LAKE SHORE BANCORP, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

0
Forward-Looking Statements
Safe-Harbor

This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, that
are based on current expectations, estimates and projections about the Company's
and the Bank's industry, and management's beliefs and assumptions. Words such as
anticipates, expects, intends, plans, believes, estimates and variations of such
words and expressions are intended to identify forward-looking statements. Such
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to forecast. Therefore,
actual results may differ materially from those expressed or forecast in such
forward-looking statements.

Potential risks and uncertainties that could cause our actual results to differ
from those anticipated in any forward-looking statements include, but are not
limited to, those described in Part I, Item 1A of the Company's Annual Report on
Form 10-K for the year ended December 31, 2021 and the following:

?risks from data loss or other security breaches, including a breach of our
operational or security systems, policies, or procedures, including
cyber-attacks on us or on our third party vendors or service providers;
?risks relating to the COVID-19 pandemic;
?the strength of the United States economy in general and of the local economies
in which we conduct operations;
?the effect of change in monetary and fiscal policy, including changes in
interest rate policies of the Board of Governors of the Federal Reserve System;
?inflation, and market and monetary fluctuations;
?climate change;
?deterioration in the credit quality of our loan portfolio and/or the value of
the collateral securing repayment of loans;
?reduction in the value of our investment securities;
?the cost and ability to attract and retain key employees;
?regulatory or legal developments, tax policy changes;
?our ability to implement and execute our business plan and strategy and expand
our operations;
?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; and
?other economic, competitive, governmental, regulatory and technological factors
affecting our operations, pricing, products and services.

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

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Insight

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 March 31, 2022 compared to the
consolidated financial condition as of December 31, 2021 and the consolidated
results of operations for the three months ended March 31, 2022 and 2021.

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

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

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

To operate successfully, we must manage various types of risk, including but not
limited to, interest rate risk, credit risk, liquidity risk, operational and
information technology risks, strategic risk, reputation risk and compliance
risk. A significant form of market risk for the Company is interest rate risk,
as the Company's assets and liabilities are sensitive to changes in interest
rates. Interest rate risk is the exposure of our net interest income to adverse
movements in interest rates. Net interest income is our primary source of
revenue and interest rate risk is a significant non-credit related risk to which
our Company is exposed. Net interest income is affected by changes in interest
rates as well as fluctuations in the level and duration of our assets and
liabilities. In addition to directly impacting net interest income, changes in
interest rates can also affect the amount of new loan originations, the ability
of borrowers and debt issuers to repay loans and debt securities, the volume of
loan repayments and refinancing, the flow and mix of deposits and the fair value
of securities.

In recent years, the Company has adjusted its strategies to manage interest rate
risk by originating a greater volume of shorter-term, adjustable rate commercial
real estate and commercial business loans and increasing its concentration of
core deposits, which are less interest rate sensitive. The Company has entered
into two interest rate swap arrangements with a total notional amount of $6.0
million to convert portions of its interest earning assets into fixed or
adjustable rate interest-earning assets, as applicable, to manage its exposure
to movements in interest rates.

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

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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, 2021.
Critical Accounting Estimates

Disclosure of the Company's significant accounting estimates 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, 2021. Some of these estimates 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 estimates since
December 31, 2021.
Analysis of Net Interest Income

Net interest income represents the difference between the interest we earn on
our interest-earning assets, such as commercial and residential mortgage loans
and investment securities, and the expense we pay on interest-bearing
liabilities, such as deposits and borrowings. Net interest income depends on
both the volume of our interest-earning assets and interest-bearing liabilities
and the interest rates we earn or pay on them.
Average Balances, Interest and Average Yields. The following table sets forth
certain information relating to our average balance sheets and reflects the
average yield on interest-earning assets and average cost of interest-bearing
liabilities, interest earned and interest paid for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods presented. Average balances are derived from daily
balances over the periods indicated. The average balances for loans are net of
allowance for loan losses but include non-accrual loans. The loan yields include
net amortization of certain deferred fees and costs that are considered
adjustments to yields. The net amortization of deferred loan fees and costs were
$90,000 and $72,000 for the three month periods ended March 31, 2022 and 2021,
respectively. Interest income on securities does not include a tax equivalent
adjustment for tax exempt securities.


