United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, ~~2018~~2019

☐ 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 ☒	Smaller reporting company ☒
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 ~~6,019,919~~5,943,173 shares of the registrant’s common stock, $0.01 par value per share, outstanding at November 8, ~~2018.~~2019.


		TABLE OF CONTENTS			TABLE OF CONTENTS

ITEM		PART I	PAGE		PART I	PAGE

1	FINANCIAL STATEMENTS			FINANCIAL STATEMENTS
	-	Consolidated Statements of Financial Condition as of September 30, 2018 (Unaudited) and December 31, 2017	1	-	Consolidated Statements of Financial Condition as of September 30, 2019 (Unaudited) and December 31, 2018	1
	-	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	2	-	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	2
	-	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	3	-	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	3
	-	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	4	-	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, June 30, and September 30, 2019 and 2018 (Unaudited)	4
	-	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	5	-	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	6
	-	Notes to Unaudited Consolidated Financial Statements	6	-	Notes to Unaudited Consolidated Financial Statements	7
2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		35	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		38
3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		53	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		55
4	CONTROLS AND PROCEDURES		53	CONTROLS AND PROCEDURES		55

		PART II			PART II

1A	RISK FACTORS		54	RISK FACTORS		56
2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		54	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		56
6	EXHIBITS		54	EXHIBITS		56
SIGNATURES			55			57

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary


Consolidated Statements of Financial Condition

		September 30,		December 31,			September 30,		December 31,
		2018		2017			2019		2018
		(Unaudited)					(Unaudited)
		(Dollars in thousands, except share data)					(Dollars in thousands, except share data)

Assets
Cash and due from banks		$	7,792	$	7,709		$	9,838	$	8,880
Interest earning deposits			2,459		6,570			10,720		3,244
Federal funds sold			27,818		26,634			-		18,627
Cash and Cash Equivalents			38,069		40,913			20,558		30,751
Securities available for sale			83,147		80,421			75,093		86,193
Federal Home Loan Bank stock, at cost			1,545		1,631			2,055		1,545
Loans receivable, net of allowance for loan losses 2018 $3,388; 2017 $3,283			388,437		365,063
Loans receivable, net of allowance for loan losses 2019 $4,141; 2018 $3,448								462,993		392,471
Premises and equipment, net			9,383		9,373			9,321		9,417
Accrued interest receivable			2,044		1,801			2,236		1,913
Bank owned life insurance			20,100		18,077			21,839		21,469
Other assets			3,428		1,698			2,720		1,949
Total Assets		$	546,153	$	518,977		$	596,815	$	545,708
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Interest bearing		$	376,892	$	350,535		$	406,574	$	377,131
Non-interest bearing			59,009		54,618			64,701		55,327
Total Deposits			435,901		405,153			471,275		432,458
Long-term debt			24,650		26,950			34,650		24,650
Advances from borrowers for taxes and insurance			1,625		3,000			1,735		3,134
Other liabilities			5,176		5,499			6,696		5,662
Total Liabilities		$	467,352	$	440,602		$	514,356	$	465,904
Stockholders' Equity
Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,827,741 shares issued and 6,046,819 shares outstanding at September 30, 2018 and 6,827,741 shares issued and 6,098,323 shares outstanding at December 31, 2017		$	68	$	68
Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,836,514 shares issued and 5,949,673 shares outstanding at September 30, 2019 and 6,827,741 shares issued and 6,004,664 shares outstanding at December 31, 2018							$	68	$	68
Additional paid-in capital			30,870		30,719			31,042		30,916
Treasury stock, at cost (780,922 shares at September 30, 2018 and 729,418 shares at December 31, 2017)			(8,137)		(7,309)
Treasury stock, at cost (886,841 shares at September 30, 2019 and 823,077 shares at December 31, 2018)								(9,802)		(8,805)
Unearned shares held by ESOP			(1,471)		(1,535)			(1,385)		(1,449)
Unearned shares held by compensation plans			(273)		(540)			(71)		(200)
Retained earnings			58,339		56,181			61,038		59,145
Accumulated other comprehensive (loss) income			(595)		791
Accumulated other comprehensive income								1,569		129
Total Stockholders' Equity			78,801		78,375			82,459		79,804
Total Liabilities and Stockholders' Equity		$	546,153	$	518,977		$	596,815	$	545,708

See notes to consolidated financial statements.	See notes to consolidated financial statements.					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,					Three Months Ended September 30,				Nine Months Ended September 30,
		2018			2017	2018		2017			2019			2018	2019		2018
	(Unaudited)									(Unaudited)
	(Dollars in thousands, except per share data)										(Dollars in thousands, except per share data)
Interest Income
Loans, including fees		$	4,663	$	4,289	$	13,480	$	12,456		$	5,653	$	4,663	$	15,676	$	13,480
Investment securities, taxable			267		189		753		597			278		267		863		753
Investment securities, tax-exempt			403		388		1,193		1,259			328		403		1,082		1,193
Other			157		81		439		167			60		157		312		439
Total Interest Income			5,490		4,947		15,865		14,479			6,319		5,490		17,933		15,865
Interest Expense
Deposits			783		523		2,101		1,499			1,173		783		3,249		2,101
Short-term borrowings												33		-		46		-
Long-term debt			134		139		413		328			142		134		409		413
Other			38		20		77		62			18		38		55		77
Total Interest Expense			955		682		2,591		1,889			1,366		955		3,759		2,591
Net Interest Income			4,535		4,265		13,274		12,590			4,953		4,535		14,174		13,274
Provision for Loan Losses			125		75		315		450			300		125		725		315
Net Interest Income after Provision for Loan Losses			4,410		4,190		12,959		12,140			4,653		4,410		13,449		12,959
Non-Interest Income
Service charges and fees			457		441		1,371		1,353			473		457		1,345		1,371
Earnings on bank owned life insurance			103		91		273		268			128		103		370		273
Unrealized (loss) gain on equity securities			(5)		-		9		-
Unrealized gain (loss) on equity securities												22		(5)		57		9
Unrealized (loss) gain on interest rate swap												(15)		16		(109)		16
Recovery on previously impaired investment securities			34		25		124		96			13		34		39		124
Gain on sale of securities available for sale			-		22		-		244
Net gain on sale of loans			4		1		10		10			27		4		29		10
Other			36		37		89		83			21		20		73		73
Total Non-Interest Income			629		617		1,876		2,054			669		629		1,804		1,876
Non-Interest Expenses
Salaries and employee benefits			2,083		1,898		6,182		5,610			2,111		2,083		6,509		6,182
Occupancy and equipment			587		565		1,735		1,740			632		587		1,855		1,735
Data processing			337		320		1,000		937			346		337		1,022		1,000
Professional services			237		231		716		703			239		237		735		716
Advertising			151		127		473		439			168		151		520		473
Postage and supplies			71		53		189		197			58		71		181		189
FDIC Insurance			40		38		114		111			1		40		71		114
Other			331		381		968		955			364		331		976		968
Total Non-Interest Expenses			3,837		3,613		11,377		10,692			3,919		3,837		11,869		11,377
Income before Income Taxes			1,202		1,194		3,458		3,502			1,403		1,202		3,384		3,458
Income Tax Expense			144		254		458		704			191		144		469		458
Net Income		$	1,058	$	940	$	3,000	$	2,798		$	1,212	$	1,058	$	2,915	$	3,000
Basic and diluted earnings per common share		$	0.17	$	0.15	$	0.49	$	0.46		$	0.20	$	0.17	$	0.48	$	0.49
Dividends declared per share		$	0.10	$	0.08	$	0.30	$	0.24		$	0.12	$	0.10	$	0.36	$	0.30

See notes to consolidated financial statements.	See notes to consolidated financial statements.									See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income


		Three Months Ended September 30,					Three Months Ended September 30,
		2018		2017			2019		2018
		(Unaudited)					(Unaudited)
		(Dollars in thousands)					(Dollars in thousands)
Net Income		$	1,058		940		$	1,212		1,058
Other Comprehensive Loss, net of tax benefit:
Unrealized holding losses on securities available for sale, net of tax benefit			(467)		(60)
Other Comprehensive Income (Loss), net of tax expense (benefit):
Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit)								207		(467)
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income, net of tax expense			(27)		(16)			(10)		(27)
Net gain on sale of securities included in net income, net of tax expense			-		(15)
Total Other Comprehensive Loss			(494)		(91)
Total Other Comprehensive Income (Loss)								197		(494)
Total Comprehensive Income		$	564	$	849		$	1,409	$	564


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2018		2017			2019		2018
		(Unaudited)					(Unaudited)
		(Dollars in thousands)					(Dollars in thousands)
Net Income		$	3,000	$	2,798		$	2,915	$	3,000
Other Comprehensive Loss, net of tax benefit:
Unrealized holding losses on securities available for sale, net of tax benefit			(1,444)		(34)
Other Comprehensive Income (Loss), net of tax expense (benefit):
Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit)								1,471		(1,444)
Reclassification adjustments related to:
Recovery on previously impaired investment securities included in net income, net of tax expense			(98)		(63)			(31)		(98)
Net gain on sale of securities included in net income, net of tax expense			-		(161)
Total Other Comprehensive Loss			(1,542)		(258)
Total Other Comprehensive Income (Loss)								1,440		(1,542)
Total Comprehensive Income		$	1,458	$	2,540		$	4,355	$	1,458

See notes to consolidated financial statements.	See notes to consolidated financial statements.					See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

~~Nine~~Three Months Ended March 31, June 30, September 30, ~~2018~~2019 and ~~2017~~2018 (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 (Loss)

Total

(Dollars in thousands, except share and per share data)
Balance - January 1, 2017

$
68

$
30,532

$
(7,300)

$
(1,620)

$
(578)

$
53,546

$
1,382

$
76,030
Net income

-

-

-

-

-

2,798

-

2,798
Other comprehensive loss, net of tax benefit of $133

-

-

-

-

-

-

(258)

(258)
ESOP shares earned (5,951 shares)

-

30

-

64

-

-

-

94
Stock based compensation

-

33

-

-

-

-

-

33
Compensation plan shares granted (27,348 shares)

-

-

270

-

(270)

-

-

-
Compensation plan shares forfeited (1,104 shares)

-

-

(10)

-

10

-

-

-
Compensation plan shares earned (20,569 shares)

-

72

-

-

220

-

-

292
Purchase of treasury stock, at cost (17,100 shares)

-

-

(269)

-

-

-

-

(269)
Cash dividends declared ($0.24 per share)

-

-

-

-

-

(559)

-

(559)
Balance - September 30, 2017

$
68

$
30,667

$
(7,309)

$
(1,556)

$
(618)

$
55,785

$
1,124

$
78,161

Balance - January 1, 2018

$
68

$
30,719

$
(7,309)

$
(1,535)

$
(540)

$
56,181

$
791

$
78,375
Net income

-

-

-

-

-

3,000

-

3,000
Other comprehensive loss, net of tax benefit of $410

-

-

-

-

-

-

(1,542)

(1,542)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI

-

-

-

-

-

(156)

156

-
ESOP shares earned (5,951 shares)

-

36

-

64

-

-

-

100
Stock based compensation

-

33

-

-

-

-

-

33
Compensation plan shares granted (5,329 shares)

-

-

51

-

(51)

-

-

-
Compensation plan shares forfeited (10,433 shares)

-

-

(99)

-

93

-

-

(6)
Compensation plan shares earned (21,366 shares)

-

82

-

-

225

-

-

307
Purchase of treasury stock, at cost (46,400 shares)

-

-

(780)

-

-

-

-

(780)
Cash dividends declared ($0.30 per share)

-

-

-

-

-

(686)

-

(686)
Balance - September 30, 2018

$
68

$
30,870

$
(8,137)

$
(1,471)

$
(273)

$
58,339

$
(595)

$
78,801

See notes to consolidated financial statements.


							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 (Loss)		Total
	(Dollars in thousands, except share and per share data)

Balance - January 1, 2018	$	68	$	30,719	$	(7,309)	$	(1,535)	$	(540)	$	56,181	$	791	$	78,375
Net income		-		-		-		-		-		936		-		936
Other comprehensive loss, net of tax benefit of $185		-		-		-		-		-		-		(697)		(697)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI		-		-		-		-		-		(156)		156		-
ESOP shares earned (1,984 shares)		-		12		-		21		-		-		-		33
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares granted (5,285 shares)		-		-		50		-		(50)		-		-		-
Compensation plan shares forfeited (9,638 shares)		-		-		(91)		-		91		-		-		-
Compensation plan shares earned (6,613 shares)		-		24		-		-		70		-		-		94
Purchase of treasury stock, at cost (20,000 shares)		-		-		(329)		-		-		-		-		(329)
Cash dividends declared ($0.10 per share)		-		-		-		-		-		(230)		-		(230)
Balance - March 31, 2018	$	68	$	30,766	$	(7,679)	$	(1,514)	$	(429)	$	56,731	$	250	$	78,193

Balance - April 1, 2018	$	68	$	30,766	$	(7,679)	$	(1,514)	$	(429)	$	56,731	$	250	$	78,193
Net income		-		-		-		-		-		1,006		-		1,006
Other comprehensive loss, net of tax benefit of $94		-		-		-		-		-		-		(351)		(351)
ESOP shares earned (1,983 shares)		-		12		-		22		-		-		-		34
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares granted (44 shares)		-		-		1		-		(1)		-		-		-
Compensation plan shares earned (7,329 shares)		-		30		-		-		77		-		-		107
Purchase of treasury stock, at cost (14,300 shares)		-		-		(243)		-		-		-		-		(243)
Cash dividends declared ($0.10 per share)		-		-		-		-		-		(228)		-		(228)
Balance - June 30, 2018	$	68	$	30,819	$	(7,921)	$	(1,492)	$	(353)	$	57,509	$	(101)	$	78,529

Balance - July 1, 2018	$	68	$	30,819	$	(7,921)	$	(1,492)	$	(353)	$	57,509	$	(101)	$	78,529
Net income		-		-		-		-		-		1,058		-		1,058
Other comprehensive loss, net of tax benefit of $131		-		-		-		-		-		-		(494)		(494)
ESOP shares earned (1,984 shares)		-		12		-		21		-		-		-		33
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares forfeited (795 shares)		-		-		(8)		-		2		-		-		(6)
Compensation plan shares earned (7,424 shares)		-		28		-		-		78		-		-		106
Purchase of treasury stock, at cost (12,100 shares)		-		-		(208)		-		-		-		-		(208)
Cash dividends declared ($0.10 per share)		-		-		-		-		-		(228)		-		(228)
Balance - September 30, 2018	$	68	$	30,870	$	(8,137)	$	(1,471)	$	(273)	$	58,339	$	(595)	$	78,801


							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 (Loss)		Total
	(Dollars in thousands, except share and per share data)
Balance - January 1, 2019	$	68	$	30,916	$	(8,805)	$	(1,449)	$	(200)	$	59,145	$	129	$	79,804
Net income		-		-		-		-		-		898		-		898
Other comprehensive income, net of tax expense of $167		-		-		-		-		-		-		628		628
Cumulative effect of adoption of ASU 2016-02 Leases (Topic 842) (net of $2 tax benefit effect)		-		-		-		-		-		(10)		-		(10)
ESOP shares earned (1,984 shares)		-		10		-		21		-		-		-		31
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares granted (5,186 shares)		-		-		49		-		(49)		-		-		-
Compensation plan shares earned (5,518 shares)		-		18		-		-		60		-		-		78
Purchase of treasury stock, at cost (7,300 shares)		-		-		(111)		-		-		-		-		(111)
Cash dividends declared ($0.12 per share)		-		-		-		-		-		(267)		-		(267)
Balance - March 31, 2019	$	68	$	30,955	$	(8,867)	$	(1,428)	$	(189)	$	59,766	$	757	$	81,062

Balance - April 1, 2019	$	68	$	30,955	$	(8,867)	$	(1,428)	$	(189)	$	59,766	$	757	$	81,062
Net income		-		-		-		-		-		805		-		805
Other comprehensive income, net of tax expense of $164		-		-		-		-		-		-		615		615
ESOP shares earned (1,983 shares)		-		6		-		21		-		-		-		27
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares forfeited (760 shares)		-		-		(8)		-		8		-		-		-
Compensation plan shares earned (6,107 shares)		-		23		-		-		58		-		-		81
Purchase of treasury stock, at cost (43,900 shares)		-		-		(672)		-		-		-		-		(672)
Cash dividends declared ($0.12 per share)		-		-		-		-		-		(265)		-		(265)
Balance - June 30, 2019	$	68	$	30,995	$	(9,547)	$	(1,407)	$	(123)	$	60,306	$	1,372	$	81,664

Balance - July 1, 2019	$	68	$	30,995	$	(9,547)	$	(1,407)	$	(123)	$	60,306	$	1,372	$	81,664
Net income		-		-		-		-		-		1,212		-		1,212
Other comprehensive income, net of tax expense of $52		-		-		-		-		-		-		197		197
Stock options exercised (17,773 shares)		-		6		-		-		-		-		-		6
ESOP shares earned (1,984 shares)		-		11		-		22		-		-		-		33
Stock based compensation		-		11		-		-		-		-		-		11
Compensation plan shares earned (4,277 shares)		-		19		-		-		52		-		-		71
Purchase of treasury stock, at cost (16,990 shares)		-		-		(255)		-		-		-		-		(255)
Cash dividends declared ($0.12 per share)		-		-		-		-		-		(480)		-		(480)
Balance - September 30, 2019	$	68	$	31,042	$	(9,802)	$	(1,385)	$	(71)	$	61,038	$	1,569	$	82,459

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2018		2017			2019		2018
		(Unaudited)					(Unaudited)
		(Dollars in thousands)					(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	3,000	$	2,798		$	2,915	$	3,000
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of investment securities			66		88			38		66
Net amortization of deferred loan costs			423		425			436		423
Provision for loan losses			315		450			725		315
Recovery on previously impaired investment securities			(124)		(96)			(39)		(124)
Unrealized gain on equity securities			(9)		-			(57)		(9)
Gain on sale of investment securities			-		(244)
Unrealized loss (gain) on interest rate swap								109		(16)
Originations of loans held for sale			(777)		(796)			(1,274)		(777)
Proceeds from sales of loans held for sale			787		806			1,303		787
Gain on sale of loans			(10)		(10)
Gain on sale of loans held for sale								(29)		(10)
Depreciation and amortization			579		648			600		579
Increase in bank owned life insurance, net			(273)		(268)			(370)		(273)
ESOP shares committed to be released			100		94			91		100
Stock based compensation expense			334		325			263		334
Increase in accrued interest receivable			(243)		(234)			(323)		(243)
(Increase) decrease in other assets			(6)		161
Decrease in other liabilities			(323)		(99)
(Increase) Decrease in other assets								(267)		10
Increase (Decrease) in other liabilities								194		(323)
Net Cash Provided by Operating Activities			3,839		4,048			4,315		3,839
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available for sale securities:
Sales			-		6,510
Maturities, prepayments and calls			6,215		8,980			12,981		6,215
Purchases			(10,826)		(2,402)			-		(10,826)
Purchases of Federal Home Loan Bank Stock			(20)		(375)			(510)		(20)
Redemptions of Federal Home Loan Bank Stock			106		84			-		106
Loan origination and principal collections, net			(25,426)		(37,384)			(71,846)		(25,426)
Additions to premises and equipment			(589)		(1,294)			(507)		(589)
Purchase of bank owned life insurance			(1,750)		-			-		(1,750)
Net Cash Used in Investing Activities			(32,290)		(25,881)			(59,882)		(32,290)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			30,748		15,030			38,817		30,748
Net decrease in advances from borrowers for taxes and insurance			(1,375)		(1,475)			(1,399)		(1,375)
Proceeds from issuance of long-term debt			1,500		9,700			14,050		1,500
Repayment of long-term debt			(3,800)		(1,700)			(4,050)		(3,800)
Proceeds from stock options exercised								6		-
Purchase of treasury stock			(780)		(269)			(1,038)		(780)
Cash dividends paid			(686)		(559)			(1,012)		(686)
Net Cash Provided by Financing Activities			25,607		20,727			45,374		25,607
Net Decrease in Cash and Cash Equivalents			(2,844)		(1,106)			(10,193)		(2,844)
CASH AND CASH EQUIVALENTS - BEGINNING			40,913		45,479			30,751		40,913
CASH AND CASH EQUIVALENTS - ENDING		$	38,069	$	44,373		$	20,558	$	38,069
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid		$	2,564	$	1,869		$	3,752	$	2,564
Income taxes paid		$	477	$	750		$	530	$	477
Right of Use Asset Recognized							$	904	$	-
Right of Use Liability Recognized							$	916	$	-

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING ACTIVITIES
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans		$	1,495	$	554		$	165	$	1,495

See notes to consolidated financial statements.	See notes to consolidated financial statements.					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, ~~2018~~2019 and for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 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, ~~2017~~2018 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, ~~2017.~~2018. The consolidated statements of income for the three and nine months ended September 30, ~~2018~~2019 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, ~~2018.~~2019.

