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Lake Shore Bancorp 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
lakeshore-10q_1112.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended                September 30, 2009

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

Commission file number:                        000-51821

LAKE SHORE BANCORP, INC.
(Exact name of registrant as specified in its character)


United States
 
20-4729288
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)

125 East Fourth Street, Dunkirk, New York
 
14048
(Address of principal executive offices)
 
(Zip code)

(716) 366-4070
(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
 
Yes ¨  No ¨

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

Large accelerated filer  
¨
Accelerated filer
¨
Non-accelerated file
¨
Smaller reporting company  
x
(Do not check if a smaller reporting company)
 

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:

Common stock ($0.01 par value) 6,164,814 shares outstanding as of October 30, 2009.

 
 

 

TABLE OF CONTENTS
 
ITEM
PAGE
     
 
 
2
 
3
 
4
 
5
 
6
     
     
     
22
39
39
   
     
40
42
42
     
43

 
 
 
 
Financial Statements

Consolidated Statements of Financial Condition
 
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
 
   
(Dollars in thousands)
 
Assets
 
Cash and due from banks
  $ 7,124     $ 6,784  
Interest bearing deposits
    9,104       4,671  
Federal funds sold
    3,233       17,583  
                 
Cash and Cash Equivalents
    19,461       29,038  
                 
Securities available for sale
    120,130       112,863  
Federal Home Loan Bank stock, at cost
    2,664       2,890  
Loans receivable, net of allowance for loan losses: 2009 $1,601;  2008 $1,476
    257,995       240,463  
Premises and equipment, net
    7,945       8,195  
Accrued interest receivable
    1,748       1,730  
Bank owned life insurance
    10,771       10,566  
Other assets
    1,172       2,088  
                 
Total Assets
  $ 421,886     $ 407,833  
Liabilities and Stockholders’ Equity
 
Liabilities
               
Deposits:
               
Interest bearing
  $ 290,365     $ 267,437  
Non-interest bearing
    21,579       25,811  
                 
Total Deposits
    311,944       293,248  
                 
Short-term borrowings
    3,960       5,500  
Long-term debt
    41,900       46,460  
Advances from borrowers for taxes and insurance
    1,705       2,968  
Other liabilities
    6,476       5,429  
                 
Total Liabilities
    365,985       353,605  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders’ Equity
               
       Common stock, $0.01 par value per share,  25,000,000 shares authorized;
    6,612,500 shares issued and 6,169,814 shares outstanding at September 30, 2009; 6,612,500 shares issued and 6,257,798 shares outstanding at December 31, 2008
    66       66  
       Additional paid-in capital
    27,815       27,754  
       Treasury stock, at cost (442,686 shares at September 30, 2009; 354,702 at December 31, 2008)
    (4,368 )     (3,748 )
       Unearned shares held by ESOP
    (2,238 )     (2,302 )
       Unearned shares held by RRP
    (1,038 )     (1,190 )
       Retained earnings
    33,550       32,520  
       Accumulated other comprehensive income
    2,114       1,128  
                 
Total Stockholders’ Equity
    55,901       54,228  
                 
Total Liabilities and Stockholders’ Equity
  $ 421,886     $ 407,833  

See notes to consolidated financial statements.



CONSOLIDATED STATEMENTS OF INCOME
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
   
2009
   
2008
   
2009
   
2008
   
(Unaudited)
(Dollars in Thousands, except per share data)
Interest Income
                     
Loans, including fees
  $ 3,523     $ 3,620     $ 10,488     $ 10,582  
Investment securities, taxable
    1,183       1,172       3,582       3,493  
Investment securities, tax-exempt
    216       141       572       376  
Other
    21       97       77       226  
Total Interest Income
    4,943       5,030       14,719       14,677  
                                 
Interest Expense
                               
Deposits
    1,521       1,591       4,686       4,868  
Short-term borrowings
    6       19       41       201  
Long-term debt
    444       521       1,339       1,482  
Other
    30       30       87       90  
Total Interest Expense
    2,001       2,161       6,153       6,641  
                                 
Net Interest Income
    2,942       2,869       8,566       8,036  
                                 
Provision for Loan Losses
    95       150       255       300  
                                 
Net Interest Income after Provision for Loan Losses
    2,847       2,719       8,311       7,736  
                                 
Non-Interest Income
                               
Impairment charge on investment securities
    -       -       -       (1,732 )
Service charges and fees
    521       525       1,456       1,492  
Earnings on bank owned life insurance
    71       102       205       306  
Gain on sale of loans
    5       -       32       -  
Other
    36       58       85       124  
Total Non-Interest Income
    633       685       1,778       190  
                                 
Non-Interest Expenses
                               
Salaries and employee benefits
    1,409       1,195       4,136       3,735  
Occupancy and equipment
    339       345       1,054       1,040  
Professional services
    308       288       896       884  
FDIC insurance
    103       10       591       24  
Data processing
    127       140       380       417  
Advertising
    108       88       286       274  
Postage and supplies
    55       69       196       197  
Other
    258       253       811       637  
Total Non-Interest Expenses
    2,707       2,388       8,350       7,208  
                                 