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                                 For the Three Months Ended              For the Three Months Ended
                                       March 31, 2022                          March 31, 2021
                                             Interest                                Interest
                               Average       Income/      Yield/       Average       Income/      Yield/
                               Balance       Expense     Rate(2)       Balance       Expense     Rate(2)
                                                       (Dollars in thousands)
Interest-earning assets:
Interest-earning deposits
& federal funds sold        $     39,161    $      15       0.15%   $     31,735    $       6       0.08%
Securities(1)                     89,601          499       2.23%         79,113          474       2.40%
Loans, including fees            518,761        5,420       4.18%        530,676        5,577       4.20%
Total interest-earning
assets                           647,523        5,934       3.67%        641,524        6,057       3.78%
Other assets                      55,629                                  45,483
Total assets                $    703,152                            $    687,007

Interest-bearing
liabilities

Accounts on demand and NOW $89,634 $19 0.08% $81,381 $19 0.09% Money market accounts

            180,011           92       0.20%        160,230           85       0.21%
Savings accounts                  74,546           10       0.05%         67,701            9       0.05%
Time deposits                    134,552          226       0.67%        157,663          514       1.30%
Borrowed funds & other
interest-bearing
liabilities                       22,564          119       2.11%         29,629          160       2.16%
Total interest-bearing
liabilities                      501,307          466       0.37%        496,604          787       0.63%
Other non-interest
bearing liabilities              114,608                                 

103,666

Stockholders' equity         87,237                                  86,737
Total liabilities &
stockholders' equity   $    703,152                            $    687,007
Net interest income                         $   5,468                               $   5,270
Interest rate spread                                        3.30%                                   3.15%
Net interest margin                                         3.38%                                   3.29%

(1) The tax equivalent adjustment for bank-qualified tax-exempt municipal securities results in rates of 2.60% and 2.79% for the three months ended March 31, 2022 and 2021, respectively.

(2)Annualized.

Rate Volume Analysis. The following table analyzes the dollar amount of changes
in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. The table shows 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.



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                                                  Three Months Ended March 31, 2022
                                                             Compared to
                                                  Three Months Ended March 31, 2021
                                                  Rate         Volume        Net Change
                                                       (Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds
sold                                          $         7    $        2    $         9
Securities                                            (35)           60             25
Loans, including fees                                 (32)         (125)          (157)
Total interest-earning assets                         (60)          (63)          (123)
Interest-bearing liabilities:
Demand & NOW accounts                                  (2)            2               -
Money market accounts                                  (3)           10              7
Savings accounts                                         -            1              1
Time deposits                                        (221)          (67)          (288)
Total deposits                                       (226)          (54)          (280)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing
liabilities                                            (6)          (35)    

(41)

Total interest-bearing liabilities                   (232)          (89)    

(321)

Total change in net interest income           $       172    $       26    

$198


As shown in the above tables, the increase in net interest income for first
quarter 2022 was primarily due to a decrease in the average cost of
interest-bearing liabilities when compared to the prior year period. Net
interest margin increased to 3.38% for the first quarter 2022 as compared to
3.29% for the first quarter 2021. The average interest rate paid on
interest-bearing liabilities decreased 26 basis points from 0.63% during first
quarter 2021 to 0.37% during first quarter 2022. The decrease in the average
interest rate paid on interest-bearing liabilities during first quarter 2022 was
partially offset by an $11.8 million increase in the average balance of
interest-bearing deposits in comparison to the prior year period. The increase
in the average balance of interest-bearing deposits was primarily driven by an
increase in the average balance of core deposit accounts. The increase in net
interest margin was partially offset by a decrease in the average yield on
interest-earning assets. The average yield on interest-earning assets for the
2022 first quarter decreased by 11 basis points when compared to the prior year
period primarily as a result of a decrease in higher yielding commercial real
estate loans. The average balance of the loan portfolio decreased $11.9 million,
or 2.2%, during the 2022 first quarter compared to the prior year quarter. The
decrease in the average balance of the loan portfolio was primarily due to a
decrease in the average balance of commercial real estate loans due to an
increase in loan paydowns.