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, ~~2018~~2019 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.

Leases

The Company leases certain properties and equipment under operating and finance leases. For operating leases in effect upon adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” at January 1, 2019 and for any leases commencing thereafter, the Company recognized a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset(s) during the lease term, the “right-of-use (“ROU”) asset.” The lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate. The ROU asset is measured at the initial amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent, any unamortized initial direct costs, and any impairment of the ROU asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments that are not included in the lease liability, and any impairment of the ROU asset. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations.

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease.

The Company’s leases are not complex; therefore there were no significant assumptions or judgements made in applying the requirements of Topic 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and non-lease components, and the determination of the discount rates for the leases.

Note 2 – New Accounting Standards

Impact of Adoption of Recent Accounting Standards

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update ~~( “ASU”) 2018-02,~~2016-02, “~~Income Statement – Reporting Comprehensive Income~~Leases (Topic ~~220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”~~ 842)”( (“ASU ~~2018-02)~~2016-02”) on January 1, ~~2018.~~2019. ASU ~~2018-02~~2016-02 was issued to ~~address~~increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the ~~income tax accounting treatment~~consolidated statements of financial condition for leases with lease terms of more than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income. ASU 2016-02 provides for a modified retrospective transition approach basis to record the impact of adopting ASU 2016-02 on financial statements. The modified retrospective transition approach allows the lessee to recognize and measure leases on the consolidated statements of financial condition at the beginning of either the earliest period presented or as of the ~~stranded tax effects within other comprehensive income. This issue came about from the enactment~~beginning of the ~~Tax Cuts~~period of adoption. The Company elected to recognize and ~~Jobs Act (the “Tax Act”)~~measure leases on ~~December 22, 2017 that changed~~the consolidated statements of financial condition at the beginning of the period of adoption presented in our financial statements, or January 1, 2019, and will not restate prior periods. Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $916,000 and the recognition of ROU assets totaling $904,000 as of the date of adoption. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. The initial gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. The most significant effects of adoption relate to the recognition of new ROU assets and lease liabilities on our consolidated statements of financial condition for two operating leases related to branch office space; and providing additional new disclosures about the Company’s ~~tax rate from 34%~~leasing activities. The Company does not expect a significant change in its leasing activities due to ~~21%.~~the adoption of ASU 2018-02 allows an entity to elect a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Act. The amount of that reclassification should include the effect of tax rate changes on the deferred tax amount, any related valuation allowance and other income tax effects on the items in AOCI.2016-02. Upon adoption of ASU ~~2018-02,~~2016-02, the Company ~~reclassified the income tax~~recognized a cumulative effect ~~of the Tax Act from AOCI~~adjustment to ~~retained earnings. The reclassification increased AOCI and decreased~~beginning retained earnings ~~by $156,000, with zero net effect on total shareholders’ equity. The Company uses~~of $10,000. Refer to Note 6 for more information related to the ~~individual security approach for all available for sale securities when releasing income tax effects remaining in AOCI.~~adoption of ASU 2016-02.

~~In July 2018, the~~The Company adopted FASB ~~issued~~ ASU ~~2018-11~~2017-08, “~~Leases (Topic 842): Targeted Improvements”~~Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)” (“ASU ~~2018-11”~~2017-08”). on January 1, 2019. ASU ~~2018-11 makes targeted improvements in order~~2017-08 amends the amortization period for certain purchased callable debt securities held at a premium to ~~provide relief~~the earliest call date. Under previous GAAP, entities generally amortized the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to ~~an entity’s costs~~be amortized to ~~implement certain aspects~~maturity. The adoption of ASU ~~2016-02~~ ~~“Leases”~~ ~~(Topic 842)” (“ASU 2016-02”). ASU 2018-11 allows lessors to combine~~

lease and associated non-lease components by class of underlying asset in contracts that meet certain criteria. For a lessor to qualify for this practical expedient, the lease and related non-lease components must have the same timing and pattern of transfer, and the lease component, if accounted for on a stand-alone basis, would be classified as an operating lease. ASU 2018-11 also provides entities with an optional transition method that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the ASU 2016-02 adoption period. This method eliminates the requirement for entities to restate the comparative periods presented to comply with ASU 2016-02. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. The amount of assets and liabilities to be added to the balance sheet under ASU 2016-02 and ASU 2018-11 are2017-08 did not ~~expected to~~ have a material impact on the Company’s consolidated financial statements ~~per preliminary estimates.~~or results of operations.

~~In August 2018, the FASB issued ASU 2018-13~~ ~~“Fair Value Measurement” (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”~~ ~~(“ASU 2018-13”). ASU 2018-13 clarifies the fair value measurement disclosure requirements of~~ Accounting Standards Codification (“ASC”) 820 by adding, eliminating and modifying certain disclosure requirements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This update is not expected to ~~have a material effect on the Company’s consolidated financial statements.~~be Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ~~(ASU 2016-13)~~(“ASU 2016-13”). ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a

troubled debt restructuring exists) from the date of initial recognition of that instrument. Further, ASU 2016-13 made certain targeted amendments to the existing impairment standards for available for sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis. ASU 2016-13 is effective for public business entities that are U.S. Securities and Exchange Commission (“SEC”) filers for fiscal periods beginning after December 15, 2019, including interim reporting periods within those periods. 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. ~~We are currently assessing~~The Company has determined its data requirements and is developing its methodologies for calculating the ~~potential impact on our consolidated financial statements; however, due~~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 ~~significant differences~~current process are being considered. We expect that the new guidance will result in an increase to the ~~revised guidance from existing GAAP,~~allowance for loan losses given that the ~~implementation~~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 ~~guidance may result in material changes in our accounting for credit losses on financial instruments.~~increase is still being evaluated. We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial ~~reporting. Alternative methodologies~~reporting procedures.

ASU 2016-13 was originally effective for public companies that are ~~being considered, data requirements~~U.S. Securities and ~~integrity~~Exchange Commission (“SEC”) filers for fiscal periods beginning after December 15, 2019, including interim reporting periods within those periods. In August 2019, the FASB issued a proposed accounting standard update to put forward staggered effective dates for certain accounting standards, including ASU 2016-13. The FASB has proposed an approach that ASU 2016-13 will be effective for Public Business Entities that are ~~being reviewed~~SEC filers, excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and ~~enhancements~~interim periods within those fiscal years. For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to ~~the current process are being considered.~~be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The FASB approved this proposed update on October 16, 2019 and expects to issue a final ASU in mid-November. The Company is ~~continuing~~currently a smaller reporting company, and once the final ASU is in place, the Company’s expected adoption date for ASU 2016-13 would change from fiscal years beginning after December 15, 2019 to ~~evaluate and implement this guidance.~~fiscal years beginning after December 15, 2022, including interim periods within those fiscal years..

Note 3 – Investment Securities

Debt Securities

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


	September 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
		(Dollars in thousands)
SECURITIES AVAILABLE FOR SALE:
Debt Securities
U.S. Government Agencies	$	2,011	$	175	$	-	$	2,186
Municipal bonds		36,504		928		-		37,432
Mortgage-backed securities:
Collateralized mortgage obligations-private label		24		1		-		25
Collateralized mortgage obligations-government sponsored entities		28,826		523		(144)		29,205
Government National Mortgage Association		170		14		-		184
Federal National Mortgage Association		2,050		82		-		2,132
Federal Home Loan Mortgage Corporation		3,407		171		-		3,578
Asset-backed securities-private label		-		235		-		235
Asset-backed securities-government sponsored entities		34		2		-		36
Total Debt Securities	$	73,026	$	2,131	$	(144)	$	75,013
Equity Securities		23		57		-		80
Total Securities Available for Sale	$	73,049	$	2,188	$	(144)	$	75,093

September 30, 2018

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(Dollars in thousands)
SECURITIES AVAILABLE FOR SALE:

Debt Securities

U.S. Government Agencies

$
2,012

$
-

$
(123)

$
1,889
Municipal bonds

46,174

522

(265)

46,431
Mortgage-backed securities:

Collateralized mortgage obligations-private label

27

-

-

27
Collateralized mortgage obligations-government sponsored entities

31,626

4

(1,165)

30,465
Government National Mortgage Association

196

6

-

202
Federal National Mortgage Association

2,477

28

(37)

2,468
Federal Home Loan Mortgage Corporation

1,314

13

(29)

1,298
Asset-backed securities-private label

-

291

-

291
Asset-backed securities-government sponsored entities

44

1

-

45
Total Debt Securities

$
83,870

$
865

$
(1,619)

$
83,116
Equity Securities

22

9

-

31
Total Securities Available for Sale

$
83,892

$
874

$
(1,619)

$
83,147

810


	December 31, 2017								December 31, 2018
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
		(Dollars in thousands)								(Dollars in thousands)
SECURITIES AVAILABLE FOR SALE:
Debt Securities
U.S. Government Agencies	$	2,013	$	-	$	(26)	$	1,987	$	2,012	$	-	$	(51)	$	1,961
Municipal bonds		44,256		1,312		(6)		45,562		44,546		521		(125)		44,942
Mortgage-backed securities:
Collateralized mortgage obligations-private label		30		-		-		30		27		-		-		27
Collateralized mortgage obligations-government sponsored entities		28,195		28		(569)		27,654		32,987		152		(686)		32,453
Government National Mortgage Association		229		16		-		245		191		8		-		199
Federal National Mortgage Association		2,834		95		-		2,929		2,367		41		(23)		2,385
Federal Home Loan Mortgage Corporation		1,518		35		-		1,553		3,833		64		(9)		3,888
Asset-backed securities-private label		69		276		(1)		344		-		270		-		270
Asset-backed securities-government sponsored entities		57		3		-		60		43		1		-		44
Total Debt Securities	$	79,201	$	1,765	$	(602)	$	80,364	$	86,006	$	1,057	$	(894)	$	86,169
Equity Securities		22		35		-		57		22		2		-		24
Total Securities Available for Sale	$	79,223	$	1,800	$	(602)	$	80,421	$	86,028	$	1,059	$	(894)	$	86,193

Debt Securities

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

At September 30, 2019 and December 31, 2018, thirty-two municipal bonds with a cost of $10.0 million and $11.0 million, respectively, and fair value of ~~$11.1~~$10.3 million and $11.2 million, respectively, were pledged under a collateral agreement with the Federal Reserve Bank (“FRB”) of New York for liquidity borrowing. At In addition, at September 30, 2019 and December 31, ~~2017,~~ ~~thirty-three~~2018, twenty-two municipal bonds with a cost of ~~$11.3~~$5.7 million and $5.6 million, respectively, and fair value of ~~$11.7~~$5.9 million ~~were pledged with the FRB. In addition, at September 30, 2018, twenty-one municipal bonds with a cost~~ and ~~fair value of~~ $5.6 million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. ~~At December 31, 2017, twenty municipal bonds with a cost of $5.1 million and fair value of $5.3 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 debt securities available for sale 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, 2018

U.S. Government Agencies

$
1,889

$
(123)

$
-

$
-

$
1,889

$
(123)
Municipal bonds

8,057

(255)

554

(10)

8,611

(265)
Mortgage-backed securities

15,304

(326)

17,068

(905)

32,372

(1,231)

$
25,250

$
(704)

$
17,622

$
(915)

$
42,872

$
(1,619)

Less than 12 months

12 months or more

Total

Gross

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(Dollars in thousands)

September 30, 2019

Mortgage-backed securities

450

(3)

11,498

(141)

11,948

(144)


December 31, 2017
December 31, 2018													December 31, 2018
U.S. Government Agencies	$	1,987	$	(26)	$	-	$	-	$	1,987	$	(26)		$	-	$	-	$	1,961	$	(51)	$	1,961	$	(51)
Municipal bonds		491		(6)		-		-		491		(6)			1,531		(5)		4,299		(120)		5,830		(125)
Mortgage-backed securities		7,547		(57)		17,602		(512)		25,149		(569)			736		(5)		23,065		(713)		23,801		(718)
Asset-backed securities -private label		68		(1)		-		-		68		(1)
	$	10,093	$	(90)	$	17,602	$	(512)	$	27,695	$	(602)		$	2,267	$	(10)	$	29,325	$	(884)	$	31,592	$	(894)

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

At September 30, ~~2018,~~2019, the ~~Company’s investment portfolio included several debt securities~~Company had one security in the “unrealized losses less than twelve months” category. The debt securities were not evaluated further for OTTI as the unrealized losses on the individual debt securities were less than 20% of book value, which management deemed to be immaterial, the securities were issued by government sponsored enterprisesmonths ” category and ~~management has the intent and ability to hold these securities.~~

~~At September 30, 2018, the Company had several debt~~24 securities in the “unrealized losses twelve months or more” category. ~~These securities were not evaluated further for OTTI, as the unrealized losses were less than 20% of book value and management~~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.

Management completed an OTTI analysis for two private label asset-backed securities, which did not have unrealized losses as of September 30, 2018. Management concluded that there was a limited risk of principal losses for these securities and that additional OTTI charges were not required as of September 30, 2018 on these securities.

The unrealized losses on debt securities shown in the previous tables were recorded as a component of other comprehensive ~~loss,~~income (loss), net of tax ~~benefit~~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,				For The Nine Months Ended September 30,
	2018		2017		2019		2018
	(Dollars in thousands)				(Dollars in thousands)
Beginning balance	$	435	$	554	$	347	$	435
Additions:
Credit loss not previously recognized		-		-		-		-
Reductions:
Losses realized during the period on OTTI previously recognized		-		-		-		-
Receipt of cash flows on previously recorded OTTI		(67)		(96)		(39)		(67)
Ending balance	$	368	$	458	$	308	$	368

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, 2019 and 2018, the Company did not sell any available for sale debt securities. ~~During the nine months ended September 30, 2017, the Company sold eighteen municipal bonds for total proceeds of $6.5 million resulting in realized gains of $244,000.~~

Equity Securities

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, available for sale equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock. During the ~~nine~~three months ended September 30, 2019 and 2018, the Company recognized an unrealized gain of ~~$9,000~~$22,000 and an unrealized loss of $5,000, respectively, on the equity securities, which was recorded in ~~noninterest~~non-interest income in the consolidated statements of income. During the nine months ended September 30, 2019 and 2018, the Company recognized an unrealized gain of $57,000 and $9,000, respectively. There were no sales of equity securities during the nine months ended September 30, ~~2018.~~2019.

Scheduled contractual maturities of available for sale securities are as follows:


	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars in thousands)				(Dollars in thousands)
September 30, 2018:
September 30, 2019:
Less than one year					$	360	$	361
After one year through five years	$	5,472	$	5,570		7,634		7,734
After five years through ten years		24,450		24,772		16,629		16,890
After ten years		18,264		17,978		13,892		14,633
Mortgage-backed securities		35,640		34,460		34,477		35,124
Asset-backed securities		44		336		34		271
Equity securities		22		31		23		80
	$	83,892	$	83,147	$	73,049	$	75,093

Note 4 - 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 through inspections performed by an independent appraisal firm. Construction loans also expose us to the risk of construction delays which may impair the borrower’s ability to repay the loan.

Other Loans:

Commercial – includes business installment loans, lines of credit, and other commercial loans. Most of our commercial loans have fixed interest rates, and are for terms generally not in excess of 5 years. Whenever possible, we collateralize these loans with a lien on business assets and equipment and require the personal guarantees from principals of the borrower. Commercial loans generally involve a higher degree of credit risk, ~~because the collateral underlying the loans may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial~~as commercial loans can also 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.

1314

The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	Real Estate Loans								Other Loans								Real Estate Loans								Other Loans
	One- to Four-Family(2)		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total		One- to Four-Family(2)		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)																(Dollars in thousands)
September 30, 2018
September 30, 2019
Allowance for Loan Losses:
Balance – July 1, 2018	$	440	$	86	$	1,887	$	329	$	658	$	30	$	44	$	3,474
Balance – July 1, 2019																	$	389	$	144	$	2,777	$	379	$	133	$	30	$	11	$	3,863
Charge-offs		(23)		-		(181)		-		-		(9)		-		(213)		(2)		-		(10)		-		-		(13)		-		(25)
Recoveries		-		-		-		-		-		2		-		2		-		-		1		-		-		2		-		3
Provision (Credit)		18		2		249		(80)		(48)		2		(18)		125		(4)		(9)		122		60		104		7		20		300
Balance – September 30, 2018	$	435	$	88	$	1,955	$	249	$	610	$	25	$	26	$	3,388
Balance – September 30, 2019																	$	383	$	135	$	2,890	$	439	$	237	$	26	$	31	$	4,141

Balance – January 1, 2018	$	511	$	122	$	1,663	$	347	$	544	$	35	$	61	$	3,283
Balance – January 1, 2019																	$	471	$	91	$	2,020	$	250	$	507	$	25	$	84	$	3,448
Charge-offs		(23)		-		(181)		-		-		(32)		-		(236)		(2)		(4)		(10)		-		-		(34)		-		(50)
Recoveries		18		1		-		-		1		6		-		26		8		1		3		-		-		6		-		18
Provision (Credit)		(71)		(35)		473		(98)		65		16		(35)		315		(94)		47		877		189		(270)		29		(53)		725
Balance – September 30, 2018	$	435	$	88	$	1,955	$	249	$	610	$	25	$	26	$	3,388
Balance – September 30, 2019																	$	383	$	135	$	2,890	$	439	$	237	$	26	$	31	$	4,141
Ending balance: individually evaluated for impairment	$	-	$	-	$	30	$	-	$	-	$	-	$	-	$	30	$	-	$	-	$	30	$	-	$	15	$	-	$	-	$	45
Ending balance: collectively evaluated for impairment	$	435	$	88	$	1,925	$	249	$	610	$	25	$	26	$	3,358	$	383	$	135	$	2,860	$	439	$	222	$	26	$	31	$	4,096

Gross Loans Receivable (1):
Ending balance	$	148,792	$	41,132	$	148,725	$	22,150	$	26,410	$	1,332	$	-	$	388,541	$	157,051	$	45,083	$	202,360	$	32,477	$	25,596	$	1,092	$	-	$	463,659
Ending balance: individually evaluated for impairment	$	179	$	19	$	665	$	-	$	61	$	-	$	-	$	924	$	171	$	-	$	235	$	-	$	30	$	-	$	-	$	436
Ending balance: collectively evaluated for impairment	$	148,613	$	41,113	$	148,060	$	22,150	$	26,349	$	1,332	$	-	$	387,617	$	156,880	$	45,083	$	202,125	$	32,477	$	25,566	$	1,092	$	-	$	463,223

⁽¹⁾

Gross Loans Receivable does not include allowance for loan losses of ~~$(3,388)~~$(4,141) or deferred loan costs of ~~$3,284.~~$3,475.

