of $3.3 million, or $0.56 per diluted share, for the nine months ended September 30, 2020. Net income for the nine months ended September 30, 2021 reflected a $1.7 million increase in net interest income, a $475,000 decrease in provision for loans losses and a $376,000 increase in non-interest income which was partially offset by a $1.2 million increase in non-interest expense and a $303,000 increase in income tax expense when compared to the nine months ended September 30, 2020.

Interest Income. Interest income increased by $334,000, or 1.8%, to $18.7 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to an increase in loan interest income. Loan interest income increased $637,000, or 3.8%, to $17.3 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020. The increase was primarily due to an increase in the average balance of the loan portfolio of $53.5 million, or 11.1%, from $482.4 million for the nine months ended September 30, 2020 to $535.9 million for the nine months ended September 30, 2021. The increase in the average balance of loans was primarily due to growth in the average balance of commercial real estate, commercial construction and PPP loans. The increase in loan interest income was also impacted by a $337,000 increase in prepayment penalties and a $147,000 increase in PPP loan fees during the nine months ended September 30, 2021 when compared to the prior year period. The increase in loan interest income was partially offset by a 30 basis points decrease in the average yield on loans to 4.30% for the nine months ended September 30, 2021 as compared to 4.60% for the nine months ended September 30, 2020. The decrease in average yield on loans was primarily due to a decrease in market interest rates. It was also due to the portfolio of PPP loans, which have an interest rate of 1.00% as per the SBA guidelines. The net yield on the PPP loans, when including the deferred origination fee income and cost, averaged 2.04%, which is well below traditional loan yields.

Investment interest income decreased $236,000, or 14.5%, to $1.4 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due to a 53 basis points decrease in the average yield of the investment portfolio. The average yield was 2.89% for the nine months ended September 30, 2020 as compared to 2.36% for the nine months ended September 30, 2021. The decrease in the average yield was due to a decrease in market interest rates since September 30, 2020 and purchases of new securities at lower interest rates. The average balance of the investment portfolio increased from $75.1 million for the nine months ended September 30, 2020 to $78.8 million for the nine months ended September 30, 2021 primarily due to securities purchases which largely consisted of municipal bond and mortgage backed securities purchases, partially offset by securities paydowns and redemptions of “callable” municipal bonds.

Other interest income decreased by $67,000, or 72.8%, to $25,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The average yield on other interest income decreased 16 basis points to 0.08% for the nine months ended September 30, 2021 from 0.24% for the nine months ended September 30, 2020 and the average balance of other interest earning assets decreased from $51.4 million for the nine months ended September 30, 2020 to $43.7 million for the nine months ended September 30, 2021. The decrease in the average yield was primarily due to the 150 basis points decrease in short term market interest rates during the first quarter of 2020 as a response to the economic impact of the COVID-19 pandemic. The decrease in the average balance of other interest earning assets was primarily due to a decrease in the average balance of interest earning deposits held by the Company as excess funds were used to fund loan originations, purchase securities available for sale and pay-off long-term debt.

Interest Expense. Interest expense decreased $1.4 million, or 38.7%, to $2.2 million for the nine months ended September 30, 2021 compared to $3.5 million for the nine months ended September 30, 2020 primarily due to a decrease in interest paid on deposits. Interest paid on deposits decreased by $1.2 million, or 42.4%, to $1.7 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020. The decrease in interest expense on deposits was primarily due to a 40 basis points decrease in the

average rate paid on deposits due to a decrease in market interest rates compared to the same period in 2020. The decrease was partially offset by a $24.9 million, or 5.5%, increase in average deposit balances for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The average balance of deposits for the nine months ended September 30, 2021 was $473.2 million with an average rate of 0.48% compared to the average balance of deposits of $448.4 million and an average rate of 0.88% for the nine months ended September 30, 2020. The increase in the average balance of interest-bearing deposits was due to an increase in core deposit accounts primarily through organic growth and the deposit of PPP funds and government stimulus payments into our customers’ deposit accounts.

Interest expense on long-term debt decreased by $112,000, or 21.8%, to $401,000 for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to a decrease in the average balance of advances from the FHLBNY. The average balance of advances from the FHLBNY for the nine months ended September 30, 2021 was $27.0 million with an average rate of 1.98% compared to an average balance of $33.7 million with an average rate of 2.03% for the nine months ended September 30, 2020. The decrease in average balance was due to the Company paying off maturing debt with excess cash on hand since September 30, 2020.

Provision for Loan Losses. A $650,000 provision to the allowance for loan losses was recorded during the nine months ended September 30, 2021 compared to $1.1 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the Company’s provision for loan losses included an adjustment of certain qualitative factors to take into account the uncertainty surrounding the impact of COVID-19 and related economic conditions on borrowers’ ability to repay loans. The provision for the nine months ended September 30, 2021 was primarily due to a charge-off associated with the downgrade and impairment of one commercial real estate loan and general reserves for loan originations during the period.