Comparison of the financial situation at March 31, 2022 and December 31, 2021

Total assets at March 31, 2022 were $707.5 million, a decrease of $6.3 million,
or 0.9%, from $713.7 million at December 31, 2021. The decrease in total assets
was primarily due to a $36.8 million decrease in cash and cash equivalents
driven by the use of cash for loan originations and a $4.3 million decrease in
securities available for sale, partially offset by a $33.1 million increase in
loans receivable, net.

Cash and cash equivalents decreased by $36.8 millioni.e. 54.5%, of $67.6 million to December 31, 2021 for $30.8 million to March 31, 2022. The decrease is mainly due to a $33.7 million a cash outflow linked to net borrowings and a $2.9 million the cash outflow related to net purchases of securities.

Securities available for sale decreased by $4.3 million, or 4.8%, from $88.8
million at December 31, 2021 to $84.6 million at March 31, 2022. The decrease
was primarily due to a $7.8 million increase in unrealized mark to market losses
due to an increase in market interest rates during the three months ended March
31, 2022. The decrease was partially offset by net securities purchases.

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Net loans receivable increased during the three months ended March 31, 2022 as
shown in the table below:

                                      At March 31,    At December 31,         Change
                                          2022             2021             $         %
                                                    (Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family(1)  $     160,052   $        158,826   $  1,226     0.8 %
Home equity                                 48,410             48,071        339     0.7 %
Commercial                                 297,004            266,525     30,479    11.4 %
Construction - Commercial                   25,462             21,824      3,638    16.7 %
Total real estate loans                    530,928            495,246     35,682     7.2 %
Other Loans:
Commercial                                  20,993             23,216     (2,223)  (9.6) %
Consumer                                     1,309              1,317         (8)  (0.6) %
Total gross loans                          553,230            519,779     33,451     6.4 %
Allowance for loan losses                   (6,500)            (6,118)      (382)    6.2 %
Net deferred loan costs                      3,556              3,545         11     0.3 %
Loans receivable, net                $     550,286   $        517,206   $ 33,080     6.4 %

(1) Includes loans for the construction of 1 to 4 dwellings.

The increase in loans receivable, net was primarily due to an increase in
commercial real estate and commercial construction loans, partially offset by a
decrease in commercial business loans. The Bank remains strategically focused on
originating shorter duration, adjustable rate commercial real estate loans and
commercial business loans to properly manage interest rate risk. During the
three months ended March 31, 2022, $2.9 million of Small Business Administration
("SBA") Paycheck Protection Program ("PPP") loans originated during 2021 or 2020
were forgiven. The outstanding balance of PPP loans was $1.7 million at March
31, 2022, as compared to $4.6 million at December 31, 2021. During the three
months ended March 31, 2022, $61,000 of fee income related to PPP loan
forgiveness was recorded as loan interest income on the consolidated statements
of income.

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Asset Quality. The following table presents information regarding activity in
our allowance for loan losses and our asset quality ratios at or for the dates
indicated:

                                                   At or for the Three Months Ended
                                                              March 31,
                                                        2022              2021
                                                        (Dollars in thousands)
Balance at beginning of year                       $       6,118      $      5,857
Provision for loan losses                                    400               150
Charge-offs:
Real estate loans:
Residential, one- to four-family                                -                 -
Home equity                                                     -                 -
Commercial                                                      -                 -
Construction - Commercial and Residential, one-
to four-family                                                  -                 -
Other loans:
Commercial                                                      -                 -
Consumer                                                     (20)               (6)
Total charge-offs                                            (20)               (6)
Recoveries:
Real estate loans:
Residential, one- to four-family                                -                 -
Home equity                                                    1                  -
Commercial                                                      -                1
Construction - Commercial and Residential, one-
to four-family                                                  -                 -
Other loans:
Commercial                                                      -                 -
Consumer                                                       1                 2
Total recoveries                                               2                 3
Net charge-offs                                              (18)               (3)
Balance at end of period                           $       6,500      $      6,004
Average loans outstanding                          $     518,761      $    530,676
Allowance for loan losses as a percent of total
net loans                                                   1.18  %           1.12  %
Allowance for loan losses as a percent of
non-performing loans                                       68.61  %         203.94  %
Ratio of net charge-offs to average loans
outstanding by loan type(1):
Real estate loans:
Residential, one- to four-family                                - %               - %
Home equity                                                 0.01  %               - %
Commercial                                                      - %               - %
Construction - Commercial                                       - %               - %
Other loans:
Commercial                                                      - %               - %
Consumer                                                   (5.83) %          (1.24) %
Ratio of net charge-offs to average loans
outstanding                                                (0.01) %               - %
(1) Annualized
                                                                          At December
                                                        At March 31,          31,
                                                            2022              2021
Non-performing loans as a percent of total net
loans:                                                      1.72  %           1.86  %
Non-performing assets as a percent of total
assets:                                                     1.37  %         

1.37%

Total non-performing assets decreased by $79,000i.e. 0.8%, at $9.7 million to
March 31, 2022 from $9.8 million to December 31, 2021mainly due to a decrease in outstanding loans.

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Other assets increased $1.8 million, or 39.6%, to $6.2 million at March 31, 2022
from $4.4 million at December 31, 2021. The increase was primarily due to a $1.6
million increase in deferred tax receivables related to unrealized mark to
market losses on the debt securities available for sale portfolio.

The table below presents the evolution of deposit balances by type of deposit account between March 31, 2022 and December 31, 2021:

                                                                                            Change
                             At March 31, 2022           At December 31, 2021             $            %
                                                      (Dollars in thousands)
Core Deposits
Demand deposits and
NOW accounts:
Non-interest bearing    $                  108,960    $                 110,676       $ (1,716)     (1.6)   %
Interest bearing                            91,921                       95,104         (3,183)     (3.3)   %
Money market                               184,101                      175,886          8,215       4.7    %
Savings                                     76,066                       74,155          1,911       2.6    %
Total core deposits                        461,048                      455,821          5,227       1.1    %
Non-core Deposits
Time deposits                              131,772                      137,363         (5,591)     (4.1)   %
Total deposits          $                  592,820    $                 

593 184 ($364) (0.1)%


The decrease in total deposits was primarily due to a decrease in time deposits,
mostly offset by an increase in net core deposits. The decrease in time deposits
was primarily due to a decrease in customer demand for these types of deposit
products. The Company's strategic focus continues to be centered on organic
growth of low-cost core deposits among its retail and commercial customers in an
effort to manage interest expense and strengthen customer relationships.

Total stockholders' equity decreased $5.3 million, or 6.0%, to $82.7 million at
March 31, 2022 from $88.0 million at December 31, 2021. The decrease in
stockholders' equity was primarily attributed to a $6.1 million decrease in
accumulated other comprehensive (loss) income as a result of the increase in
market interest rates and $312,000 in dividends paid, partially offset by net
income of $1.1 million during the first three months of 2022.

Comparison of operating results for the three months ended March 31, 2022
and 2021

General. Net income was $1.1 million for the three months ended March 31, 2022,
or $0.18 per diluted share, a decrease of $627,000, or 37.1%, compared to net
income of $1.7 million, or $0.29 per diluted share, for the three months ended
March 31, 2021. Net income for the three months ended March 31, 2022 reflected a
$579,000 increase in non-interest expense, a $250,000 increase in provision for
loans losses and an $88,000 decrease in non-interest income, which was partially
offset by a $198,000 increase in net interest income and a $92,000 decrease in
income tax expense when compared to the three months ended March 31, 2021.