⁽²⁾

Includes one- to four-family construction loans.

1415


	Real Estate Loans								Other Loans								Real Estate Loans								Other Loans
	One- to Four-Family(1)		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total		One- to Four-Family(1)		Home Equity		Commercial		Construction - Commercial		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)
September 30, 2017
																	(Dollars in thousands)
September 30, 2018
Allowance for Loan Losses:
Balance – July 1, 2017	$	471	$	124	$	1,888	$	302	$	331	$	32	$	75	$	3,223
Balance – July 1, 2018																	$	440	$	86	$	1,887	$	329	$	658	$	30	$	44	$	3,474
Charge-offs		-		-		(75)		-		(2)		(8)		-		(85)		(23)		-		(181)		-		-		(9)		-		(213)
Recoveries		1		1		-		-		-		2		-		4		-		-		-		-		-		2		-		2
Provision (Credit)		54		10		(145)		15		167		5		(31)		75		18		2		249		(80)		(48)		2		(18)		125
Balance – September 30, 2017	$	526	$	135	$	1,668	$	317	$	496	$	31	$	44	$	3,217
Balance – September 30, 2018																	$	435	$	88	$	1,955	$	249	$	610	$	25	$	26	$	3,388

Balance – January 1, 2017	$	432	$	114	$	1,803	$	149	$	338	$	28	$	18	$	2,882
Balance – January 1, 2018																	$	511	$	122	$	1,663	$	347	$	544	$	35	$	61	$	3,283
Charge-offs		-		(3)		(75)		-		(20)		(36)		-		(134)		(23)		-		(181)		-		-		(32)		-		(236)
Recoveries		2		4		-		-		1		12		-		19		18		1		-		-		1		6		-		26
Provision (Credit)		92		20		(60)		168		177		27		26		450		(71)		(35)		473		(98)		65		16		(35)		315
Balance – September 30, 2017	$	526	$	135	$	1,668	$	317	$	496	$	31	$	44	$	3,217
Balance – September 30, 2018																	$	435	$	88	$	1,955	$	249	$	610	$	25	$	26	$	3,388

⁽¹⁾

Includes one– to four-family construction loans.


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

December 31, 2017
December 31, 2018
Allowance for Loan Losses:
Balance – December 31, 2017	$	511	$	122	$	1,663	$	347	$	544	$	35	$	61	$	3,283
Balance – December 31, 2018																	$	471	$	91	$	2,020	$	250	$	507	$	25	$	84	$	3,448
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	30	$	-	$	-	$	-	$	-	$	30
Ending balance: collectively evaluated for impairment	$	511	$	122	$	1,663	$	347	$	544	$	35	$	61	$	3,283	$	471	$	91	$	1,990	$	250	$	507	$	25	$	84	$	3,418

Gross Loans Receivable (1):
Ending Balance	$	144,614	$	38,078	$	122,747	$	30,802	$	27,612	$	1,355	$	-	$	365,208	$	155,024	$	41,830	$	150,475	$	22,252	$	21,825	$	1,156	$	-	$	392,562
Ending balance: individually evaluated for impairment	$	184	$	21	$	1,498	$	-	$	54	$	-	$	-	$	1,757	$	178	$	-	$	382	$	-	$	-	$	-	$	-	$	560
Ending balance: collectively evaluated for impairment	$	144,430	$	38,057	$	121,249	$	30,802	$	27,558	$	1,355	$	-	$	363,451	$	154,846	$	41,830	$	150,093	$	22,252	$	21,825	$	1,156	$	-	$	392,002

⁽¹⁾

Gross Loans Receivable does not include allowance for loan losses of ~~$(3,283)~~$(3,448) or deferred loan costs of ~~$3,138.~~$3,357.

⁽²⁾

Includes ~~one–~~one- to ~~four- family~~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				Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
							For the Nine Months Ended										For the Nine Months Ended
	At September 30, 2018						September 30, 2018				At September 30, 2019						September 30, 2019
	(Dollars in thousands)										(Dollars in thousands)
With no related allowance recorded:
Residential, one- to four-family	$	179	$	179	$	-	$	181	$	10	$	171	$	171	$	-	$	175	$	7
Home equity		19		19		-		19		-
Commercial real estate		409		409		-		413		-
Commercial loans		61		61		-		73		1
Commercial real estate(1)												-		-		-		35		-
Total impaired loans with no related allowance		668		668		-		686		11		171		171		-		210		7

With an allowance recorded:
Commercial real estate(1)		256		256		30		1,584		3
Commercial real estate												235		235		30		280		8
Commercial loans												30		30		15		32		1
Total impaired loans with an allowance		256		256		30		1,584		3		265		265		45		312		9

Total of impaired loans:
Residential, one- to four-family		179		179		-		181		10		171		171		-		175		7
Home equity		19		19		-		19		-
Commercial real estate		665		665		30		1,997		3		235		235		30		315		8
Commercial loans		61		61		-		73		1		30		30		15		32		1
Total impaired loans	$	924	$	924	$	30	$	2,270	$	14	$	436	$	436	$	45	$	522	$	16

(1)~~Two commercial real estate loans with a combined recorded investment of $1.4 million and a related allowance of $60,000 were foreclosed upon~~This loan was paid off during the nine months ended September 30, ~~2018 and included in Other Assets on the Consolidated Statement of Financial Condition at September 30, 2018.~~2019.

1617

			Unpaid				Average		Interest				Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
							For the Year Ended										For the Year Ended
	At December 31, 2017						December 31, 2017				At December 31, 2018						December 31, 2018
	(Dollars in thousands)										(Dollars in thousands)
With no related allowance recorded:
Residential, one- to four-family	$	184	$	184	$	-	$	197	$	15	$	178	$	178	$	-	$	180	$	12
Home equity		21		21		-		21		-
Home equity (1)												-		-		-		17		-
Commercial real estate		1,498		1,498		-		1,674		222		134		134		-		356		-
Commercial loans		54		54		-		54		-		-		-		-		59		1
Total impaired loans with no related allowance		1,757		1,757		-		1,946		237		312		312		-		612		13

With an allowance recorded:
Commercial real estate~~(1)~~(2)		-		-		-		230		-		248		248		30		1,249		4
Commercial loans(2)		-		-		-		50		6
Total impaired loans with an allowance		-		-		-		280		6		248		248		30		1,249		4

Total of impaired loans:
Residential, one- to four-family		184		184		-		197		15		178		178		-		180		12
Home equity		21		21		-		21		-		-		-		-		17		-
Commercial real estate		1,498		1,498		-		1,904		222		382		382		30		1,605		4
Commercial loans		54		54		-		104		6		-		-		-		59		1
Total impaired loans	$	1,757	$	1,757	$	-	$	2,226	$	243	$	560	$	560	$	30	$	1,861	$	17

(1)~~This loan was~~These loans were either paid off or foreclosed upon during the year ended December 31, ~~2017 and was recorded in other assets at December 31, 2017.~~2018.

(2)~~This loan was paid off~~Two commercial real estate loans with a combined recorded investment of $1.4 million and a related allowance of $60,000 were foreclosed upon during the year ended December 31, ~~2017.~~2018.

1718

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-		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		Past Due		Past Due		Past Due			Due			Due	Receivable		Accrual
	(Dollars in thousands)														(Dollars in thousands)
September 30, 2018:
September 30, 2019:
Real Estate Loans:
Residential, one- to four-family	$	674	$	407	$	1,205	$	2,286	$	146,160	$	148,446	$	2,187
Residential, one- to four-family(1)															$	1,492	$	587	$	1,230		$	3,309	$	153,742	$	157,051	$	2,342
Home equity		153		52		341		546		40,586		41,132		336		296		-		626			922		44,161		45,083		665
Commercial		-		-		589		589		148,136		148,725		665		-		-		235			235		202,125		202,360		235
Construction - Commercial		-		-		-		-		22,150		22,150		-		-		-		-			-		32,477		32,477		-
Construction - Residential, one- to four-family		-		-		-		-		346		346		-
Other Loans:
Commercial		-		52		76		128		26,282		26,410		76		186		-		-			186		25,410		25,596		53
Consumer		9		4		-		13		1,319		1,332		-		-		1		5			6		1,086		1,092		5
Total	$	836	$	515	$	2,211	$	3,562	$	384,979	$	388,541	$	3,264	$	1,974	$	588	$	2,096		$	4,658	$	459,001	$	463,659	$	3,300

	30-59 Days		60-89 Days		90 Days or More		Total Past			Current	Total Loans		Loans on Non-		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		Past Due		Past Due		Past Due			Due			Due	Receivable		Accrual
	(Dollars in thousands)														(Dollars in thousands)
December 31, 2017:
December 31, 2018:
Real Estate Loans:
Residential, one- to four-family	$	692	$	942	$	1,233	$	2,867	$	141,698	$	144,565	$	2,196
Residential, one- to four-family(1)															$	851	$	342	$	1,361	��	$	2,554	$	152,470	$	155,024	$	2,310
Home equity		27		59		212		298		37,780		38,078		235		211		187		333			731		41,099		41,830		337
Commercial		411		-		1,265		1,676		121,071		122,747		1,323		76		-		306			382		150,093		150,475		382
Construction - Commercial		-		-		-		-		30,802		30,802		-		-		-		-			-		22,252		22,252		-
Construction - Residential, one- to four-family		-		-		-		-		49		49		-
Other Loans:
Commercial		61		8		54		123		27,489		27,612		54		-		-		15			15		21,810		21,825		15
Consumer		22		2		22		46		1,309		1,355		25		5		-		-			5		1,151		1,156		-
Total	$	1,213	$	1,011	$	2,786	$	5,010	$	360,198	$	365,208	$	3,833	$	1,143	$	529	$	2,015		$	3,687	$	388,875	$	392,562	$	3,044

(1)

Includes one- to four-family construction loans.

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~~.balance. Interest income not recognized on non-accrual loans during the nine month periods ended September 30, 2019 and 2018 was $107,000 and ~~2017 was~~ $205,000, ~~and $209,000,~~ respectively.

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.

1819

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, ~~2018~~2019 and December 31, ~~2017:~~2018:


	Pass/Performing		Special Mention		Substandard		Doubtful		Loss		Total		Pass/ Performing		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)												(Dollars in thousands)
September 30, 2018
September 30, 2019
Real Estate Loans:
Residential, one- to four-family(1)	$	145,747	$	-	$	2,699	$	-	$	-	$	148,446	$	154,589	$	-	$	2,462	$	-	$	-	$	157,051
Home equity		40,640		-		492		-		-		41,132		44,162		-		921		-		-		45,083
Commercial		146,011		728		1,986		-		-		148,725		200,055		1,456		849		-		-		202,360
Construction - Commercial		22,150		-		-		-		-		22,150		32,477		-		-		-		-		32,477
Construction - Residential, one- to four-family		346		-		-		-		-		346
Other Loans:
Commercial		25,024		62		1,324		-		-		26,410		25,543		-		53		-		-		25,596
Consumer		1,328		-		4		-		-		1,332		1,086		-		6		-		-		1,092
Total	$	381,246	$	790	$	6,505	$	-	$	-	$	388,541	$	457,912	$	1,456	$	4,291	$	-	$	-	$	463,659


	Pass/ Performing		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
December 31, 2018
Real Estate Loans:
Residential, one- to four-family(1)	$	152,039	$	-	$	2,985	$	-	$	-	$	155,024
Home equity		41,346		-		484		-		-		41,830
Commercial		148,149		376		1,950		-		-		150,475
Construction - Commercial		22,252		-		-		-		-		22,252
Other Loans:
Commercial		20,722		61		1,042		-		-		21,825
Consumer		1,153		-		3		-		-		1,156
Total	$	385,661	$	437	$	6,464	$	-	$	-	$	392,562

Pass/Performing

Special Mention

Substandard

Doubtful

Loss

Total

(Dollars in thousands)
December 31, 2017

Real Estate Loans:

Residential, one- to four-family

$
141,751

$
-

$
2,814

$
-

$
-

$
144,565
Home equity

37,611

-

467

-

-

38,078
Commercial

118,977

866

2,904

-

-

122,747
Construction - Commercial

30,802

-

-

-

-

30,802
Construction - Residential, one- to four-family

49

-

-

-

-

49
Other Loans:

Commercial

26,165

1,093

354

-

-

27,612
Consumer

1,342

-

11

-

2

1,355
Total

$
356,697

$
1,959

$
6,550

$
-

$
2

$
365,208

(1)

Includes one- to four-family construction loans.

Troubled debt restructurings (“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.

1920

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, 2018

Real Estate Loans:

Residential, one- to four-family

5

$
179

-

$
-

5

$
179

-

$
-
Home equity

1

19

1

19

-

-

-

-
Total

6

$
198

1

$
19

5

$
179

-

$
-

At December 31, 2017

Real Estate Loans:

Residential, one- to four-family

5

$
184

-

$
-

5

$
184

-

$
-
Home equity

2

21

1

19

1

2

-

-
Total

7

$
205

1

$
19

6

$
186

-

$
-


					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, 2019
Real Estate Loans:
Residential, one- to four-family		5	$	171		1	$	30		4	$	141		-	$	-


At December 31, 2018
Real Estate Loans:
Residential, one- to four-family		5	$	178		1	$	34		4	$	144		1	$	34

No additional loan commitments were outstanding to these borrowers at September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

There were no loans restructured and classified as TDRs during the three and nine month periods ended September 30, ~~2018~~2019 and ~~September 30, 2017, respectively.~~2018.

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 ~~$1.7 million~~$770,000 and ~~$435,000~~$678,000 at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 ~~$1.4~~$1.2 million and ~~$965,000~~$1.1 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Note 5 – Borrowings

At September 30, 2019 and December 31, 2018, the Company had no short-term borrowings.

At September 30, 2019 and December 31, 2018, 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, 2018.

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



	Weighted Average Interest Rate		Amount Outstanding
Maturity	At September 30, 2019	At December 31, 2018		At September 30, 2019		At December 31, 2018
			(Dollars in thousands)

2019	1.91%	1.96%	$	2,200	$	6,250
2020	2.09%	2.09%		6,100		6,100
2021	2.30%	2.30%		7,800		7,800
2022	2.18%	2.18%		2,000		2,000
2023	2.48%	2.36%		3,550		2,500
2024	1.73%	-		13,000		-
	2.04%	2.16%	$	34,650	$	24,650

Note 6 – Leases

Operating leases with terms longer than 12 months in which we are the lessee are recorded as ROU assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated statements of financial condition under ASU 2016-02. Finance leases in which we are the lessee are recorded in premises and equipment on the consolidated statements of financial condition. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income.

The Company leases certain branch offices under operating or finance leases. Certain lease arrangements contain extension options which are typically for 5 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of September 30, 2019, operating lease ROU assets and liabilities were $808,000 and $830,000, respectively.

Operating lease costs that were recorded in occupancy and equipment expense on the consolidated statements of income for the three months ended September 30, 2019 and 2018 were $38,000 and $34,000, respectively. Operating lease costs for the nine months ended September 30, 2019 and 2018, were $114,000 and $103,000, respectively.

There were no sale and leaseback transactions, leveraged leases, lease transactions with related parties or leases that had not yet commenced during the nine months ended September 30, 2019.

The table below summarizes information related to our lease liabilities at or for the nine months ended September 30, 2019 and 2018:


	For the Nine Months Ended September 30,
(in thousands, except for percent and period data)	2019			2018

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	103		$	103
Operating cash flows from finance leases		95			90

Weighted-average remaining lease term, operating leases, in years		5.8			1.1
Weighted-average discount rate – operating leases		2.61	%		N/A

The Company has one long-term finance lease agreement for a branch location that was not impacted by the adoption of ASU 2016-02. The outstanding balance of the finance lease (included in other liabilities) at September 30, 2019 and December 31, 2018 was $757,000 and $797,000, respectively, with a weighted-average discount rate of 9.22%. The remaining term of this lease is 9.0 years. The asset related to this finance lease is included in premises and equipment and consists of the cost of $1.1 million less accumulated depreciation of approximately $580,000 and $548,000 at September 30, 2019 and December 31, 2018, respectively.

The table below summarizes the maturity of remaining lease liabilities as of September 30, 2019:


	Operating		Finance
	Leases		Lease
	(Dollars in thousands)
2019	$	34	$	32
2020		145		126
2021		157		126
2022		157		126
2023		157		131
2024 and thereafter		247		612
Total Lease Payments	$	897	$	1,153
Less: Amounts representing interest		(67)		(396)
Present value of lease liabilities	$	830	$	757

Note 57 – Earnings per Share

Earnings per share was calculated for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, 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”), unearned shares held by the Lake Shore Bancorp, Inc. 2006 Recognition and Retention Plan (“RRP”), and unearned shares held 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.

2023

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


	Three Months Ended September 30,				Three Months Ended September 30,
	2018		2017		2019		2018
Numerator – net income	$	1,058,000	$	940,000	$	1,212,000	$	1,058,000
Denominator:
Basic weighted average shares outstanding		6,074,753		6,115,140		5,987,857		6,074,753
Increase in weighted average shares outstanding due to:
Stock options		14,276		9,113		-		14,276
Diluted weighted average shares outstanding (1)		6,089,029		6,124,253		5,987,857		6,089,029

Earnings per share:
Basic	$	0.17	$	0.15	$	0.20	$	0.17
Diluted	$	0.17	$	0.15	$	0.20	$	0.17

	Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2019		2018
Numerator – net income	$	3,000,000	$	2,798,000	$	2,915,000	$	3,000,000
Denominator:
Basic weighted average shares outstanding		6,086,216		6,109,468		6,011,070		6,086,216
Increase in weighted average shares outstanding due to:
Stock options		13,462		9,093		-		13,462
Diluted weighted average shares outstanding (1)		6,099,678		6,118,561		6,011,070		6,099,678

Earnings per share:
Basic	$	0.49	$	0.46	$	0.48	$	0.49
Diluted	$	0.49	$	0.46	$	0.48	$	0.49

⁽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 for each plan were outstanding during the three and nine month periods ended September 30, ~~2017,~~2019, but were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive. ~~During the three and nine month periods ended September 30, 2018, there were no stock options excluded from the calculation of diluted earnings per share.~~

Note 68 – 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, ~~2018~~2019 and December 31, ~~2017.~~2018. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

2124

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


	Contract Amount				Contract Amount
	September 30,		December 31,		September 30,		December 31,
	2018		2017		2019		2018
	(Dollars in thousands)				(Dollars in thousands)

Commitments to grant loans	$	41,273	$	16,426	$	27,596	$	41,901
Unfunded commitments under lines of credit	$	48,969	$	41,395	$	59,081	$	52,371

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. At September 30, 2018 and December 31, 2017, the Company’s loan commitments with fixed interest rates for the next five years totaled $10.5 million and $7.9 million, respectively. The range of interest rates on these fixed rate commitments was 3.95% to 6.59% at September 30, 2018.