During the nine months ended September 30, 2021, the Company recorded a $642,000 net provision for commercial real estate and construction – commercial loans. This consisted of a $426,000 provision for a charge-off related to one commercial real estate loan during the period. The remaining provision was primarily related to adjustments to certain qualitative factors for commercial real estate and construction – commercial loans during the nine months ended September 30, 2021. An $110,000 net provision was recorded for one-to four-family, home equity and consumer loans that primarily reflected adjustments to certain qualitative factors for these loan types, partially offset by net loan recoveries for these loan types during the nine months ended September 30, 2021. A $144,000 net credit provision was recorded for commercial business loans which reflected a $69,000 credit allowance to account for an $115,000 decrease in criticized and classified commercial business loans and adjustments to certain qualitative factors. Furthermore, a $75,000 credit allowance to account for a $3.4 million decrease in outstanding commercial business loans, excluding PPP loans, during the nine months ended September 30, 2021 was recorded. A $42,000 unallocated provision was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

During the nine months ended September 30, 2020, the Company recorded a $933,000 net provision for commercial real estate and construction – commercial loans. This consisted of a $693,000 provision to reflect an adjustment of certain qualitative factors to take into account the uncertain impacts of COVID-19 on economic conditions and borrowers’ ability to repay loans and a $156,000 general allowance to reflect inherent losses within the portfolio due to organic growth. It also included an $84,000 provision to reflect the $11.9 million increase in criticized and classified commercial real estate loans, which consists primarily of one loan relationship which is well-collateralized. An $183,000 net provision was recorded for commercial business loans which reflected adjustments to certain qualitative factors relating to the COVID-19 impact on economic conditions and an increase in classified loans. The provision also reflected a credit allowance to account for a $5.7 million decrease in outstanding commercial business loans, excluding PPP loans, during the nine months ended September 30, 2020. A $44,000 provision was recorded for one-to four-family, home equity and consumer loans primarily to reflect an increase in classified loans during the nine months ended September 30,

2020. A $35,000 unallocated credit provision was recorded to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the loan portfolio.

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

Non-Interest Income. Non-interest income increased by $376,000, or 20.5%, to $2.2 million for the nine months ended September 30, 2021 as compared to $1.8 million for the nine months ended September 30, 2020. The increase was primarily due to a $277,000 increase in unrealized gains on interest rate swaps due to an increase in long-term interest rates during the nine months ended September 30, 2021. Non-interest income was also positively impacted by a $121,000 increase in service charges and fees and a $94,000 increase in debit card fee income. During the prior year period, the Company waived certain ATM fees and other service charges to provide relief to customers during the onset of the COVID-19 pandemic. The increase in non-interest income was partially offset by a $61,000 decrease in earnings on bank owned life insurance during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The decrease was also due to a $55,000 decrease in gains on the sale of residential mortgage loans due to impact of increased market competition on the pricing of residential mortgage loan products in our market area, resulting in less income earned per loan at time of sale during the nine months ended September 30, 2021.

Non-Interest Expense. Non-interest expense increased by $1.2 million, or 10.2%, to $12.8 million for the nine months ended September 30, 2021 as compared to $11.7 million for the nine months ended September 30, 2020. Professional services increased $462,000, or 62.4%, primarily due to one-time costs of $509,000 associated with the Company’s undertaking of a core processing system upgrade which was completed during the third quarter of 2021. Salary and employee benefits expense increased $408,000, or 6.5%, primarily due to an increase in annual salaries and the creation of an officer position for retail, sales and marketing which was filled in August 2020. Data processing expenses increased $146,000, or 14.4%, primarily due to an increase in core system processing costs and activity. Occupancy and equipment expenses increased $127,000, or 6.6%, primarily due to increases in building maintenance and repairs and also additional cleaning expense related to the COVID-19 pandemic. FDIC Insurance expense increased $56,000, or 70.9%, due to the receipt of small bank assessment credits during the nine months ended September 30, 2020. These increases were partially offset by a decrease in advertising expense of $35,000, or 6.5%, primarily due to a change in the schedule and structure of our marketing activities.

Income Taxes Expense. Income tax expense was $884,000 for the nine months ended September 30, 2021, an increase of $303,000, or 52.2%, as compared to $581,000 for the nine months ended September 30, 2020. The increase in income tax expense was primarily due to an increase in income before taxes and an increase in the effective tax rate. The effective tax rate for the nine months ended September 30, 2021 and 2020 was 16.8% and 14.9%, respectively. The increase in the effective tax rate was primarily due to a decrease in the mix of tax-exempt income derived from our municipal bond portfolio in relation to our pre-tax income.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business. Liquidity is primarily needed to fund loan commitments, to pay the deposit withdrawal requirements of our customers as well as to fund current and planned expenditures. Our primary sources of funds consist of deposits, scheduled amortization and prepayments of loans and securities, maturities and sales of investments and loans, excess cash, interest earning deposits at other financial institutions, and funds provided from operations. We have written agreements with the FHLBNY, which allows us to borrow the maximum lending values designated by the type of collateral pledged. As of September 30, 2021, the maximum amount that we can borrow from the FHLBNY was $115.2 million and was collateralized by a pledge of certain fixed-rate residential, one- to four-family loans. At September 30, 2021, we had outstanding advances under this agreement of $22.2 million. We have a written agreement with the Federal Reserve Bank discount window for overnight borrowings which is collateralized by a pledge of our securities and allows us to borrow up to the value of the securities pledged, which was equal to a book value of $11.0 million and a fair value of $11.3 million as of September 30, 2021. There were no balances outstanding with the Federal Reserve Bank at September 30, 2021. We have also