Interest Income. Interest income decreased by $123,000, or 2.0%, to $5.9 million
for the three months ended March 31, 2022 when compared to the three months
ended March 31, 2021. Loan interest income decreased by $157,000, or 2.8%, to
$5.4 million for the three months ended March 31, 2022 as compared to the prior
year period primarily due to a decrease in the average balance of the loan
portfolio of $11.9 million, or 2.2%, from $530.7 million for the three months
ended March 31, 2021 to $518.8 million for the three months ended March 31,
2022. The decrease in the average balance of loans was primarily due to an
increase in loan paydowns,

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which included PPP loan forgiveness. The average yield on loans was 4.18% for
the three months ended March 31, 2022 as compared to 4.20% for the three months
ended March 31, 2021.

Investment interest income increased $25,000, or 5.3%, to $499,000 for the three
months ended March 31, 2022 compared to the three months ended March 31, 2021,
primarily due to a $10.5 million, or 13.3%, increase in the average balance of
the investment portfolio from $79.1 million for the three months ended March 31,
2021 to $89.6 million for the three months ended March 31, 2022. The increase in
the average balance was primarily due to securities purchases which largely
consisted of municipal bond and mortgage backed securities, partially offset by
securities paydowns and redemptions of callable municipal bonds. The increase in
investment income was partially offset by a 17 basis points decrease in the
average yield earned on the investment portfolio. The average yield was 2.40%
for the three months ended March 31, 2021 as compared to 2.23% for the three
months ended March 31, 2022. The decrease in the average yield was primarily the
result of pay-downs in higher yielding securities since March 31, 2021.

Interest Expense. Interest expense decreased $321,000, or 40.8%, to $466,000 for
the three months ended March 31, 2022 compared to $787,000 for the three months
ended March 31, 2021 primarily due to a decrease in interest paid on deposits.
Interest paid on deposits decreased by $280,000, or 44.7%, to $347,000 for the
three months ended March 31, 2022 when compared to the three months ended March
31, 2021. The decrease in interest expense on deposits was primarily due to a 25
basis points decrease in the average interest rate paid on deposit accounts. The
decrease was partially offset by an $11.8 million, or 2.5%, increase in average
deposit balances for the three months ended March 31, 2022 as compared to the
three months ended March 31, 2021. The average balance of deposits for the three
months ended March 31, 2022 was $478.7 million with an average rate of 0.29%
compared to the average balance of deposits of $467.0 million and an average
rate of 0.54% for the three months ended March 31, 2021. The increase in the
average balance of interest-bearing deposits was due to an increase in core
deposit accounts, partially offset by a decrease in time deposit accounts. The
decrease in time deposits was primarily due to a decrease in customer demand for
these types of deposit products.

Interest expense on long-term debt decreased by $39,000, or 27.3%, to $104,000
for the three months ended March 31, 2022 when compared to the three months
ended March 31, 2021 primarily due to a decrease in the average balance of
advances from the FHLBNY. The average balance of advances from the FHLBNY for
the three months ended March 31, 2022 was $22.0 million with an average rate of
1.90% compared to an average balance of $29.0 million and an average rate of
1.98% for the three months ended March 31, 2021. The decrease in average balance
was due to the Company paying off maturing debt with excess cash on hand since
March 31, 2021.

Provision for Loan Losses. A $400,000 provision to the allowance for loan losses
was recorded during the three months ended March 31, 2022 compared to $150,000
for the three months ended March 31, 2021. The increase in provision for loan
losses was primarily due to an increase in commercial real estate and
construction - commercial loan balances when compared to the same period in
2021.

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

During the three months ended March 31, 2022, the Company recorded a provision
of $620,000 for commercial real estate and construction - commercial loans. This
consisted of a $547,000 provision in general allowance due to an increase in
commercial real estate and construction - commercial loans during the three
months ended March 31, 2022, driven by organic loan growth in these loan
categories. It also included a $73,000 increase in general allowance due to an
increase in criticized and classified commercial real estate loans during the
three months ended March 31, 2022. An $88,000 net credit provision was recorded
for commercial business loans primarily due to a decrease in criticized and
classified loans for this loan type. A $73,000 net provision was recorded for
one-to four-family, home equity and consumer loans that primarily reflected
adjustments to certain qualitative factors and an increase in classified loans
for these loan types during the three months ended March 31, 2022. A $205,000
credit provision was recorded for the unallocated category of loan losses to
reflect the

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margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the spread and general losses of the loan portfolio.