Note 79 – Stock-based Compensation

As of September 30, ~~2018,~~2019, 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 ~~$144,000~~$115,000 and ~~$146,000~~$144,000 for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The compensation cost that has been recorded for the nine months ended September 30, 2019 and 2018 was $354,000 and ~~2017 was~~ $434,000, ~~and $418,000,~~ 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, ~~2018~~2019 and ~~2017~~2018 is presented below:


	September 30, 2018				September 30, 2017				September 30, 2019				September 30, 2018
	Options		Weighted Average Exercise Price	Remaining Contractual Life	Options		Weighted Average Exercise Price	Remaining Contractual Life	Options		Weighted Average Exercise Price	Remaining Contractual Life	Options		Weighted Average Exercise Price	Remaining Contractual Life
Outstanding at beginning of year	82,321	$	12.98		82,826	$	12.95		82,321	$	12.98		82,321	$	12.98
Granted	-		-		-		-		-		-		-		-
Exercised	-		-		-		-		(17,773)		7.88		-		-
Forfeited	-		-		-		-
Outstanding at end of period	82,321	$	12.98	6.6 years	82,826	$	12.95	7.6 years	64,548	$	14.38	7.1 years	82,321	$	12.98	6.6 years

Options exercisable at end of period	30,681	$	10.61	6.6 years	18,279	$	7.88	7.6 years	25,818	$	14.38	7.1 years	30,681	$	10.61	6.6 years

Fair value of options granted		$	-			$	-			$	-			$	-

At September 30, ~~2018,~~2019, stock options outstanding had an intrinsic value of ~~$290,000~~$11,000 and there were no remaining options available for grant under the Stock Option Plan. There were 17,773 stock options exercised during the nine months ended September 30, 2019. There were no stock options exercised during the ~~three and~~ nine

months ended September 30, ~~2018 and 2017.~~2018. Compensation expense related to the Stock Option Plan for the three month period ended September 30, 2019 and 2018 ~~and 2017~~ was ~~$8,000, respectively.~~$8,000. Compensation expense related to the Stock Option Plan for the nine month period ended September 30, 2019 and 2018 ~~and 2017~~ was ~~$25,000,~~ ~~respectively~~.$25,000. At September 30, ~~2018, $104,000~~2019, $70,000 of unrecognized compensation cost related to the Stock Option Plan is expected to be recognized over a period of 3725 months.

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, ~~2018,~~2019, there were ~~106,820~~113,752 shares vested or distributed to eligible participants under the RRP. Compensation expense amounted to $14,000 and $23,000 for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Compensation expense amounted to ~~$67,000~~$58,000 and ~~$66,000~~$67,000 for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. At September 30, ~~2018, $130,000~~2019, $49,000 of unrecognized compensation cost related to the RRP is expected to be recognized over a period of 3725 months.

A summary of the status of unvested shares under the RRP for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 is as follows:


	2018		Weighted Average Grant Price (per Share)	2017		Weighted Average Grant Price (per Share)	2019		Weighted Average Grant Price (per Share)	2018		Weighted Average Grant Price (per Share)
Unvested shares outstanding at beginning of year	17,119	$	13.06	24,110	$	12.96	10,188	$	13.27	17,119	$	13.06
Granted	-		-	-		-	-		-	-		-
Vested	(4,914)		12.17	(4,974)		12.14	(4,915)		12.17	(4,914)		12.17
Forfeited	-		-	-		-
Unvested shares outstanding at end of period	12,205	$	13.42	19,136	$	13.18	5,273	$	14.30	12,205	$	13.42

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, ~~2018~~2019 as follows:

Grant Date

Number of Restricted Stock Awards

Vesting

Fair Value per Share of Award on Grant Date

Awardees

February 7, 2018

5,285

100% on December 14, 2018

$
17.00

Non-employee directors
April 24, 2018

44

100% on December 14, 2018

16.88

Non-employee director


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

February 6, 2019	5,186	100% on December 13, 2019	$	15.89	Non-employee directors

A summary of the status of unvested restricted stock awards under the EIP for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 is as follows:


	2018		Weighted Average Grant Price (per Share)	2017		Weighted Average Grant Price (per Share)	2019		Weighted Average Grant Price (per Share)	2018		Weighted Average Grant Price (per Share)
Unvested shares outstanding at beginning of year	42,915	$	14.40	26,072	$	12.77	25,321	$	15.28	42,915	$	14.40
Granted	5,329		17.00	27,348		15.90	5,186		15.89	5,329		17.00
Vested	(4,213)		12.16	(4,207)		12.16	(4,213)		12.16	(4,213)		12.16
Forfeited	(795)		14.85	(625)		13.76	(760)		15.90	(795)		14.85
Unvested shares outstanding at end of period	43,236	$	14.93	48,588	$	14.57	25,534	$	15.90	43,236	$	14.93

As of September 30, ~~2018,~~2019, there were ~~36,010~~58,138 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 ~~$77,000~~$60,000 and ~~$81,000~~$77,000 for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Compensation expenserelated to unvested EIP restricted stock awards during the nine months ended September 30, 2019 and 2018 was $172,000 and ~~2017 was~~ $234,000, ~~and $224,000,~~ respectively.At September 30, ~~2018, $220,000~~2019, $42,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 153 months.

A summary of the status of stock options under the EIP for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 is presented below:


	September 30, 2018				September 30, 2017				September 30, 2019				September 30, 2018
	Options		Exercise Price	Remaining Contractual Life	Options		Exercise Price	Remaining Contractual Life	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		20,000	$	14.38		20,000	$	14.38
Granted	-		-		-		-		-		-		-		-
Exercised	-		-		-		-		-		-		-		-
Forfeited	-		-		-		-		-		-		-		-
Outstanding at end of period	20,000	$	14.38	8.1 years	20,000	$	14.38	9.1 years	20,000	$	14.38	7.1 years	20,000	$	14.38	8.1 years

Options exercisable at end of period	3,998	$	14.38	8.1 years	-	$	-		7,997	$	14.38	7.1 years	3,998	$	14.38	8.1 years

Fair value of options granted			-				-				-				-

At September 30, ~~2018,~~2019, stock options outstanding had an intrinsic value of ~~$42,000~~$3,000 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, ~~2018~~2019 and ~~2017, respectively,~~2018, and amounted to $8,000 for the nine months ended September 30, ~~2018~~2019 and ~~2017, respectively.~~2018. At September 30, ~~2018, $32,000~~2019, $22,000 of unrecognized compensation cost related to unvested stock options is expected to be recognized over a period of 3725 months.

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, ~~2018,~~2019, the balance of the loan to the ESOP was ~~$1.6~~$1.4 million and the fair value of unallocated shares was ~~$2.4~~

$1.9 million. As of September 30, ~~2018,~~2019, there were 72,891 allocated shares and 134,895 unallocated shares compared to 70,031 allocated shares and 142,830 unallocated shares ~~compared to 62,956 allocated shares and 150,765 unallocated shares~~ at September 30, ~~2017.~~2018. The ESOP compensation expense was $30,000 for the three months ended September 30, 2019 and $33,000 for the three months ended September 30, 2018 ~~and $31,000 for the three months ended September 30, 2017~~ based on 1,984 shares earned in each of those quarters. The ESOP compensation expense was $91,000 for the nine months ended September 30, 2019 and $100,000 for the nine months ended September 30, 2018 ~~and $94,000 for the nine months ended September 30, 2017~~ based on 5,951 shares earned in each of those periods.

Note 810 - 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, ~~2018~~2019 and December 31, ~~2017~~2018 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.

The measurement of fair value under FASB ~~ASC~~Accounting Standards Codification (“ASC”) Topic 820, ~~“Fair~~“Fair Value Measurements and Disclosures” (“ASC Topic 820”) 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 under ASC Topic 820 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.

2528

The Company’s consolidated statement of financial condition contains investment securities available for sale and derivative instruments that are recorded at fair value on a recurring basis. For ~~assets~~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, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	Fair Value Measurements at September 30, 2018								Fair Value Measurements at September 30, 2019
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)								(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities available for sale:
Debt Securities
U.S. Government Agencies	$	1,889	$	1,889	$	-	$	-	$	2,186	$	2,186	$	-	$	-
Municipal bonds		46,431		-		46,431		-		37,432		-		37,432		-
Mortgage-backed securities:
Collateralized mortgage obligations-private label		27		-		27		-		25		-		25		-
Collateralized mortgage obligations-government sponsored entities		30,465		-		30,465		-		29,205		-		29,205		-
Government National Mortgage Association		202		-		202		-		184		-		184		-
Federal National Mortgage Association		2,468		-		2,468		-		2,132		-		2,132		-
Federal Home Loan Mortgage Corporation		1,298		-		1,298		-		3,578		-		3,578		-
Asset-backed securities:
Private label		291		-		291		-		235		-		235		-
Government sponsored entities		45		-		45		-		36		-		36		-
Total Debt Securities	$	83,116	$	1,889	$	81,227	$	-	$	75,013	$	2,186	$	72,827	$	-
Equity Securities		31		-		31		-		80		-		80		-
Total Securities Available for Sale	$	83,147	$	1,889	$	81,258	$	-	$	75,093	$	2,186	$	72,907	$	-
Interest Rate Swap(1)									$	(156)	$	-	$	(156)	$	-

⁽¹⁾

Included in Other Assets and Other Liabilities on the consolidated statements of financial condition.

2629


	Fair Value Measurements at December 31, 2017								Fair Value Measurements at December 31, 2018
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)								(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities available for sale:
Debt Securities
U.S. Government Agencies	$	1,987	$	1,987	$	-	$	-	$	1,961	$	1,961	$	-	$	-
Municipal bonds		45,562		-		45,562		-		44,942		-		44,942		-
Mortgage-backed securities:
Collateralized mortgage obligations-private label		30		-		30		-		27		-		27		-
Collateralized mortgage obligations-government sponsored entities		27,654		-		27,654		-		32,453		-		32,453		-
Government National Mortgage Association		245		-		245		-		199		-		199		-
Federal National Mortgage Association		2,929		-		2,929		-		2,385		-		2,385		-
Federal Home Loan Mortgage Corporation		1,553		-		1,553		-		3,888		-		3,888		-
Asset-backed securities:
Private label		344		-		-		344		270		-		270		-
Government sponsored entities		60		-		60		-		44		-		44		-
Total Debt Securities	$	80,364	$	1,987	$	78,033	$	344	$	86,169	$	1,961	$	84,208	$	-
Equity Securities		57		-		57		-		24		-		24		-
Total Securities Available for Sale	$	80,421	$	1,987	$	78,090	$	344	$	86,193	$	1,961	$	84,232	$	-
Interest Rate Swap(1)									$	(47)	$	-	$	(47)	$	-

⁽¹⁾

Included in Other Assets and Other Liabilities on the consolidated statements of financial condition

Any transfers between levels would be recognized as of the actual date of event or change in circumstances that caused the transfer. There were no reclassifications between the Level 1 and Level 2 categories for the nine months ended September 30, ~~2018~~2019 and for the year ended December 31, ~~2017.~~ 2018.

During the nine months ended September 30, 2018, asset-backed securities – private label were transferred from the Level 3 category to the Level 2 category. These securities were transferred to Level 2 because the Company changed its method of valuing these securities and that method now uses Level 2 inputs. These securities are now valued using Level 2 inputs because the price volatility associated with these securities has been reduced and management considers the quoted market price for these securities to be reasonable.

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 ~~speeds,~~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:

The fair value of securities available for sale 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

2730

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 speeds, credit information and the security’s 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. Securities available for sale measured within the Level 3 category as of December 31, 2017 consisted of private label asset-backed securities.

Investment securities available for sale – 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.

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3), specifically, asset-backed securities - private label, for the nine months ended September 30, ~~2018 and 2017:~~2018:

2018

2017

(Dollars in thousands)
Beginning Balance

$
344

$
832
Total gains - realized/unrealized:

Included in earnings

-

-
Included in other comprehensive loss

-

11
Total losses - realized/unrealized:

-

Included in earnings

-

-
Included in other comprehensive loss

-

(64)
Sales

-

-
Principal paydowns

-

(337)
Transfers to (out of) Level 3

(344)

-
Ending Balance

$
-

$
442


	September 30, 2018
	(Dollars in thousands)
Beginning Balance	$	344
Total gains - realized/unrealized:
Included in earnings		-
Included in other comprehensive loss		-
Total losses - realized/unrealized:		-
Included in earnings		-
Included in other comprehensive loss		-
Sales		-
Principal paydowns		-
Transfers to (out of) Level 3		(344)
Ending Balance	$	-

Both observable and unobservable inputs may be used to determine the fair value of assets and liabilities measured on a recurring basis that the Company has classified within the Level 3 category. As a result, any unrealized gains and losses for assets within the Level 3 category may include changes in fair value attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The following table presents additional quantitative information about the Level 3 inputs for the asset-backed securities - private label category. The fair values for this category were developed using the discounted cash flow technique with the following unobservable input ranges as of December 31, 2017 (dollars in thousands):

~~Unobservable Inputs~~

~~Security Category~~

~~Fair Value~~

~~Loan Type/Collateral~~

~~Credit Ratings~~

~~Constant Prepayment Speed (CPR)~~

~~Probability of Default (Annual Default Rate)~~

~~Loss Severity~~

~~December 31, 2017~~

~~Asset-backed securities - private label~~

~~344~~

~~Sub-prime First and Prime Second Lien - Residential Real Estate~~

~~B- thru D~~

~~5-12~~

~~3.0-5.0%~~

~~75.0% - 100.0%~~

At December 31, 2017, Level 3 inputs were determined by the Company’s management using inputs from its third party financial advisor on a quarterly basis. The significant unobservable inputs used in the fair value measurement of the reporting entity’s asset-backed, private label securities are prepayment rates, probability of default and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the

~~assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.~~

In addition to disclosure of the fair value of assets on a recurring basis, ASC Topic 820 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 as required by ASC Topic 310, “Receivables – Loan Impairment,” 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.

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


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

At September 30, 2018
At September 30, 2019
Impaired loans	$	260	$	-	$	-	$	260	$	250	$	-	$	-	$	250
Foreclosed real estate		1,650		-		-		1,650		209		-		-		209

At December 31, 2017
At December 31, 2018
Impaired loans	$	35	$	-	$	-	$	35	$	252	$	-	$	-	$	252
Foreclosed real estate		438		-		-		438		184		-		-		184

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
At September 30, 2018

Impaired loans
$
260

Market valuation of underlying collateral (1)

Direct Disposal Costs (2)

7.00-13.70%
Foreclosed real estate

1,650

Market valuation of property (1)

Direct Disposal Costs (2)

3.90-10.00%
At December 31, 2017

Impaired loans
$
35

Market valuation of underlying collateral (1)

Direct Disposal Costs (2)

7.00%
Foreclosed real estate

438

Market valuation of property (1)

Direct Disposal Costs (2)

7.00-16.80%


	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)	Fair Value Estimate		Valuation Technique	Unobservable Input	Range
At September 30, 2019
Impaired loans	$	250	Market valuation of underlying collateral (1)	Direct Disposal Costs (2)	7.00-20.33%
Foreclosed real estate		209	Market valuation of property (1)	Direct Disposal Costs (2)	7.00-10.00%
At December 31, 2018
Impaired loans	$	252	Market valuation of underlying collateral (1)	Direct Disposal Costs (2)	7.00-20.33%
Foreclosed real estate		184	Market valuation of property (1)	Direct Disposal Costs (2)	7.00-10.00%

⁽¹⁾

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

⁽²⁾

The fair value basis of impaired loans and 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 September 30, 2019, impaired loans valued using Level 3 inputs had a carrying amount of $295,000 and valuation allowances of $45,000. By comparison at December 31, 2018, impaired loans valued using Level 3 inputs had a carrying amount of ~~$290,000~~$282,000 and valuation allowances of $30,000. ~~By comparison at December 31, 2017, impaired loans valued using Level 3 inputs had a carrying amount of $35,000 and no valuation allowances.~~

Once a loan is determined to be impaired, the fair value of the loan continues to be evaluated based upon the market value of the underlying collateral securing the loan or by using a discounted future cash flow method if the loan is not collateral dependent. At September 30, ~~2018,~~2019, impaired loans with a carrying amount that had been written down utilizing Level 3 inputs during the nine months ended September 30, 2019 comprised of one loan with a fair value of $15,000 and resulted in an additional provision for loan losses of $15,000. At December 31, 2018, impaired loans whose carrying amount was written down utilizing Level 3 inputs during the year ended December 31, 2018 comprised of one loan with a fair value of $226,000 and resulted in an additional provision for loan ~~loss~~losses of $30,000.

At September 30, ~~2018,~~2019, foreclosed real estate valued using Level 3 inputs had a carrying amount of ~~$1.9 million~~$297,000 and valuation allowances of ~~$294,000. By comparison at~~$88,000. At December 31, ~~2017,~~2018, foreclosed real estate valued using ~~Level~~level 3 inputs had a carrying amount of ~~$557,000~~$260,000 and valuation allowances of ~~$119,000.~~$76,000.

Once a loan is foreclosed, the fair value of the real estate owned continues to be evaluated based upon the market value of the repossessed real estate originally securing the loan. At September 30, ~~2018,~~2019, foreclosed real estate with a carrying value that had been written down utilizing Level 3 inputs during the nine months ended September 30, ~~2018~~2019 comprised of ~~four~~two properties with a fair value of ~~$1.7 million~~$81,000 and resulted in an additional provision for loan losses of ~~$181,000~~$2,000 and subsequent write-downs ~~recorded in~~through non-interest expense of ~~$22,000.~~$10,000. At December 31, ~~2017,~~2018, foreclosed real estate with a carrying value that had been written down utilizing Level 3 inputs during the year ended December 31, ~~2017~~2018 comprised of two properties with a fair value of ~~$399,000~~$203,000 and resulted in an additional provision for loan losses of ~~$75,000~~$20,000 and subsequent write-downs recorded in non-interest expense of ~~$15,000.~~$40,000.

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, 2018										Fair Value Measurements at September 30, 2019
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs		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)		Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)										(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	38,069	$	38,069	$	38,069	$	-	$	-	$	20,558	$	20,558	$	20,558	$	-	$	-
Securities available for sale		83,147		83,147		1,889		81,258		-		75,093		75,093		2,186		72,907		-
Federal Home Loan Bank stock		1,545		1,545		-		1,545		-		2,055		2,055		-		2,055		-
Loans receivable, net		388,437		371,524		-		-		371,524		462,993		454,036		-		-		454,036
Accrued interest receivable		2,044		2,044		-		2,044		-		2,236		2,236		-		2,236		-
Interest Rate Swap												(156)		(156)		-		(156)		-
Financial liabilities:
Deposits		435,901		438,844		-		438,844		-		471,275		474,459		-		474,459		-
Long-term debt		24,650		23,972		-		23,972		-		34,650		34,918		-		34,918		-
Accrued interest payable		84		84		-		84		-		70		70		-		70		-
Off-balance-sheet financial instruments		-		-		-		-		-		-		-		-		-		-

Fair Value Measurements at December 31, 2017

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

$
40,913

$
40,913

$
40,913

$
-

$
-
Securities available for sale

80,421

80,421

1,987

78,090

344
Federal Home Loan Bank stock

1,631

1,631

-

1,631

-
Loans receivable, net

365,063

356,275

-

-

356,275
Accrued interest receivable

1,801

1,801

-

1,801

-
Financial liabilities:

Deposits

405,153

408,348

-

408,348

-
Long-term debt

26,950

26,634

-

26,634

-
Accrued interest payable

57

57

-

57

-
Off-balance-sheet financial instruments

-

-

-

-

-


	Fair Value Measurements at December 31, 2018
	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	$	30,751	$	30,751	$	30,751	$	-	$	-
Securities available for sale		86,193		86,193		1,961		84,232		-
Federal Home Loan Bank stock		1,545		1,545		-		1,545		-
Loans receivable, net		392,471		376,774		-		-		376,774
Accrued interest receivable		1,913		1,913		-		1,913		-
Interest Rate Swap		(47)		(47)		-		(47)		-
Financial liabilities:
Deposits		432,458		435,547		-		435,547		-
Long-term debt		24,650		24,292		-		24,292		-
Accrued interest payable		63		63		-		63		-
Off-balance-sheet financial instruments		-		-		-		-		-

Note 911 – Treasury Stock

During the three months ended September 30, 2019, the Company repurchased 16,990 shares of common stock at an average cost of $14.99 per share. During the nine months ended September 30, 2019, the Company repurchased 68,190 shares of common stock at an average cost of $15.22 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase program. As of September 30, 2019, there were 116,239 shares remaining to be repurchased under the existing stock repurchase program. During the nine months ended September 30, 2019, the Company transferred 5,186 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, 2019, there were 760 shares transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.88 per share due to stock forfeitures.