established lines of credits with correspondent banks for $42.0 million, of which $40.0 million is unsecured and the remaining $2.0 million will be secured by a pledge of our securities when a draw is made. There were no borrowings on these lines as of September 30, 2021.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, calls of investment securities, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic.

Our primary investing activities include the origination of loans and the purchase of investment securities. For the nine months ended September 30, 2021, we originated loans of approximately $109.1 million as compared to approximately $117.3 million of loans originated during the nine months ended September 30, 2020. Loan originations exceeded principal repayments and other deductions during the first nine months of 2021 by $1.7 million. Purchases of investment securities totaled $21.3 million and $20.3 million during the nine months ended September 30, 2021 and 2020, respectively. These activities were funded primarily through deposit growth, principal payments received on loans and securities, borrowings and cash reserves.

As described elsewhere in this report, the Company has loan commitments to borrowers and borrowers have unused overdraft lines of protection, unused home equity lines of credit and unused commercial lines of credit that may require funding at a future date. The Company believes it has sufficient funds to fulfill these commitments, including sources of funds available through the use of FHLBNY advances or other liquidity sources. Total deposits were $591.8 million at September 30, 2021, as compared to $560.3 million at December 31, 2020. Approximately $80.3 million of time deposit accounts are scheduled to mature within one year as of September 30, 2021. Based on our deposit retention experience, current pricing strategy, and competitive pricing policies, we anticipate that a significant portion of these time deposits will remain with us following their maturity.

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

We do not anticipate any material capital expenditures in 2021. We do not have any balloon or other payments due on any long-term obligations, other than the borrowing agreements noted above.

Capital

Federal regulations require a federal savings bank to meet certain capital standards, as discussed in the “Supervision and Regulation - Federal Banking Regulation – Capital Requirements” section included in our Annual Report on Form 10-K for the year ended December 31, 2020.

The federal banking agencies have developed a “Community Bank Leverage Ratio” (bank’s tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A “qualifying community bank” may elect to utilize the Community Bank Leverage Ratio in lieu of the general applicable risk-based capital requirements under Basel III. If the community bank exceeds this ratio it will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Basel III. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio at 9.0%. The Bank elected to be subject to this new definition when it became effective on January 1, 2020. Pursuant to the CARES Act, the federal banking agencies issued final rules that temporarily lowered the Community Bank Leverage Ratio during 2020 to 8%, with a gradual return to the standard rate beginning in 2022. Effective January 1,

2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. The ratio will return to 9.0% on January 1, 2022.

As of September 30, 2021, the Bank was considered a “qualifying community bank” and its Community Bank Leverage Ratio was 11.51% so it was deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.

Off-Balance Sheet Arrangements

Other than loan commitments and two interest rate swap agreements that are not designated as hedging instruments, as previously noted, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Refer to Note 8 in the Notes to our Consolidated Financial Statements for a summary of loan commitments outstanding as of September 30, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required as the Company is a smaller reporting company.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II

Item 1A. Risk Factors.

There have been no material changes in the Company’s risk factors from those disclosed in its Annual Report on Form 10-K.

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

The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each month of the quarter ended September 30, 2021:

COMPANY PURCHASES OF EQUITY SECURITIES



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

July 1 through July 31, 2021	-	$	-	-	106,327
August 1 through August 31, 2021	20,000		14.96	20,000	86,327
September 1 through September 30, 2021	40,000		14.95	40,000	46,327
Total	60,000	$	14.95	60,000	46,327

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

Item 6. Exhibits



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

________________

*Filed herewith.

SIGNATURES

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


		LAKE SHORE BANCORP, INC.
		(Registrant)

November 15, 2021	By:	/s/ Daniel P. Reininga
		Daniel P. Reininga
		President and Chief Executive Officer
		(Principal Executive Officer)

November 15, 2021	By:	/s/ Rachel A. Foley
		Rachel A. Foley
		Chief Financial Officer
		(Principal Financial Officer)

November 15, 2021	By:	/s/ Steven W. Schiavone
		Steven W. Schiavone
		Controller
		(Principal Accounting Officer)

LAKE SHORE BANCORP, INC. - Quarter Report: 2021 September (Form 10-Q)

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