During the three months ended March 31, 2021, the Company recorded a $148,000
net provision for commercial real estate and construction - commercial loans.
This consisted of a $121,000 general allowance to reflect inherent losses within
the portfolio due to organic growth during the 2021 period. It also included a
$27,000 provision to reflect an increase in criticized and classified commercial
real estate loans, which consists primarily of one loan relationship that is
well-collateralized. An $89,000 net credit provision was recorded for commercial
business loans which reflected a $62,000 credit allowance to account for a
$600,000 decrease in criticized and classified commercial business loans.
Furthermore, a $27,000 credit allowance to account for a decrease in outstanding
commercial business loans, excluding PPP loans, during the three months ended
March 31, 2021 was recorded. A $78,000 provision was recorded for one-to
four-family, home equity and consumer loans that primarily reflected adjustments
to certain qualitative factors for these loan types, which was partially offset
by a decrease in classified loans for these loan types. A $13,000 unallocated
provision was recorded to reflect the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating allocated and
general losses in the loan portfolio.

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

Non-Interest Income. Non-interest income decreased by $88,000, or 10.7%, to
$732,000 for the three months ended March 31, 2022 as compared to the three
months ended March 31, 2021. The decrease was primarily due to a $169,000
decrease in gains on the sale of residential mortgage loans due to the impact of
a rising interest rate environment, a lower volume of loans sold, and less
income earned per loan at time of sale. The decrease in non-interest income was
partially offset by a $97,000 increase in unrealized gains on interest rate
swaps due to an increase in long-term interest rates during the three months
ended March 31, 2022.

Non-Interest Expense. Non-interest expense increased by $579,000, or 14.7%, to
$4.5 million for the three months ended March 31, 2022 as compared to $4.0
million for the three months ended March 31, 2021. Salary and employee benefits
expense increased $306,000, or 14.6%, primarily due to a $285,000 decrease in
deferred salaries associated with a decrease in the number of loans originated
during the three months ended March 31, 2022 when compared to the three months
ended March 31, 2021. The increase was also due to annual salary increases.
Other expenses increased $217,000, or 71.9%, primarily due to one-time data
security expense, as well as loan and foreclosure related expenses. Occupancy
and equipment expense increased $76,000, or 11.2%, primarily due to an increase
in maintenance contracts and equipment expenses related to the new core
processing system conversion completed in the third quarter of 2021.
Professional services increased $30,000, or 11.2%, primarily due to an increase
in consulting costs. The increase in non-interest expense was partially offset
by a $44,000, or 12.3%, decrease in data processing expenses due to lower
processing costs associated with the core processing system.

Income Taxes Expense. Income tax expense was $207,000 for the three months ended
March 31, 2022, a decrease of $92,000, or 30.8%, as compared to $299,000 for the
three months ended March 31, 2021. The decrease in income tax expense was
primarily due to a decrease in income before taxes, partially offset by an
increase in the effective tax rate. The effective tax rate for the three months
ended March 31, 2022 and 2021 was 16.3% and 15.0%, respectively.