During the three months ended September 30, 2018, the Company repurchased 12,100 shares of common stock at an average cost of $17.24 per share. During the nine months ended September 30, 2018, the Company repurchased 46,400 shares of common stock at an average cost of $16.81 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase program. As of September 30, 2018, there were 108,090 shares remaining to be repurchased under the existing stock repurchase program. During the nine months ended September 30, 2018, the Company transferred 5,329 shares of common stock out of the 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 three and nine months ended September 30, 2018, there were 795 and 10,433 shares, respectively, transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.81 and $9.42 per share, respectively, due to stock forfeitures.

3134

During the three months ended September 30, 2017, the Company repurchased 3,600 shares of common stock at an average cost of $15.85 per share. During the nine months ended September 30, 2017, the Company repurchased 17,100 shares of common stock at an average cost of $15.75 per share. These shares were repurchased pursuant to the Company’s publicly announced common stock repurchase program. As of September 30, 2017, there were 67,401 shares remaining to be repurchased under the existing stock repurchase program. During the nine months ended September 30, 2017, the Company transferred 27,348 shares of common stock out of the treasury stock reserved for the 2012 Equity Incentive Plan, at an average cost of $9.88 per share to fund awards that had been granted under the plan. During the three and nine months ended September 30, 2017, there were 904 and 1,104 shares, respectively, transferred back into treasury stock reserved for the 2012 Equity Incentive Plan at an average cost of $9.59 and $9.58 per share, respectively, due to stock forfeitures.

Note 1012 – Other Comprehensive ~~Loss~~Income (Loss)

In addition to presenting the Consolidated Statements of Comprehensive Income herein, the following table shows the tax effects allocated to the Company’s single component of other comprehensive ~~loss~~income (loss) for the periods presented:

For the Three Months Ended September 30, 2018

For The Three Months Ended September 30, 2017

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

(Unaudited)

(Dollars in thousands)
Net unrealized losses on securities available for sale:

Net unrealized losses arising during the period

$
(591)

$
124

$
(467)

$
(91)

$
31

$
(60)
Less: reclassification adjustment related to:

Recovery on previously impaired investment securities included in net income

(34)

7

(27)

(25)

9

(16)
Gain on sale of securities included in net income

-

-

-

(22)

7

(15)
Total Other Comprehensive Loss

$
(625)

$
131

$
(494)

$
(138)

$
47

$
(91)


	For the Three Months Ended September 30, 2019						For The Three Months Ended September 30, 2018
	Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pre-Tax Amount		Tax Benefit		Net of Tax Amount
	(Unaudited)
	(Dollars in thousands)
Net unrealized gains (losses) on securities available for sale:
Net unrealized gains (losses) arising during the period	$	262	$	(55)	$	207	$	(591)	$	124	$	(467)
Less: reclassification adjustment related to:
Recovery on previously impaired investment securities included in net income		(13)		3		(10)		(34)		7		(27)
Total Other Comprehensive Income (Loss)	$	249	$	(52)	$	197	$	(625)	$	131	$	(494)

For the Nine Months Ended September 30, 2018

For The Nine Months Ended September 30, 2017

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

Pre-Tax Amount

Tax Benefit

Net of Tax Amount

(Unaudited)

(Dollars in thousands)
Net unrealized losses on securities available for sale:

Net unrealized losses arising during the period

$
(1,828)

$
384

$
(1,444)

$
(51)

$
17

$
(34)
Less: reclassification adjustment related to:

Recovery on previously impaired investment securities included in net income

(124)

26

(98)

(96)

33

(63)
Gain on sale of securities included in net income

-

-

-

(244)

83

(161)
Total Other Comprehensive Loss

$
(1,952)

$
410

$
(1,542)

$
(391)

$
133

$
(258)


	For the Nine Months Ended September 30, 2019						For The Nine Months Ended September 30, 2018
	Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pre-Tax Amount		Tax Benefit			Net of Tax Amount
	(Unaudited)
	(Dollars in thousands)
Net unrealized gains (losses) on securities available for sale:
Net unrealized gains (losses) arising during the period	$	1,862	$	(391)	$	1,471	$	(1,828)	$	384	$	(1,444)
Less: reclassification adjustment related to:
Recovery on previously impaired investment securities included in net income		(39)		8		(31)		(124)		26		(98)
Total Other Comprehensive Income (Loss)	$	1,823	$	(383)	$	1,440	$	(1,952)	$	410	$	(1,542)

The following table presents the amounts reclassified out of the single component of the Company’s accumulated other comprehensive ~~loss~~income for the indicated periods:


	Amounts Reclassified from Accumulated
Details about Accumulated Other	Other Comprehensive Income				Affected Line Item
Comprehensive Income	for the three months ended September 30,				on the Consolidated
Components	2019		2018		Statements of Income
	(Dollars in thousands)
Net unrealized gains and losses on securities available for sale:
Recovery on previously impaired investment securities	$	(13)	$	(34)	Recovery on previously impaired investment securities
		(13)		(34)
Provision for income tax expense		3		7	Income Tax Expense
Total reclassification for the period	$	(10)	$	(27)	Net Income

Amounts Reclassified from Accumulated

Details about Accumulated Other
Other Comprehensive Loss

Affected Line Item
Comprehensive Loss
for the three months ended September 30,

on the Consolidated
Components
2018

2017

Statements of Income

(Dollars in thousands)

Net unrealized gains and losses on securities available for sale:

Recovery on previously impaired investment securities
$
(34)

$
(25)

Recovery on previously impaired investment securities
Sale of securities

-

(22)

Gain on sale of securities available for sale

(34)

(47)

Provision for income tax benefit

7

16

Income Tax Expense
Total reclassification for the period
$
(27)

$
(31)

Net Income


	Amounts Reclassified from Accumulated					Amounts Reclassified from Accumulated
Details about Accumulated Other	Other Comprehensive Loss				Affected Line Item	Other Comprehensive Income				Affected Line Item
Comprehensive Loss	for the nine months ended September 30,				on the Consolidated
Comprehensive Income						for the nine months ended September 30,				on the Consolidated
Components	2018		2017		Statements of Income	2019		2018		Statements of Income
	(Dollars in thousands)					(Dollars in thousands)
Net unrealized gains and losses on securities available for sale:
Recovery on previously impaired investment securities	$	(124)	$	(96)	Recovery on previously impaired investment securities	$	(39)	$	(124)	Recovery on previously impaired investment securities
Sale of securities		-		(244)	Gain on sale of securities available for sale
		(124)		(340)			(39)		(124)
Provision for income tax benefit		26		116	Income Tax Expense
Provision for income tax expense							8		26	Income Tax Expense
Total reclassification for the period	$	(98)	$	(224)	Net Income	$	(31)	$	(98)	Net Income

Note 1113 – Revenue Recognition

~~As of January 1, 2018, the Company adopted FASB ASU 2014-09~~ ~~“Revenue from Contracts with Customers (Topic 606)”~~ (“ASU 2014-09”) for non-interest revenue streams. The Company has elected to apply ASU 2014-09 using the modified retrospective method. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; and as such, a cumulative effect adjustment to retained earnings was not deemed necessary under the modified retrospective implementation method. The adoption of ASU 2014-09 did, however, require additional disclosures.

The Company’s non-interest revenue streams primarily result from services it provides to its deposit customers. When a customer makes a deposit, the Company records a liability under ASC 405“Liabilities” because the Company has an obligation to deliver cash to its customer on demand. A contract between the Company and a deposit account customer is typically documented in writing and is often terminable at will by the customer alone or by both the customer and the Company without penalty. The term of a deposit contract between a customer and the Company will likely be day-to-day or minute-to-minute, and the termination clause is likely similar to a renewal right where each day or minute represents the renewal of the contract. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying ASC Topic 606 ~~that significantly affects~~ "Revenue from Contracts with Customers" ("Topic 606") on the determination of the amount and timing of ~~revenue from contracts with customers.~~revenue. The Company’s primary non-interest revenue streams within the scope of ASU ~~2014-~~

2014-09 33"Revenue from Contracts with Customers (Topic 606)"

09 ("ASU 2014-09") are described in further detail below. The Company has no material unsatisfied performance obligations as of September 30, ~~2018.~~ 2019.

Service Charges on Deposit Accounts

Service charges and fees on deposit accounts consist of transaction-based fees, account maintenance fees, and overdraft service fees for various retail and business deposit customers. Transaction-based fees, such as stop payment charges, are recognized at the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn directly from the customer’s account balance.

Fees, Interchange Income, and Other Service Charges

Fees, interchange income, and other service charges are primarily comprised of debit card income, ATM fees, merchant services income and other service charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are used to purchase goods or services from a merchant via a card payment network, such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value. ATM fees are comprised of fees earned whenever a Company’s ATM or debit card is used at a non-Company ATM or a non-Company cardholder uses a Company ATM. ATM fees represent a fixed fee for the convenience to cardholders for accessibility of funds. Merchant services income mainly represents fees charged to merchants serviced by a third party vendor under contract with the Company for debit or credit card processing, and represents a percentage of the underlying transaction value. Other service charges include revenue from services provided to our retail or business customers, which may include fees for wire transfer processing, bill pay services, cashier’s checks and other services. The Company’s performance obligation for fees, interchange income and other service charges are

largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically immediately or in the following month.

Other

Other non-interest income consists of safe deposit rental fees. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Gain/Losses on Sale of OREO

The Company records a gain or loss from the sale of ~~OREO~~other real estate owned (“OREO”) when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company ~~adjusts~~may need to adjust the transaction price and related gain (loss) on sale if a significant financing component is present. Gains (losses) on the sale of OREO are generally recorded in non-interest expense on the consolidated statement of income as an offset to OREO expenses. There were no sales of OREO ~~in which~~during the nine months ended September 30, 2019 and 2018 where the Company financed the sale ~~during~~of the ~~three and nine months ended September 30, 2018.~~property.

Contract Balances

The Company’s non-interest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company did not have any significant contract balances.

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	For the Three Months Ended				For the Nine Months Ended				For the three months ended September 30,				For the nine months ended September 30,
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		2019		2018		2019		2018
	(Dollars in thousands)								(Dollars in thousands)
Non-Interest Income
In-Scope of Topic 606:
Service charges on deposit accounts	$	218	$	221	$	655	$	690	$	208	$	218	$	601	$	655
Fees, interchange income and other service charges		203		190		595		554		227		203		629		595
Other		9		9		30		30		9		9		30		30
Non-interest Income (in-scope of Topic 606)		430		420		1,280		1,274		444		430		1,260		1,280
Non-interest Income (out of scope of Topic 606)		199		197		596		780		225		199		544		596
Total Non-Interest Income	$	629	$	617	$	1,876	$	2,054	$	669	$	629	$	1,804	$	1,876

Note 1214 – Subsequent Events

On October ~~24, 2018,~~23, 2019, the Board of Directors declared a quarterly cash dividend of ~~$0.10~~$0.12 per share on the Company’s common stock, payable on November ~~19, 2018~~21, 2019 to shareholders of record as of November ~~6, 2018.~~7, 2019. Lake Shore, MHC (the “MHC”), which holds 3,636,875 shares, or approximately ~~60.4%~~61.2% of the Company’s total outstanding stock, has elected to waive receipt of the dividend on its ~~right to receive this cash dividend of approximately $364,000.~~shares. On March ~~9, 2018,~~7, 2019, 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 ~~7, 2019,~~6, 2020, aggregating up to ~~$0.40~~$0.48 per share. During the third quarter of 2019, the MHC elected to receive a cash dividend of $0.06 per share, or approximately $218,000, to replenish cash at the top tier holding company for operating expenses. The MHC waived ~~$364,000~~$218,000 of dividends during the three months ended September 30, ~~2018~~2019 and $1.1 million of dividends during the nine months ended September 30, ~~2018.~~2019. Cumulatively ~~Lake Shore,~~the MHC has waived approximately ~~$10.5~~$11.9 million of cash dividends as of September 30, ~~2018.~~2019. The dividends waived by ~~Lake Shore,~~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

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as “believe,” “will,” “expect,” “project,” “may,” “could,” “anticipate,” “estimate,” “intend,” “plan,” “targets” and similar expressions. These statements are based upon our current beliefs and expectations and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors.

The following factors, including the factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q (if applicable) and in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements:

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;

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

changes in legislation or regulation, including the implementation of the Dodd-Frank Act; and

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

Any or 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 ~~statements~~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. For a more complete discussion of certain risks, uncertainties and other factors affecting the Company, refer to the Company’s Risk Factors, contained in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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, ~~2018~~2019 compared to the consolidated financial condition as of December 31, ~~2017~~2018 and the consolidated results of operations for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018.

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 and gains and losses on 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 available for sale 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, the Company entered into an interest rate swap arrangement with a notional amount of $3.0 million to convert a portion of its fixed rate residential, one- to four-family real estate loans into adjustable rate interest-earning assets, to ~~better~~ 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.

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, ~~2017.~~2018.

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, ~~2017.~~2018. 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, ~~2017.~~2018.

Analysis of Net Interest Income

Net interest income represents the difference between the interest we earn on our interest-earning assets, such as commercial ~~loans,~~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 ~~sheet~~sheets and ~~reflect~~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 ~~interest~~ income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods ~~indicated.~~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 bank qualified municipal bonds.


	For the Three Months Ended					For the Three Months Ended					For the Three Months Ended					For the Three Months Ended
	September 30, 2018					September 30, 2017					September 30, 2019					September 30, 2018
	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/
	Balance		Expense		Rate(2)	Balance		Expense		Rate(2)	Balance		Expense		Rate(2)	Balance		Expense		Rate(2)
	(Dollars in thousands)										(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	32,972	$	157	1.90%	$	31,466	$	81	1.03%	$	11,144	$	60	2.15%	$	32,972	$	157	1.90%
Securities(1)		85,797		670	3.12%		76,678		577	3.01%		79,153		606	3.06%		85,797		670	3.12%
Loans		383,810		4,663	4.86%		362,198		4,289	4.74%		451,459		5,653	5.01%		383,810		4,663	4.86%
Total interest-earning assets		502,579		5,490	4.37%		470,342		4,947	4.21%		541,756		6,319	4.67%		502,579		5,490	4.37%
Other assets		40,089					37,924					43,542					40,089
Total assets	$	542,668				$	508,266				$	585,298				$	542,668

Interest-bearing liabilities
Demand & NOW accounts	$	51,223	$	15	0.12%	$	49,850	$	16	0.13%	$	53,578	$	14	0.10%	$	51,223	$	15	0.12%
Money market accounts		118,713		238	0.80%		87,099		72	0.33%		124,923		374	1.20%		118,713		238	0.80%
Savings accounts		52,825		8	0.06%		54,211		8	0.06%		53,898		8	0.06%		52,825		8	0.06%
Time deposits		150,178		522	1.39%		146,987		427	1.16%		167,378		777	1.86%		150,178		522	1.39%
Borrowed funds & other interest-bearing liabilities		25,466		172	2.70%		27,806		159	2.29%		32,372		193	2.38%		25,466		172	2.70%
Total interest-bearing liabilities		398,405		955	0.96%		365,953		682	0.75%		432,149		1,366	1.26%		398,405		955	0.96%
Other non-interest bearing liabilities		65,101					64,080					70,636					65,101
Stockholders' equity		79,162					78,233					82,513					79,162
Total liabilities & stockholders' equity	$	542,668				$	508,266				$	585,298				$	542,668
Net interest income			$	4,535				$	4,265				$	4,953				$	4,535
Interest rate spread					3.41%					3.46%					3.41%					3.41%
Net interest margin					3.61%					3.63%					3.66%					3.61%

⁽¹⁾

The tax equivalent adjustment for bank qualified municipal securities results in rates of ~~3.62%~~3.50% and ~~4.05%~~3.62% for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

⁽²⁾

Annualized.

3841

	For the Nine Months Ended					For the Nine Months Ended					For the Nine Months Ended					For the Nine Months Ended
	September 30, 2018					September 30, 2017					September 30, 2019					September 30, 2018
	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/
	Balance		Expense		Rate(2)	Balance		Expense		Rate(2)	Balance		Expense		Rate(2)	Balance		Expense		Rate(2)
	(Dollars in thousands)										(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	35,002	$	439	1.67%	$	29,798	$	167	0.75%	$	18,097	$	312	2.30%	$	35,002	$	439	1.67%
Securities(1)		83,481		1,946	3.11%		81,737		1,856	3.03%		83,244		1,945	3.12%		83,481		1,946	3.11%
Loans		375,989		13,480	4.78%		348,716		12,456	4.76%		421,641		15,676	4.96%		375,989		13,480	4.78%
Total interest-earning assets		494,472		15,865	4.28%		460,251		14,479	4.19%		522,982		17,933	4.57%		494,472		15,865	4.28%
Other assets		38,754					37,325					43,062					38,754
Total assets	$	533,226				$	497,576				$	566,044				$	533,226

Interest-bearing liabilities
Demand & NOW accounts	$	50,466	$	42	0.11%	$	50,688	$	48	0.13%	$	51,351	$	40	0.10%	$	50,466	$	42	0.11%
Money market accounts		112,796		572	0.68%		83,694		183	0.29%		120,572		958	1.06%		112,796		572	0.68%
Savings accounts		53,070		23	0.06%		53,933		23	0.06%		53,627		24	0.06%		53,070		23	0.06%
Time deposits		149,611		1,464	1.30%		147,664		1,245	1.12%		165,071		2,227	1.80%		149,611		1,464	1.30%
Borrowed funds & other interest-bearing liabilities		26,834		490	2.43%		22,678		390	2.29%		28,358		510	2.40%		26,834		490	2.43%
Total interest-bearing liabilities		392,777		2,591	0.88%		358,657		1,889	0.70%		418,979		3,759	1.20%		392,777		2,591	0.88%
Other non-interest bearing liabilities		61,645					61,424					65,483					61,645
Stockholders' equity		78,804					77,495					81,582					78,804
Total liabilities & stockholders' equity	$	533,226				$	497,576				$	566,044				$	533,226
Net interest income			$	13,274				$	12,590				$	14,174				$	13,274
Interest rate spread					3.40%					3.49%					3.37%					3.40%
Net interest margin					3.58%					3.65%					3.61%					3.58%

⁽¹⁾

The tax equivalent adjustment for bank qualified municipal securities results in ~~rates~~a rate of ~~3.61%~~3.58% and ~~4.09%~~3.61% for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, 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, 2018						Three Months Ended September 30, 2019
	Compared to						Compared to
	Three Months Ended September 30, 2017						Three Months Ended September 30, 2018
	Rate		Volume		Net Change		Rate		Volume		Net Change
		(Dollars in thousands)						(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	72	$	4	$	76	$	18	$	(115)	$	(97)
Securities		22		71		93		(13)		(51)		(64)
Loans, including fees		113		261		374		147		843		990
Total interest-earning assets		207		336		543		152		677		829
Interest-bearing liabilities:
Demand & NOW accounts		(1)		-		(1)		(2)		1		(1)
Money market accounts		132		34		166		123		13		136
Savings accounts		-		-		-		-		-		-
Time deposits		86		9		95		190		65		255
Total deposits		217		43		260		311		79		390
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities		26		(13)		13		(15)		36		21
Total interest-bearing liabilities		243		30		273		296		115		411
Total change in net interest income	$	(36)	$	306	$	270	$	(144)	$	562	$	418


	Nine Months Ended September 30, 2019
	Compared to
	Nine Months Ended September 30, 2018
	Rate		Volume			Net Change
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	130	$	(257)	$	(127)
Securities		5		(6)		(1)
Loans, including fees		513		1,683		2,196
Total interest-earning assets		648		1,420		2,068
Interest-bearing liabilities:
Demand & NOW accounts		(2)		-		(2)
Money market accounts		344		42		386
Savings accounts		-		1		1
Time deposits		599		164		763
Total deposits		941		207		1,148
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities		(2)		22		20
Total interest-bearing liabilities		939		229		1,168
Total change in net interest income	$	(291)	$	1,191	$	900

Nine Months Ended September 30, 2018

Compared to

Nine Months Ended September 30, 2017

Rate

Volume

Net Change

(Dollars in thousands)
Interest-earning assets:

Interest-earning deposits & federal funds sold

$
238

$
34

$
272
Securities

50

40

90
Loans, including fees

46

978

1,024
Total interest-earning assets

334

1,052

1,386
Interest-bearing liabilities:

Demand & NOW accounts

(6)

-

(6)
Money market accounts

308

81

389
Savings accounts

-

-

-
Time deposits

202

17

219
Total deposits

504

98

602
Other interest-bearing liabilities:

Borrowed funds & other interest-bearing liabilities

38

62

100
Total interest-bearing liabilities

542

160

702
Total change in net interest income

$
(208)

$
892

$
684

Net interest margin increased five basis points to 3.66% for the three months ended September 30, 2019 from 3.61% for the three months ended September 30, 2018. The net interest margin for the 2019 third quarter was primarily impacted by an increased volume of higher-yielding average loan balances. The average balance of the loan portfolio increased by ~~$21.6~~$67.6 million, or ~~6.0%~~17.6%, during the three months ended September 30, ~~2018~~2019 as compared to the third quarter of ~~2017. This increase was~~2018 primarily due to an increase in the average balance of ~~higher yielding~~ commercial real estate, one- to four-family residential real estate and home equity ~~and~~loans, partially offset by a decrease in commercial business ~~loans, which increased~~loans. Furthermore, the overall average yield ofon interest-earning assets ~~by 16~~increased 30 basis points during the third quarter

of ~~2018.~~2019 when compared to the prior year period primarily due to the growth in higher yielding commercial real estate loans. The 21increase in the average yield earned on interest earning assets was offset by a 30 basis points increase in the average interest rate paid on interest bearing liabilities, ~~during the three month period ended September 30, 2018 as compared to third quarter 2017 was primarily due to~~resulting in an increase in the average interest rates being paid on money market accounts, time deposit accounts and borrowings as a result of an increase in market rates and competition for deposit accounts. The net interest margin and interest rate spread ~~decreased by two basis points and five basis points, respectively,~~of 3.41% for the three months ended September 30, ~~2018 as compared to the three months ended September 30, 2017, primarily due to the~~2019 and 2018. The increase in the average interest rate ~~being~~ paid on interest bearing liabilities ~~during the third quarter~~was primarily due to higher average rates being paid on time deposit accounts and money market accounts as a result of ~~2018.~~increased deposit rates and competition for deposit accounts.

Net interest margin increased three basis points to 3.61% for the nine months ended September 30, 2019 from 3.58% for the nine months ended September 30, 2018. The net interest margin for the nine months ended September 30, 2019 was primarily impacted by an increased volume of higher-yielding average loan balances. The average balance of the loan portfolio increased by ~~$27.3~~$45.7 million, or ~~7.8%~~12.1%, during the nine months ended September 30, ~~2018~~2019 as compared to the ~~same~~ nine ~~month period in 2017. The increase in the average balance of the loan portfolio was~~months ended September 30, 2018 primarily due to an increase in the average balance of ~~higher yielding~~ commercial real estate, one- to four-family residential real estate and home equity ~~and~~loans, partially offset by a decrease in average commercial business ~~loans, which increased~~loans. Furthermore, the overall average yield ofon interest-earning assets ~~by nine~~increased 29 basis points during the nine months ended September 30, ~~2018.~~2019 when compared to the prior year period primarily due to the growth in higher yielding commercial real estate loans. The 18increase in average yield earned on interest earning assets was offset by a 32 basis points increase in the average interest rate paid on interest bearing liabilities ~~during~~which resulted in a three basis points decrease in the interest rate spread to 3.37% for the nine months ended September 30, ~~2018~~2019 as compared to the same period in ~~2017 was primarily due to an increase in~~ the ~~average interest rates being paid on money market accounts, time deposit accounts and borrowings as a result of an increase in market rates and competition for deposit accounts.~~prior year. The net interest margin and interest rate spread decreased by seven basis points and nine basis points, respectively, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to the increase in the average interest rate ~~being~~ paid on interest bearing liabilities ~~during the nine months ended September 30, 2018.~~was primarily due to higher average rates being paid on time deposit accounts and money market accounts as a result of increased deposit rates and competition for deposit accounts.

Comparison of Financial Condition at September 30, ~~2018~~2019 and December ~~30, 2017~~31, 2018

Total assets at September 30, ~~2018~~2019 were ~~$546.2~~$596.8 million, an increase of ~~$27.2~~$51.1 million, or ~~5.2%~~9.4%, from ~~$519.0~~$545.7 million at December 31, ~~2017.~~2018. The increase in total assets was primarily due to a ~~$23.4~~$70.5 million increase in loans receivable, ~~a $2.7~~net partially offset by an $11.1 million ~~increase~~decrease in securities available for sale ~~a $2.0 million increase in bank owned life insurance,~~ and a ~~$1.7 million increase in other assets partially offset by a $2.8~~$10.2 million decrease in cash and cash equivalents.

Cash and cash equivalents decreased by ~~$2.8~~$10.2 million, or ~~7.0%~~33.1%, from ~~$40.9~~$30.8 million at December 31, ~~2017~~2018 to ~~$38.1~~$20.6 million at September 30, ~~2018.~~2019. The decrease was primarily due to a net cash outflow of ~~$25.4~~$71.8 million relating to net loan originations and principal collections, ~~and a net cash outflow of $4.6 million for purchases, sales and maturities on the investment portfolio,~~which was partially offset by a ~~$30.7~~$38.8 million increase in total deposits, a $13.0 million increase in cash flow received on the securities available for sale portfolio due to maturities, prepayments and calls of securities and a $10.0 million increase in long-term debt during the nine months ended September 30, ~~2018.~~2019.

Securities available for sale ~~increased~~decreased by ~~$2.7~~$11.1 million, or ~~3.4%~~12.9%, to ~~$83.1~~$75.1 million at September 30, ~~2018~~2019 compared to ~~$80.4~~$86.2 million at December 31, ~~2017.~~2018. The ~~increase~~decrease was primarily due to ~~$10.8 million of new securities purchased, partially offset by~~ the receipt of ~~$6.2~~$13.0 million ~~for~~in maturities, prepayments and calls of securities ~~and $2.0~~partially offset by a $1.9 million ofincrease in unrealized ~~losses~~gains on the securities portfolio. The increase in unrealized gains on the securities portfolio was primarily due to a decrease in market interest rates during the nine months ended September 30, ~~2018. The unrealized losses on~~2019, which increased the value of securities ~~portfolio were primarily due to an increase~~held in ~~market interest rates during~~ the ~~first nine months of 2018.~~portfolio.

4144

Net loans receivable increased during the nine months ended September 30, ~~2018~~2019 as shown in the table below:


	At September 30,		At December 31,		Change				At September 30,		At December 31,		Change
	2018		2017		$		%		2019		2018		$		%
	(Dollars in thousands)								(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family(1)	$	148,446	$	144,565	$	3,881	2.7	%	$	157,051	$	155,024	$	2,027	1.3	%
Home equity		41,132		38,078		3,054	8.0	%		45,083		41,830		3,253	7.8	%
Commercial		148,725		122,747		25,978	21.2	%		202,360		150,475		51,885	34.5	%
Construction - Commercial		22,150		30,802		(8,652)	(28.1)	%		32,477		22,252		10,225	46.0	%
Construction - Residential, one- to four-family		346		49		297	606.1	%
Total real estate loans		360,799		336,241		24,558	7.3	%		436,971		369,581		67,390	18.2	%
Other Loans:
Commercial		26,410		27,612		(1,202)	(4.4)	%		25,596		21,825		3,771	17.3	%
Consumer		1,332		1,355		(23)	(1.7)	%		1,092		1,156		(64)	(5.5)	%
Total gross loans		388,541		365,208		23,333	6.4	%		463,659		392,562		71,097	18.1	%
Allowance for loan losses		(3,388)		(3,283)		(105)	3.2	%		(4,141)		(3,448)		(693)	20.1	%
Net deferred loan costs		3,284		3,138		146	4.7	%		3,475		3,357		118	3.5	%
Loans receivable, net	$	388,437	$	365,063	$	23,374	6.4	%	$	462,993	$	392,471	$	70,522	18.0	%

(1)

Includes one- to four-family construction loans.

~~As fixed rate one-~~During 2019, we continue to ~~four-family residential real estate loans present additional interest rate risk to our loan portfolio as a result of the longer duration of these types of assets, we~~ remain strategically focused ~~in 2018~~ on originating shorter duration, adjustable rate commercial real estate ~~and commercial business~~ loans to diversify our asset mix, to reduce interest rate risk ~~to take advantage of the opportunities available to serve small businesses in our market area,~~ and to increase our net interest margin.

4245

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,			At September 30,			At December 31,
	2018			2017			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Loans past due 90 days or more but still accruing:
Real estate loans:
Residential, one- to four-family	$	-		$	-		$	123		$	174
Home equity		10			-			5			-
Commercial		-			-			-			-
Construction – Commercial and Residential, one- to four-family		-			-			-			-
Other loans:
Commercial		-			-			-			-
Consumer		-			-			-			-
Total	$	10		$	-		$	128		$	174
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential, one- to four-family	$	2,187		$	2,196		$	2,342		$	2,310
Home equity		336			235			665			337
Commercial		665			1,323			235			382
Construction – Commercial and Residential, one- to four-family		-			-			-			-
Other loans:
Commercial		76			54			53			15
Consumer		-			25			5			-
Total non-accrual loans		3,264			3,833			3,300			3,044
Total non-performing loans		3,274			3,833			3,428			3,218
Foreclosed real estate		1,710			435			770			678
Total non-performing assets	$	4,984		$	4,268		$	4,198		$	3,896
Ratios:
Non-performing loans as a percent of total loans:		0.84	%		1.05	%		0.74	%		0.82	%
Non-performing assets as a percent of total assets:		0.91	%		0.82	%		0.70	%		0.71	%
Troubled debt restructuring:
Loans accounted for on a non-accrual basis
Real estate loans:
Home equity	$	19		$	19
Residential, one- to four-family							$	30		$	34
Performing loans
Real estate loans:
Residential, one- to four-family	$	179		$	184		$	141		$	144
Home equity		-			2

Total non-performing loans ~~decreased~~increased by ~~$559,000,~~$210,000, or ~~14.6%~~6.5%, to ~~$3.3~~$3.4 million at September 30, ~~2018~~2019 from ~~$3.8~~$3.2 million at December 31, ~~2017,~~2018, primarily due to ~~the foreclosure of two non-performing~~an increase in home equity and commercial ~~real estate~~business non-accrual loans during the first nine months of ~~2018.~~2019, offset by a decrease in non-accrual commercial real estate loans.

4346

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


	At or for the Nine Months Ended September 30,				At or for the Nine Months Ended September 30,
	2018		2017		2019		2018
	(Dollars in thousands)				(Dollars in thousands)
Balance at beginning of period	$	3,283	$	2,882
Balance at beginning of year					$	3,448	$	3,283
Provision for loan losses		315		450		725		315
Charge-offs:
Real estate loans:
Residential, one- to four-family		(23)		-		(2)		(23)
Home equity		-		(3)		(4)		-
Commercial		(181)		(75)		(10)		(181)
Construction – Commercial and Residential, one- to four-family		-		-		-		-
Other loans:
Commercial		-		(20)		-		-
Consumer		(32)		(36)		(34)		(32)
Total charge-offs		(236)		(134)		(50)		(236)
Recoveries:
Real estate loans:
Residential, one- to four-family		18		2		8		18
Home equity		1		4		1		1
Commercial		-		-		3		-
Construction – Commercial and Residential, one- to four-family		-		-		-		-
Other loans:
Commercial		1		1		-		1
Consumer		6		12		6		6
Total recoveries		26		19		18		26
Net charge-offs		(210)		(115)		(32)		(210)
Balance at end of period	$	3,388	$	3,217	$	4,141	$	3,388
Average loans outstanding	$	375,989	$	348,716	$	421,641	$	375,989
Allowance for loan losses as a percent of total net loans		0.87%		0.89%		0.89%		0.87%
Allowance for loan losses as a percent of non-performing loans		103.48%		85.83%		120.76%		103.48%
Ratio of net charge-offs to average loans outstanding(1)		0.07%		0.04%		(0.01)%		(0.07)%

(1) Annualized

4447

~~Bank owned life insurance (“BOLI”)~~Other assets increased ~~by $2.0~~$771,000, or 39.6%, from $1.9 million ~~or 11.2%,~~at December 31, 2018 to ~~$20.1~~$2.7 million at September 30, ~~2018~~2019. The increase was primarily due to the recognition of lease assets on the consolidated statements of financial condition as ~~compared to $18.1 million at December 31, 2017. During~~a result of the ~~nine months ended September 2018, the Company purchased an additional $1.8 million~~adoption of ~~BOLI to offset the costs of benefits provided under an employee retention agreement entered into during 2018.~~ASU 2016-02 on January 1, 2019.

The table below shows changes in deposit balances by type of deposit account between September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	At September 30,		At December 31,		Change				At September 30,		At December 31,		Change
	2018		2017		$		%		2019		2018		$		%
	(Dollars in thousands)								(Dollars in thousands)
Core Deposits
Demand deposits and NOW accounts:
Non-interest bearing	$	59,009	$	54,618	$	4,391	8.0	%	$	64,701	$	55,327	$	9,374	16.9	%
Interest bearing		55,322		49,869		5,453	10.9	%		55,174		50,211		4,963	9.9	%
Money market		117,224		99,305		17,919	18.0	%		130,714		119,885		10,829	9.0	%
Savings		52,164		52,922		(758)	(1.4)	%		53,331		52,050		1,281	2.5	%
Total core deposits		283,719		256,714		27,005	10.5	%		303,920		277,473		26,447	9.5	%
Non-core Deposits
Time deposits		152,182		148,439		3,743	2.5	%		167,355		154,985		12,370	8.0	%
Total deposits	$	435,901	$	405,153	$	30,748	7.6	%	$	471,275	$	432,458	$	38,817	9.0	%

The increase in ~~total deposits~~money market and time deposit account balances was primarily due to ~~growth~~the Company offering competitive interest rates in ~~core deposits.~~its market area to attract funds. Competition in our market area has increased as a result of new banks entrants. The growth in core deposits was the result of the Company’s continued strategic focus on growing lower-cost core deposits among its retail and commercial customers in an effort to manage interest expense and strengthen customer relationships.

Our borrowings, consisting of advances from the ~~Federal Home Loan Bank of New York (“FHLBNY”), decreased~~FHLBNY, increased by ~~$2.3~~$10.0 million, or ~~8.5%~~40.1%, from ~~$27.0~~$24.7 million at December 31, ~~2017~~2018 to ~~$24.7~~$34.7 million at September 30, ~~2018.~~2019. The ~~decrease was due~~additional borrowings were used as part of a balance sheet management strategy to ~~the use~~take advantage of ~~excess liquidity~~lower interest rates in an effort to ~~pay off long-term debt which matured~~mitigate interest rate risk. Borrowing proceeds were also used to fund loan originations during the first nine months of ~~2018.~~2019.

Total stockholders’ equity increased ~~$426,000,~~$2.7 million, or ~~0.5%~~3.3%, from ~~$78.4~~$79.8 million at December 31, ~~2017~~2018 to ~~$78.8~~$82.5 million at September 30, ~~2018.~~2019. The increase in stockholders’ equity was primarily due to net income of ~~$3.0~~$2.9 million and a ~~$151,000~~$1.4 million increase in ~~additional paid in capital attributed to stock based compensation,~~accumulated other comprehensive income, partially offset by ~~$1.4 million in other comprehensive losses, $780,000 of treasury stock repurchases and $686,000 in cash~~ dividends paid of $1.0 million and the repurchase of common stock for $1.0 million during the ~~first~~ nine months ~~of 2018.~~ended September 30, 2019.

Comparison of Results of Operations for the Three Months Ended September 30, ~~2018~~2019 and ~~2017~~2018

General. Net income was ~~$1.1~~$1.2 million for the three months ended September 30, ~~2018,~~2019, or ~~$0.17~~$0.20 per diluted share, an increase of ~~$118,000,~~$154,000, or ~~12.6%~~14.6%, compared to net income of ~~$940,000,~~$1.1 million, or ~~$0.15~~$0.17 per diluted share, for the three months ended September 30, ~~2017.~~2018. Net income for the three months ended September 30, ~~2018~~2019 reflected a ~~$270,000~~$418,000 increase in net interest income and ~~an $110,000 decrease~~a $40,000 increase in non-interest income ~~tax expense~~ which was partially offset by a ~~$224,000~~$175,000 increase in provision for loan losses, an $82,000 increase in non-interest expenses and a ~~$50,000~~$47,000 increase in ~~provision for loan losses.~~income tax expense.

Interest Income. Interest income increased by ~~$543,000,~~$829,000, or ~~11.0%~~15.1%, to $6.3 million for the three months ended September 30, ~~2018 to $5.5 million~~2019 compared to the three months ended September 30, ~~2017~~2018 primarily due to an increase in loan interest income. Loan interest income increased by ~~$374,000,~~$990,000, or ~~8.7%~~21.2%, to ~~$4.7~~$5.7 million for the three months ended September 30, ~~2018~~2019 compared to the three months ended September 30, ~~2017,~~2018, primarily due to an increase in the average balance of the loan portfolio ~~of $21.6~~by $67.6 million, or ~~6.0%~~17.6%, from ~~$362.2~~

$383.8 million for the three months ended September 30, ~~2017~~2018 to ~~$383.8~~$451.5 million for the three months ended September 30, ~~2018.~~2019. The

average yield on the loan portfolio increased from ~~4.74% for the three months ended September 30, 2017 to~~ 4.86% for the three months ended September 30, ~~2018.~~2018 to 5.01% for the three months ended September 30, 2019. The increase in the average balance of loans and average yield on loans was primarily due to an increase in the average balance of higher yielding commercial real estate ~~home equity and commercial business~~ loans.

Investment interest income ~~increased $93,000,~~decreased $64,000, or ~~16.1%~~9.6%, ~~to $670,000~~ for the three months ended September 30, ~~2018~~2019 compared to the three months ended September 30, ~~2017. The~~2018, due to a decrease in the average balance and average yield onof the investment portfolio ~~increased~~ from ~~$76.7 million and 3.01% for the three months ended September 30, 2017 to~~ $85.8 million and 3.12% for the three months ended September 30, ~~2018.~~2018 to $79.2 million and 3.06% for the three months ended September 30, 2019. The ~~increase~~decrease in the average balance and average yield of the investment portfolio was primarily due to ~~the purchase~~securities paydowns and redemptions of ~~higher yielding securities, which was~~“callable” municipal bonds, partially offset by ~~paydowns received on lower yielding~~ securities purchases since September 30, ~~2017.~~ 2018.