Cash and capital resources

Liquidity describes our ability to meet the financial obligations that arise
during the ordinary course of business. Liquidity is primarily needed to fund
loan commitments, to pay the deposit withdrawal requirements of our customers as
well as to fund current and planned expenditures. Our primary sources of funds
consist of deposits, scheduled amortization and prepayments of loans and
securities, maturities and sales of investments and loans, excess cash, interest
earning deposits at other financial institutions, and funds provided from
operations. We have written agreements with the FHLBNY, which allows us to
borrow the maximum lending values designated by the type of collateral pledged.
As of March 31, 2022, the maximum amount that we can borrow from the FHLBNY was
$108.8 million and was collateralized by a pledge of certain fixed-rate
residential, one- to four-

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family loans. At March 31, 2022, we had outstanding advances under this
agreement of $22.0 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 $10.6 million and a fair
value of $9.9 million as of March 31, 2022. There were no balances outstanding
with the Federal Reserve Bank at March 31, 2022. We have also established lines
of credits with correspondent banks for $42.0 million, of which $40.0 million is
unsecured and the remaining $2.0 million will be secured by a pledge of our
securities when a draw is made. There were no borrowings on these lines as of
March 31, 2022.

While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows, calls of investment securities,
and prepayments of loans and mortgage-backed securities are strongly influenced
by interest rates, general and local economic conditions, and competition in the
marketplace. These factors reduce the predictability of the timing of these
sources of funds.

Our primary investing activities include the origination of loans and the
purchase of investment securities. For the three months ended March 31, 2022, we
originated loans of approximately $56.6 million as compared to approximately
$44.8 million of loans originated during the three months ended March 31, 2021.
Loan originations exceeded principal repayments and other deductions during the
first three months of 2022 by $33.7 million. Purchases of investment securities
totaled $6.2 million and $2.5 million during the three months ended March 31,
2022 and 2021, respectively. These activities were funded primarily through
deposit growth, principal payments received on loans and securities, borrowings
and cash reserves.

As described elsewhere in this report, the Company has loan commitments to
borrowers and borrowers have unused overdraft lines of protection, unused home
equity lines of credit and unused commercial lines of credit that may require
funding at a future date. The Company believes it has sufficient funds to
fulfill these commitments, including sources of funds available through the use
of FHLBNY advances or other liquidity sources. Total deposits were $592.8
million at March 31, 2022, as compared to $593.2 million at December 31, 2021.
Approximately $67.2 million of time deposit accounts are scheduled to mature
within one year as of March 31, 2022. Based on our deposit retention experience,
current pricing strategy, and competitive pricing policies, we anticipate that a
significant portion of these time deposits will remain with us following their
maturity.

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

We do not anticipate any material capital expenditures in 2022. We do not have
any balloon or other payments due on any long-term obligations, other than the
borrowing agreements noted above.

Capital

Federal regulations require a federal savings bank to meet certain capital
standards, as discussed in the "Supervision and Regulation - Federal Banking
Regulation - Capital Requirements" section included in our Annual Report on Form
10-K for the year ended December 31, 2021.
The federal banking agencies have developed a "Community Bank Leverage Ratio"
(bank's tier 1 capital to average total consolidated assets) for financial
institutions with assets of less than $10 billion and limited amounts of
off-balance-sheet exposures and trading assets and liabilities. A "qualifying
community bank" may elect to utilize the Community Bank Leverage Ratio in lieu
of the general applicable risk-based capital requirements under Basel III. If
the community bank exceeds this ratio it will be deemed to be in compliance with
all other capital and leverage requirements, including the capital requirements
to be considered "well capitalized" under Basel III. The federal banking
agencies may consider a financial institution's risk profile when evaluating
whether it qualifies as a community bank for purposes of the capital ratio
requirement. The

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federal banking agencies set the minimum capital for the Community Bank Leverage
Ratio at 9.0%. The Bank elected to be subject to this new definition when it
became effective on January 1, 2020.

As of March 31, 2022, the Bank was considered a "qualifying community bank" and
its Community Bank Leverage Ratio was 12.14% so it was deemed to be in
compliance with all other capital and leverage requirements, including the
capital requirements to be considered "well capitalized" under Prompt Corrective
Action statutes.

Off-balance sheet arrangements

Other than loan commitments and two interest rate swap agreements that are not
designated as hedging instruments, as previously noted, we do not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources
that is material to investors. Refer to Note 7 in the Notes to our Consolidated
Financial Statements for a summary of loan commitments outstanding as of March
31, 2022.

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