Other interest income was ~~$157,000~~$60,000 for the three months ended September 30, ~~2018,~~2019, a ~~$76,000,~~$97,000, or ~~93.8%~~61.8%, ~~increase~~decrease as compared to the three months ended September 30, ~~2017. This increase was primarily due to an 87 basis points increase in the~~2018. The average ~~yield on the~~balance of interest-earning deposits and ~~federal~~Federal funds sold ~~portfolio. The average yield increased from 1.03%~~decreased by $21.8 million, or 66.2%, for the three months ended September 30, ~~2017~~2019 as compared to the three months ended September 30, 2018, while the average yield increased to 2.15% for the three months ended September 30, 2019 from 1.90% for the three months ended September 30, 2018. The decrease in the average balance of interest earning deposits and Federal Funds sold was primarily due to the use of excess cash to fund loan originations. The increase in the average yield ~~increased~~was primarily due to higher average rates earned on excess funds, as a result of ~~a 100 basis points increase~~the volatility in ~~the~~short term market rates and fed funds rate, since September 30, ~~2017. The average balance of the interest-earning deposits and federal funds sold portfolio~~2018.

Interest Expense. Interest expense increased ~~by $1.5 million,~~$411,000, or ~~4.8%~~43.0%, ~~from $31.5~~to $1.4 million for the three months ended September 30, 2017 to $33.0 million for the three months ended September 30, 2018. The increase in the average balance was primarily due to an increase in deposits that have not yet been utilized to fund loan originations or securities purchases.

~~Interest Expense.Interest expense increased $273,000, or 40.0%,~~2019 compared to $955,000 for the three months ended September 30, ~~2018 compared~~2018. Interest paid on deposits increased by $390,000, or 49.8%, to ~~$682,000~~$1.2 million for the three months ended September 30, ~~2017 primarily due to an increase in interest paid on deposits. Interest paid on deposits increased by $260,000, or 49.7%, to $783,000 for the three months ended September 30, 2018~~2019 when compared to the three months ended September 30, ~~2017. Interest~~2018. Deposit interest expense was primarily impacted by a 4740 and 2347 basis points increase, respectively, in the average interest rates paid on money market and time deposit ~~accounts as a result of the increase in short term interest rates since September 30, 2017. The increase~~accounts. Interest expense was also ~~due to~~impacted by a ~~$31.6~~$26.8 million, or 7.1%, increase in average ~~core deposits~~deposit balances for the three months ended September 30, ~~2018~~2019 as compared to the three months ended September 30, ~~2017 as a result of the Company’s continued strategic focus on growing lower cost core deposits.~~2018. The average balance of deposits for the three months ended September 30, ~~2018~~2019 was ~~$372.9~~$399.8 million with an average rate of ~~0.84%~~1.17% compared to ~~the~~an average deposit balance of ~~deposits of $338.1~~$372.9 million and an average rate of ~~0.62%~~0.84% for the three months ended September 30, ~~2017.~~2018. The increase in the average balance of interest-bearing deposits was primarily due to an increase in time deposits and money market accounts as a result of the Company offering higher rates on these deposit types to attract funds in its increasingly competitive market area.

Interest expense on short-term borrowings and long-term debt increased $41,000, or 30.6%, to $175,000 for the three months ended September 30, 2019 when compared to the three months ended September 30, 2018 primarily due to an increase in the average balance and average yield of advances from the FHLBNY. The average balance of advances from the FHLBNY for the three months ended September 30, 2019 was $31.6 million with an average rate of 2.22% compared to an average balance of $24.7 million and an average rate of 2.18% for the three months ended September 30, 2018. The increase in the average balance of FHLBNY advances was due to additional borrowings that allowed the Bank to take advantage of low fixed-rates to fund loan growth and to manage interest rate risk. The four basis points increase in the average rate paid on FHLBNY advances was primarily due to an increase in short-term borrowings since September 30, 2018, which had higher rates due to the inverted yield curve.

Provision for Loan Losses. A ~~$125,000~~$300,000 provision to the allowance for loan losses was recorded during the three months ended September 30, ~~2018,~~2019, which was a ~~$50,000,~~$175,000, or ~~66.7%~~140.0%, increase in comparison to the provision recorded during the three months ended September 30, ~~2017.~~2018. The provision expense recorded during the three months ended September 30, 2019 primarily reflected inherent losses on new loans as a result of the $23.0 million, or 5.2%, increase in total gross loans since June 30, 2019.

judgment that considers observable trends, conditions, and other relevant environmental and economic factors.

The third quarter 2019 provision included a net provision of $182,000 to account for inherent losses in the commercial real estate portfolio, including commercial construction loans, as a result of organic growth, as well as to account for changes in relevant environmental and economic factors. The quarterly provision ~~expense~~also included a $104,000 net provision on the commercial business loan portfolio as a result of organic growth during the quarter, as well as to reflect changes in relevant environmental and economic factors. Additionally, a net provision of $14,000 was ~~primarily~~posted to reflect changes in classified loans on the one- to four- family, home equity and consumer loan portfolios as well as to adjust the unallocated portion of the allowance due to the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

During the three months ended September 30, 2018, the Company recorded a $125,000 provision to the allowance for loan losses. The provision primarily consisted of a $249,000 provision for commercial real estate loans, which consisted of a $150,000 general allowance, to reflect inherent losses resulting from organic growth and to reflect relevant environmental and economic factors, a $121,000 ~~increase in reserves~~specific allowance related to charge-offs on two previously impaired commercial real estate loans that were foreclosed upon during the third quarter of ~~2018.~~

2018 and a $22,000 credit provision for a decrease in criticized/classified commercial real estate loans. The ~~$125,000~~ provision ~~recorded during the three months ended September 30, 2018 was~~also included a ~~result of a comprehensive quarterly evaluation. 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. The quarterly evaluation consisted of the following:

~~$249,000 provision for commercial real estate loans, which included a:~~

$150,000 general allowance on performing commercial real estate loans, primarily due to an $11.8 million net increase in the loan portfolio during the three months ended September 30, 2018 to reflect inherent losses within the portfolio;

~~$121,000 specific allowance related to charge-offs on two previously impaired commercial real estate loans that were foreclosed upon during the third quarter of 2018; which was partially offset by a~~

~~$22,000 credit provision for a decrease in criticized/classified commercial real estate loans; and a~~

~~$128,000~~$128,000 credit provision for commercial real estate – ~~construction loans and commercial business loans as a result of a $7.1 million and $3.3 million decrease, respectively, in commercial -~~ construction loans and commercial business loans as a result of a decrease in the total portfolio balances for these loan types during the third quarter of 2018.

~~During the three months ended September 30, 2017, the Company recorded a $75,000 provision to the allowance for loan losses. The quarterly evaluation consisted of the following:~~

~~$145,000 net credit provision for commercial real estate loans which included a:~~

~~$175,000 credit provision attributed to the reduction in the reserve for one substandard criticized commercial real estate loan during the quarter, which was partially offset by a;~~

~~$30,000 provision recorded for a $264,000 increase in special mention criticized commercial real estate loans during the quarter;~~

~~$167,000 provision for commercial business loans primarily due to a $1.1 million increase in special mention criticized commercial business loans during the three months ended September 30, 2017;~~

$16,000 general allowance on performing construction loans due to a $1.3 million, or 4.5%, increase in the construction loan portfolio during the three months ended September 30, 2017 to reflect inherent losses within the portfolio;

$68,000 provision on one-to four-family, home equity and consumer loans primarily to reflect inherent losses within these portfolios as a result of an increase in the historical average net charge-off rates for these loan types, as well as in classified loans during the three months ended September 30, 2017; and a

$31,000 unallocated credit provision for loan losses during the three months ended September 30, 2017, to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

Refer to Note 4 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 ~~$12,000,~~$40,000, or ~~1.9%~~6.4%, to $669,000 for the three months ended September 30, 2019 as compared to $629,000 for the three months ended September 30, ~~2018 as compared to $617,000 for the three months ended September 30, 2017.~~2018. The increase was primarily ~~attributed~~due to a $27,000 increase in unrealized gains on equity securities, a $25,000 increase in earnings on bank owned life insurance, a $23,000 increase in gains on the sale of loans and a $16,000 increase in service charges and fees which were partially offset by a ~~$12,000~~$31,000 increase in ~~earnings~~unrealized losses on ~~bank owned life insurance~~a derivative contract and a ~~$9,000 increase~~$21,000 decrease in recoveries on previously impaired ~~investment~~ securities ~~during the three months ended September 30, 2018 as~~when compared to the three months ended September 30, 2017. The increase was partially offset by there being no sales of securities during the third quarter of 2018 as compared to a $22,000 pre-tax realized gain on the sale of securities during the third quarter of 2017.prior year quarter.

Non-interest Expenses. Non-interest expenses increased ~~$224,000,~~$82,000, or ~~6.2%~~2.1%, from ~~$3.6 million for the three months ended September 30, 2017 to~~ $3.8 million for the three months ended September 30, ~~2018. Salaries~~2018 to $3.9 million for the three months ended September 30, 2019. Salary and employee benefits increased ~~$185,000,~~$28,000, or ~~9.8%~~1.3%, primarily due to annual salary increases, new hires and higher expenses related to ~~health insurance,~~ retirement benefits, ~~and~~partially offset by lower expenses related to stock compensation awards. Occupancy and equipment ~~expenses~~costs increased ~~$22,000,~~by $45,000, or ~~3.9%~~7.8%, primarily due to ~~higher~~increases in software and technology maintenance costs, property taxes and ~~repair expenses.~~building maintenance costs. Advertising expenses increased ~~$24,000,~~by $17,000, or ~~18.9%~~11.3%, due to costs related to the development of marketing campaigns and an increase in sponsorships. Other expenses increased by $33,000, or 10.0%, primarily due to ~~the development of new marketing campaigns during the third quarter of 2018. Postage and supplies increased $18,000, or 34.0%, and~~an increase in other real estate owned expenses. The increase in non-interest expenses was also due to increases in data processing ~~expenses increased $17,000, or 5.3%, during the third quarter~~costs as a result of ~~2018 when compared to the third~~

~~quarter of 2017.~~growth in loan and deposit products and an increase in digital services offered. These increases were partially offset by a decrease in ~~other expenses~~FDIC Insurance expense of ~~$50,000,~~$39,000, or ~~13.1%~~97.5%, ~~primarily~~ due to the receipt of a ~~decrease in foreclosure related expenses.~~small bank assessment credit during the three months ended September 30, 2019.

Income Taxes Expense. Income tax expense ~~decreased~~increased by ~~$110,000,~~$47,000, or ~~43.3%~~32.6%, from ~~$254,000 for the three months ended September 30, 2017 to~~ $144,000 for the three months ended September 30, ~~2018.~~2018 to $191,000 for the three months ended September 30, 2019. The income tax expense ~~decreased~~increased primarily due to ~~a decrease~~an increase in income before taxes and an increase in the effective tax rate ~~which was partially offset by an increase in income before income taxes.~~during the three months ended September 30, 2019. The effective tax rate for the three months ended September 30, 2019 and 2018 was 13.6% and 12.0%, respectively. The higher effective tax rate was primarily due to a lower mix of tax-exempt income derived from our municipal bond portfolio in relation to pre-tax income during the three months ended September 30, 2019.

Comparison of Results of Operations for the Nine Months Ended September 30, 2019 and 2018

General.Net income was $2.9 million for the nine months ended September 30, 2019, or $0.48 per diluted share, a decrease of $85,000, or 2.8%, compared to net income of $3.0 million, or $0.49 per diluted share, for the nine months ended September 30, 2018. The decrease in net income for the nine months ended September 30, 2019 was primarily the result of a $492,000 increase in non-interest expenses, a $410,000 increase in the provision for loan losses and a $72,000 decrease in non-interest income partially offset by a $900,000 increase in net interest income.

Interest Income.Interest income for the nine months ended September 30, 2019 was $17.9 million, an increase of $2.1 million, or 13.0%, compared to the nine months ended September 30, 2018 primarily due to an increase in loan interest income. Loan interest income increased by $2.2 million, or 16.3%, to $15.7 million for the nine months ended September 30, 2019 compared to $13.5 million for the nine months ended September 30, 2018, primarily due to an increase in the average balance of loans by $45.7 million, or 12.1%, from $376.0 million for the nine months ended September 30, 2018 to $421.6 million for the nine months ended September 30, 2019. The average yield on the loan portfolio increased 18 basis points from 4.78% for the nine months ended September 30, 2018 to 4.96% for the nine months ended September 30, 2019. The increase in the average balance of loans and average yield on loans was primarily due to an increase in the average balance of higher yielding commercial real estate loans.

Other interest income was $312,000 for the nine months ended September 30, 2019, a $127,000, or 28.9%, decrease as compared to the nine months ended September 30, 2018. The average balance in other interest earning assets and Federal Funds sold decreased from $35.0 million for the nine months ended September 30, 2018 to $18.1 million for the nine months ended September 30, 2019 while the average yield increased to 2.30% for the nine months ended September 30, 2019 from 1.67% for the nine months ended September 30, 2018. The decrease in the average balance of interest earning deposits and Federal Funds sold was primarily due to the use of excess cash to fund loan originations. The increase in the average yield was primarily due to higher average rates earned on excess funds, as a result of the volatility in short term market rates since September 30, 2018.

Interest Expense. Interest expense was $3.8 million, an increase of $1.2 million, or 45.1%, for the nine months ended September 30, 2019, when compared to the same nine month period in 2018. Interest paid on deposits increased by $1.1 million, or 54.6%, to $3.2 million for the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018. Interest expense was primarily impacted by a 38 and 50 basis points increase, respectively, in the average interest rates paid on money market and time deposit accounts. The increase was also due to a $24.7 million, or 6.7%, increase in average deposit balances for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The average balance of deposits for the nine months ended September 30, 2019 was $390.6 million with an average rate of 1.11% compared to an average balance of $365.9 million and an average rate of 0.77% for the nine months ended September 30, 2018. The increase in the average balance of interest-bearing deposits was primarily due to an increase in time deposits and money market accounts as a result of the Company offering higher rates on these deposit types to attract funds in its increasingly competitive market area.

The interest expense on short-term borrowings and long-term debt increased $42,000, or 10.2%, to $455,000 for the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018 primarily due to an increase in the average balance and average yield of advances from the FHLBNY. The average balance of advances from the FHLBNY for the nine months ended September 30, 2019 was $27.6 million with an average rate of 2.20% compared to an average balance of $26.0 million and an average rate of 2.12% for the nine months ended September 30, 2018. The increase in the average balance was due to additional borrowings that allowed the Bank to take advantage of low fixed-rates to fund loan growth and mitigate interest rate risk during the nine months ended September 30, 2019. The eight basis points increase in the average rate paid on FHLBNY advances was primarily due to an increase in short-term borrowings since September 30, 2018, which had higher rates due to the inverted yield curve.

Provision for Loan Losses.A $725,000 provision to the allowance for loan losses was recorded during the nine months ended September 30, 2019, which was a $410,000, or 130.2%, increase in comparison to the

provision recorded during the nine months ended September 30, 2018. The provision expense recorded during the nine months ended September 30, 2019 primarily reflected inherent losses on new loans as a result of a $71.2 million, or 18.1%, year to date increase in total gross loans since December 31, 2018.

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.

The provision to the allowance for loan losses recorded during the nine months ended September 30, 2019 included a $1.1 million net provision to account for inherent losses in the commercial real estate portfolio, including commercial construction loans, as a result of organic growth and to account for changes in relevant environmental and economic factors, which was partially offset by a credit due to reductions in criticized and classified commercial real estate loans. A $270,000 net credit was recorded on the commercial business loan portfolio to account for reductions in criticized and classified commercial business loans during the nine months ended September 30, 2019, changes in the related environmental factors used to qualitatively assess inherent loan losses on commercial business loans and changes in the historical average net charge-off rate, which was partially offset by a provision to account for inherent losses on the $3.8 million, or 17.3%, increase in commercial business loans since December 31, 2018. An $18,000 net credit to the provision was recorded for one-to four-family, home equity and consumer loans due to changes in the related environmental factors used to qualitatively assess inherent loan losses on these types of loans, partially offset by a provision to reflect a net increase in classified loans during the nine months ended September 30, 2019. Lastly, a $53,000 credit was recorded on the unallocated provision for loan losses, to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

During the nine months ended September 30, 2018, the Company recorded a $315,000 provision to the allowance for loan losses. The provision consisted of a $473,000 net provision for commercial real estate loans, primarily to account for inherent losses on new loans due to organic growth and to account for charge-offs on two previously impaired commercial real estate loans that were foreclosed upon during the third quarter of 2018, partially offset by a credit for a decrease in criticized/classified commercial real estate loans. The provision also consisted of a $65,000 provision for commercial business loans as a result of an increase in criticized and classified loans in this portfolio. The provision was partially offset by a $98,000 credit provision on construction – commercial real estate loans, primarily due to a, decrease in this loan portfolio since December 31, 2017 and a $90,000 credit provision on one-to four-family, home equity, construction – one- to four- family and consumer loans. The credit provision on one-to four-family, home equity, construction – one- to four- family and consumer loans was primarily due to changes in the related environmental factors used to qualitatively assess inherent loan losses and a decrease in the historical average net charge-off rate for these loan types over the last five years, partially offset by net charge-offs recorded during the nine months ended September 30, 2018. During the nine months ended September 30, 2018, a credit provision of $35,000 was recorded to adjust the unallocated portion of the allowance primarily due to the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

Refer to Note 4 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 $72,000, or 3.8%, from $1.9 million for the nine months ended September 30, 2018 to $1.8 million for the nine months ended September 30, 2019. The decrease was primarily attributed to a $125,000 unrealized loss on a derivative contract, an $85,000 decrease in recoveries of previously impaired investment securities and a $26,000 decrease in service charges and fees during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. These decreases were partially offset by a $97,000 increase in earnings on bank owned life insurance, a $48,000 increase in unrealized gain on equity securities and a $19,000 increase in gains on the sale of loans for the nine months ended September 30, 2019 when compared to the same nine months in 2018.

Non-Interest Expenses. Non-interest expenses increased by $492,000, or 4.3%, from $11.4 million for the nine months ended September 30, 2018 to $11.9 million for the nine months ended September 30, 2019. Salaries and employee benefits increased $327,000, or 5.3%, primarily due to annual salary increases, incentives and retirement expenses partially offset by lower stock compensation expenses and higher deferred salaries related to loan originations. Occupancy and equipment increased by $120,000, or 6.9%, primarily due to increases in equipment, software and technology maintenance and depreciation, building maintenance and property taxes. Advertising expenses increased by $47,000, or 9.9%, due to the development of marketing campaigns and an increase in sponsorships. Data processing expense increased $22,000 primarily due to an increase in the number of customer accounts and transactions and professional services expense increased $19,000 primarily due to an increase in legal expenses. These increases were partially offset by a decrease in FDIC Insurance expense of $43,000, or 37.7%, due to the receipt of a small bank assessment credit during the nine months ended September 30, 2019.

Income Taxes Expense. Income tax expense increased by $11,000, or 2.4%, from $458,000 for the nine months ended September 30, 2018 to $469,000 for the nine months ended September 30, 2019. The income tax expense increase was primarily due to an increase in the effective tax rate, partially offset by a decrease in income before taxes. The effective tax rate for the nine months ended September 30, 2019 was 13.9%, while the effective tax rate for the ~~three~~nine months ended September 30, ~~2017~~2018 was ~~21.3%~~13.2%. The ~~decrease~~increase in the effective tax rate was primarily due to ~~the Tax Cuts and Jobs Act (“Tax Act”), which lowered the federal corporate tax rate from 34% to 21% as of January 1, 2018. The impact of the lower corporate tax rate was partially offset by~~ a decrease in the projected mix of tax-exempt income derived from our municipal bond portfolio and bank-owned life insurance in relation to our projection of pre-tax income for the current year.

~~Comparison of Results of Operations for the Nine Months Ended September 30, 2018 and 2017~~

~~General.~~Net income was $3.0 million for the nine months ended September 30, 2018, or $0.49 per diluted share, an increase of $202,000, or 7.2%, compared to net income of $2.8 million, or $0.46 per diluted share, for the nine months ended September 30, 2017. Net income for the nine months ended September 30, 2018 reflected a $684,000 increase in net interest income, a $246,000 decrease in income tax expense and a $135,000 decrease in provision for loan losses which was partially offset by a $685,000 increase in non-interest expenses and a $178,000 decrease in non-interest income.

~~Interest Income.~~ Interest income for the nine months ended September 30, 2018 was $15.9 million, an increase of $1.4 million, or 9.6%, compared to the nine months ended September 30, 2017 primarily due to an increase in loan interest income. Loan interest income increased by $1.0 million, or 8.2%, to $13.5 million for the nine months ended September 30, 2018 compared to $12.5 million for the nine months ended September 30, 2017, primarily due to an increase in the average balance of the loan portfolio of $27.3 million, or 7.8%, from $348.7 million for the nine months ended September 30, 2017 to $376.0 million for the nine months ended September 30, 2018. The increase in the average balance of loans was primarily due to an increase in the origination of higher yielding commercial real estate, home equity and commercial business loans. The average yield on the loan portfolio increased from 4.76% for the nine months ended September 30, 2017 to 4.78% for the nine months ended September 30, 2018 primarily due to net growth in the overall loan portfolio. The increase in the average yield was partially impacted by the prior year receipt of $202,000 of interest income on one non-performing commercial real estate loan which paid off during the first nine months of 2017. The average yield on the loan portfolio would have been 4.69% for the nine months ended September 30, 2017 if the $202,000 of interest income received on the non-performing loan payoff was excluded.

Investment interest income increased $90,000, or 4.9%, to $1.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The average yield on the investment portfolio increased from 3.03% for the nine months ended September 30, 2017 to 3.11% for the nine months ended September 30, 2018. The increase in the average yield was primarily due to the purchase of higher yielding securities and the paydowns of lower yielding securities. The average balance of the investment portfolio increased from $81.7 million for the nine months ended September 30, 2017 to $83.5 million for the nine months ended September 30, 2018. The increase was primarily due to the purchase of securities, which was partially offset by paydowns received on the securities portfolio since September 30, 2017.

Other interest income was $439,000 for the nine months ended September 30, 2018, a $272,000, or 162.8%, increase as compared to the nine months ended September 30, 2017. This increase was primarily due to a 92 basis points increase in the average yield on the interest-earning deposit and federal funds sold portfolio. The average yield increased from 0.75% for the nine months ended September 30, 2017 to 1.67% for the nine months ended September 30, 2018. The average yield increased as a result of a 100 basis points increase in the fed funds rate since September 30, 2017. The average balance of the interest-earning deposits and federal funds sold portfolio increased by $5.2 million, or 17.5%, from $29.8 million for the nine months ended September 30, 2017 to $35.0 million for the nine months ended September 30, 2018. The increase in the average balance

~~was primarily due to an increase in deposits that have not yet been utilized to fund loan originations or securities purchases.~~

~~Interest Expense.~~Interest expense increased $702,000, or 37.2%, to $2.6 million for the nine months ended September 30, 2018, when compared to the same nine month period in 2017. Interest paid on deposits increased by $602,000, or 40.2%, to $2.1 million for the nine months ended September 30, 2018 when compared to the nine months ended September 30, 2017. Deposit interest expense was primarily impacted by a 39 and 18 basis points increase, respectively, in the average interest rates paid on money market and time deposit accounts as a result of the increase in short term market interest rates since September 30, 2017. The increase was also due to a $28.0 million, or 14.9%, increase in average core deposits for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 as a result of the Company’s continued strategic focus on growing lower cost core deposits. The average balance of deposits for the nine months ended September 30, 2018 was $365.9 million with an average rate of 0.77% compared to the average balance of deposits of $336.0 million and an average rate of 0.59% for the nine months ended September 30, 2017.

Interest expense related to advances from the FHLBNY increased $85,000, or 25.9%, to $413,000 for the nine months ended September 30, 2018 when compared to the nine months ended September 30, 2017 primarily due to an increase in the average balance and average rate of FHLBNY advances. The average balance of advances from the FHLBNY for the nine months ended September 30, 2018 was $26.0 million with an average rate of 2.12% compared to an average balance of $21.8 million and an average rate of 2.01% for the nine months ended September 30, 2017. The increase in the average balance was due to additional borrowings that allowed the Bank to take advantage of low fixed-rates to fund loan growth and the increase in the average rate paid was primarily due to the increase in market interest rates since the nine months ended September 30, 2017.

~~Provision for Loan Losses.~~ A $315,000 provision to the allowance for loan losses was recorded during the nine months ended September 30, 2018, which was a $135,000, or 30.0%, decrease in comparison to the provision recorded during the nine months ended September 30, 2017. The decrease in provision expense was primarily due to a higher provision being recorded for the downgrade in loan classification for two commercial loan relationships during the nine months ended September 30, 2017. As of September 30, 2018, these specific commercial loans were performing, and well collateralized by commercial real estate, as well as fixtures and equipment.

The $315,000 provision recorded during the nine months ended September 30, 2018 was a result of a comprehensive quarterly evaluation. The quarterly 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. The quarterly evaluation consisted of the following:~~

~~$473,000 net provision for commercial real estate loans, which included a:~~

$304,000 general allowance on performing commercial real estate loans; primarily due to a $26.0 million, or 21.2%, increase in the loan portfolio since December 31, 2017, to reflect inherent losses within the portfolio;

~~$181,000 provision for charge-offs on two previously impaired commercial real estate loans that were foreclosed upon during the third quarter of 2018; which was partially offset by a~~

~~$12,000 credit to reflect a $1.1 million decrease in criticized/classified commercial real estate loans during the nine months ended September 30, 2018;~~

~~$65,000 provision for commercial business loans to reflect an increase in reserves on criticized and classified commercial business loans;~~

~~$98,000 credit provision on construction – commercial real estate loans, primarily due to a $8.7 million, or 28.1%, decrease in this loan portfolio since December 31, 2017;~~

~~$90,000 credit provision on one-to four-family, home equity, construction – one- to four- family and consumer loans which reflected a:~~

~~$72,000 credit provision for changes in the related environmental factors used to qualitatively assess inherent loan losses; and an~~

$18,000 credit to reflect a decrease in the historical average net charge-off rate for these loan types over the last five years; partially offset by $30,000 of net charge-offs recorded during the nine months ended September 30, 2018; and a

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

During the nine months ended September 30, 2017, a provision of $450,000 to the allowance for loan losses was recorded as a result of a comprehensive quarterly evaluation. The quarterly evaluation consisted of the following:

$177,000 general allowance on performing commercial business loans; primarily due to a $2.9 million, or 14.2%, increase in the loan portfolio since December 31, 2016 and due to a $895,000 increase in criticized and classified loans during the nine months ended September 30, 2017;

$169,000 general allowance on performing construction loans, primarily due to a $16.9 million, or 16.5%, increase in the construction loan portfolio since December 31, 2016, to reflect inherent losses within the portfolio;

$138,000 provision for one-to four-family, home equity, and consumer loans to reflect an increase in classified loans, an increase in the historical average net charge-off rate for these loan types over the last five years and for net charge-offs recorded during the nine months ended September 30, 2017;

~~$60,000 net credit provision for commercial real estate loans, which included a:~~

$390,000 credit provision on impaired commercial real estate loans; primarily due to an increase in the estimated collateral value for one impaired commercial real estate loan, as a result of an increase in the occupancy rate;

~~$176,000 credit provision for changes in the related environmental factors used to qualitatively assess inherent loan losses on commercial real estate loans; partially offset by a~~

$215,000 provision to reflect inherent risk associated with growth in commercial real estate loan originations. The commercial real estate loan portfolio increased $15.8 million, or 14.8%, since December 31, 2016;

~~$216,000 provision for the downgrade of certain performing commercial real estate loans; and a~~

~~$75,000 provision for the charge-off of one foreclosed loan during the nine months ended September 30, 2017;~~

$26,000 unallocated provision for loan losses to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

~~Refer to Note 4 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 $178,000, or 8.7%, from $2.1 million for the nine months ended September 30, 2017 to $1.9 million for the nine months ended September 30, 2018. The decrease was primarily attributed to there being no sales of securities during the nine months ended September 30, 2018 as compared to a $244,000 pre-tax realized gain on the sale of securities during the nine months ended September 30, 2017. The decrease was partially offset by a $28,000 increase in recoveries on previously impaired investment securities, an $18,000 increase in service charges and fees and a $9,000 increase in unrealized gains on equity securities during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.

~~Non-Interest Expenses.~~ Non-interest expenses increased by $685,000, or 6.4%, from $10.7 million for the nine months ended September 30, 2017 to $11.4 million for the nine months ended September 30, 2018. Salaries and employee benefits increased $572,000, or 10.2%, primarily due to annual salary increases and higher expenses related to health insurance, retirement benefits and stock compensation awards. Data processing expenses increased $63,000, or 6.7%, due to implementation of new technology and growth in deposit and loan accounts. Advertising expenses increased $34,000, or 7.7%, primarily due to the development of new marketing campaigns during the first nine months of 2018.

~~Income Taxes Expense.~~Income tax expense decreased by $246,000, or 34.9%, from $704,000 for the nine months ended September 30, 2017 to $458,000 for the nine months ended September 30, 2018. The income tax expense decreased primarily due to a decrease in the effective tax rate and a decrease in income before income taxes. The effective tax rate for the nine months ended September 30, 2018 was 13.2%, while the effective tax rate for the nine months ended September 30, 2017 was 20.1%. The decrease in the effective tax rate was primarily due to the Tax Act, which lowered the federal corporate tax rate from 34% to 21% as of January 1, 2018. The impact of the lower corporate tax rate was partially offset by a decrease in the projected mix of tax-exempt income derived from our municipal bond portfolio and bank-owned life insurance in relation to our projection of pre-tax income for the current year.

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, ~~fed funds balances,~~ scheduled amortization and prepayments of loans and securities, maturities and sales of investments and loans, excess cash and 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, ~~2018,~~2019, the maximum amount that we can borrow from the FHLBNY was ~~$104.5~~$112.0 million and was collateralized by a pledge of certain fixed-rate residential, one- to four-family loans. At September 30, ~~2018,~~2019, we had outstanding advances under this agreement of ~~$24.7~~$34.7 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~~$10.0 million and a fair value of ~~$11.1~~$10.3 million as of September 30, ~~2018.~~2019. There were no balances outstanding with the Federal Reserve Bank at September 30, ~~2018.~~2019. We have also established lines of credits with correspondent banks for $22.0 million, of which $20.0 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, ~~2018.~~2019.

~~Historically, loan repayments~~While maturities and ~~maturing investment~~scheduled amortization of loans and securities ~~were a relatively~~are predictable ~~source~~sources of ~~funds. However,~~funds, deposit ~~flows,~~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. ~~To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers.~~

Our primary investing activities include the origination of loans and the purchase of investment securities. For the nine months ended September 30, ~~2018,~~2019, we originated loans of approximately ~~$96.6~~$135.1 million as compared to approximately ~~$92.3~~$96.6 million of loans originated during the nine months ended September 30, ~~2017.~~2018. Loan originations exceeded principal repayments and other deductions during the first nine months of ~~2018~~2019 by ~~$25.4~~$71.8 million. ~~The loan originations were funded through principal payments received on loans and~~We did not purchase any investment securities ~~customer deposits, borrowings and cash reserves.~~during the nine months ended September 30, 2019. Purchases of investment securities totaled $10.8 ~~million and $2.4~~ million during the nine months ended September 30, ~~2018~~2018. These activities were funded primarily through deposit growth, principal payments received on loans and ~~2017, respectively.~~securities, borrowings and cash reserves.

~~At September 30, 2018, we had~~

As described elsewhere in this report, the Company has loan commitments to borrowers ~~of approximately $41.2 million~~ 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 ~~approximately $49.0 million.~~funds available through the use of FHLBNY advances or other liquidity sources. Total deposits were ~~$435.9~~$471.3 million at September 30, ~~2018,~~2019, as compared to ~~$405.2~~$432.5 million at December 31, ~~2017. The increase in total deposits~~2018. Total deposit growth was primarily ~~due to growth~~ in time deposits and net core deposits ~~during~~and the ~~first nine months~~growth was primarily attributed to the Company’s offering of ~~2018. The Company’s strategic focus is on growing lower-cost core deposits among~~higher interest rates to attract funding in its ~~retail and commercial customers in an effort to manage interest expenses. Time~~increasingly competitive market area. Approximately $84.6 million of time deposit accounts are scheduled to mature within one year ~~were $54.8 million at~~as of September 30, ~~2018.~~2019. 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.~~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 ~~2018.~~2019. We do not have any balloon or other payments due on any long-term obligations, other than the borrowing agreements noted above. Our off-balance sheet items include loan commitments as described in Note 6 in the Notes to our Consolidated Financial Statements and, as of September 30, 2018, an interest swap agreement for a notional amount of $3.0 million which is not designated as a hedging instrument and does not have a material impact on our consolidated statements of income.

Capital

As of January 1, 2015, new regulations that substantially amended the bank capital requirements became applicable to us. These regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act, 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, ~~2017.~~2018.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies ~~are required to develop~~have developed a “Community Bank Leverage Ratio” (the ratio of a bank’s ~~tangible equity~~tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 ~~billion.~~billion and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A “qualifying community bank” that exceeds this ratio will be 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. 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 ~~must~~ set the minimum capital for the new Community Bank Leverage Ratio at ~~not less than 8% and not more than 10%~~9.00%. A financial institution can elect to be subject to this new ~~definition.~~definition after it becomes effective on January 1, 2020. In the interim, the Basel III rules remain in effect.

As of September 30, ~~2018,~~2019, as shown in the table below, the Bank’s Tier 1 and risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions, as determined by the Office of the Comptroller of the Currency (the “OCC”), our primary regulator.

5254

The Bank’s actual capital amounts and ratios and those required by the regulatory standards in effect as of the dates presented are as follows:


At September 30, 2018	Actual Ratio		Minimum For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
At September 30, 2019									Actual Ratio		Minimum For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
Common Equity Tier 1 ("CET1") capital (to risk-weighted assets)	19.42	%	>=	4.50	%	>=	6.50	%	17.01	%	>=	4.50	%	>=	6.50	%
Tier 1 capital (to risk-weighted assets)	19.42	%	>=	6.00	%	>=	8.00	%	17.01	%	>=	6.00	%	>=	8.00	%
Total capital (to risk-weighted assets)	20.30	%	>=	8.00	%	>=	10.00	%	17.93	%	>=	8.00	%	>=	10.00	%
Tier 1 Leverage (to adjusted total assets)	13.84	%	>=	4.00	%	>=	5.00	%	13.18	%	>=	4.00	%	>=	5.00	%
At December 31, 2017	Actual Ratio		Minimum For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
At December 31, 2018									Actual Ratio		Minimum For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
CET 1 capital (to risk-weighted assets)	20.82	%	>=	4.50	%	>=	6.50	%	19.70	%	>=	4.50	%	>=	6.50	%
Tier 1 capital (to risk-weighted assets)	20.82	%	>=	6.00	%	>=	8.00	%	19.70	%	>=	6.00	%	>=	8.00	%
Total capital (to risk-weighted assets)	21.75	%	>=	8.00	%	>=	10.00	%	20.59	%	>=	8.00	%	>=	10.00	%
Tier 1 Leverage (to adjusted total assets)	14.40	%	>=	4.00	%	>=	5.00	%	13.99	%	>=	4.00	%	>=	5.00	%

In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of September 30, ~~2018,~~2019, the Bank's capital conservation buffer was ~~12.30%~~9.93% exceeding the minimum of ~~1.875%~~2.50% for ~~2018.~~2019.

Off-Balance Sheet Arrangements

Other than loan commitments and an interest rate swap agreement that is not designated as a hedging instrument, as noted above, 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 68 in the Notes to our Consolidated Financial Statements for a summary of loan commitments outstanding as of September 30, ~~2018.~~2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not ~~applicable~~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, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

5355

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, ~~2018:~~2019:

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, 2018

3,400

$
17.25

3,400

116,790
August 1 through August 31, 2018

7,100

17.30

7,100

109,690
September 1 through September 30, 2018

1,600

16.93

1,600

108,090
Total

12,100

$
17.24

12,100

108,090



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, 2019	9,600	$	15.05	9,600	7,390
August 1 through August 31, 2019	7,390		14.92	7,390	-
September 1 through September 30, 2019	-		-	-	116,239
Total	16,990	$	14.99	16,990	116,239

⁽¹⁾

On ~~May 16, 2018,~~September 6, 2019, our Board of Directors approved a new stock repurchase plan pursuant to which we can repurchase up to ~~121,190~~116,239 shares of our outstanding common stock. This amount represented approximately 5% of our outstanding common stock not owned by the MHC as of ~~May 16, 2018.~~September 6, 2019. The repurchase plan does not have an expiration date and superseded ~~all of the prior stock repurchase programs. This plan superseded~~ the prior Board of Directors approved stock repurchase plan from ~~December 11, 2015~~May 16, 2018 which had ~~34,101~~no remaining shares available to purchase at ~~May 15, 2018.~~September 6, 2019.

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				XBRL Instance Document*
			101.SCH				XBRL Taxonomy Extension Schema Document*
			101.CAL				XBRL Taxonomy Calculation Linkbase Document*
			101.DEF				XBRL Taxonomy Extension Definition Linkbase Document*
			101.LAB				XBRL Taxonomy Label Linkbase Document*
			101.PRE				XBRL Taxonomy Presentation Linkbase Document*

________________

*Filed herewith.

5456

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 13, ~~2018~~2019	By:	/s/ Daniel P. Reininga
		Daniel P. Reininga
		President and Chief Executive Officer
		(Principal Executive Officer)

November 13, ~~2018~~2019	By:	/s/ Rachel A. Foley
		Rachel A. Foley
		Chief Financial Officer
		(Principal Financial ~~and~~Officer)

November 13, 2019	By:	/s/ Steven W. Schiavone
		Steven W. Schiavone
		Controller
		(Principal Accounting Officer)

5557


	Nine Months Ended September 30, 2018
	Compared to
	Nine Months Ended September 30, 2017
	Rate		Volume			Net Change
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	238	$	34	$	272
Securities		50		40		90
Loans, including fees		46		978		1,024
Total interest-earning assets		334		1,052		1,386
Interest-bearing liabilities:
Demand & NOW accounts		(6)		-		(6)
Money market accounts		308		81		389
Savings accounts		-		-		-
Time deposits		202		17		219
Total deposits		504		98		602
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing liabilities		38		62		100
Total interest-bearing liabilities		542		160		702
Total change in net interest income	$	(208)	$	892	$	684