Income before Income Taxes
    773       1,016       1,739       718  
                                 
Income Taxes
    171       149       378       119  
                                 
Net Income
  $ 602     $ 867     $ 1,361     $ 599  
                                 
Basic earnings per common share
  $ 0.10     $ 0.14     $ 0.23     $ 0.10  
Diluted earnings per common share
  $ 0.10     $ 0.14     $ 0.23     $ 0.10  
Dividends declared per share
  $ 0.05     $ 0.05     $ 0.15     $ 0.14  
 
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Unearned
Shares
held by
ESOP
   
Unearned
Shares held
by RRP
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
   
(Dollars in thousands, except per share data)
 
Balance – January 1, 2008
  $ 66     $ 27,653     $ (2,215 )   $ (2,388 )   $ (1,367 )   $ 31,534     $ 182     $ 53,465  
                                                                 
Comprehensive loss:
                                                               
Net income
    -       -       -       -       -       599       -       599  
Other comprehensive loss
    -       -       -       -       -       -       (954 )     (954 )
                                                                 
Total Comprehensive Loss
                                                            (355 )
                                                                 
ESOP shares earned (5,951 shares)
    -       (9 )     -       65       -       -       -       56  
Stock based compensation
    -       105       -       -       -       -       -       105  
RRP shares earned (9,935 shares)
    -       (18 )     -       -       132       -       -       114  
Purchase of treasury stock, at cost (91,973 shares)
    -       -       (889 )     -       -       -       -       (889 )
Cash dividends declared ($0.14 per share)
    -       -       -       -       -       (375 )     -       (375 )
Balance – September 30, 2008
  $ 66     $ 27,731     $ (3,104 )   $ (2,323 )   $ (1,235 )   $ 31,758     $ (772 )   $ 52,121  
                                                                 
Balance – January 1, 2009
  $ 66     $ 27,754     $ (3,748 )   $ (2,302 )   $ (1,190 )   $ 32,520     $ 1,128     $ 54,228  
                                                                 
Cumulative effect of ASC 820-10 adoption (net of $4 tax effect)
    -       -       -       -       -       8       (8 )     -  
Comprehensive income:
                                                               
Net income
    -       -       -       -       -       1,361       -       1,361  
Other comprehensive income
    -       -       -       -       -       -       994       994  
                                                                 
Total Comprehensive Income
                                                            2,355  
                                                                 
ESOP shares earned (5,951 shares)
    -       (24 )     -       64       -       -       -       40  
Stock based compensation
    -       111       -       -       -       -       -       111  
RRP shares earned (11,350 shares)
    -       (26 )     -       -       152       -       -       126  
Purchase of treasury stock, at cost (87,984 shares)
    -       -       (620 )     -       -       -       -       (620 )
Cash dividends declared ($0.15 per share)
    -       -       -       -       -       (339 )     -       (339 )
Balance – September 30, 2009
  $ 66     $ 27,815     $ (4,368 )   $ (2,238 )   $ (1,038 )   $ 33,550     $ 2,114     $ 55,901  
 
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
 
   
(Dollars in thousands)
 
Cash Flows from Operating Activities
           
Net income
  $ 1,361     $ 599  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net accretion of investment securities
    (184 )     (98 )
Amortization of deferred loan costs
    349       342  
Provision for loan losses
    255       300  
Impairment of investment securities
    -       1,732  
Increase in fair value of interest rate floor derivative product
    -       (166 )
Loss on sale of interest rate floor derivative product
    135       -  
Originations of loans held for sale
    (6,242 )     (1,025 )
Proceeds from sales of loans
    6,274       1,051  
Gain on sale of loans
    (32 )     -  
Depreciation and amortization
    407       397  
Earnings on bank owned life insurance
    (205 )     (306 )
ESOP shares committed to be released
    40       56  
Stock based compensation expense
    237       219  
Increase in accrued interest receivable
    (18 )     (160 )
Decrease (Increase) in other assets
    255       (574 )
Increase in other liabilities
    315       1,207  
                 
Net Cash Provided by Operating Activities
    2,947       3,574  
                 
Cash Flows from Investing Activities
               
Activity in available for sale securities:
               
Maturities, prepayments and calls
    25,777       14,666  
Purchases
    (31,134 )     (16,594 )
Purchases of Federal Home Loan Bank Stock
    (49 )     (749 )
Redemptions of Federal Home Loan Bank Stock
    275       860  
Proceeds from sale of interest rate floor derivative product
    890       -  
Loan origination and principal collections, net
    (18,500 )     (15,929 )
Additions to premises and equipment
    (157 )     (527 )
Investment in unconsolidated entity
    -       (150 )
                 
Net Cash Used In Investing Activities
    (22,898 )     (18,423 )
                 
Cash Flows from Financing Activities
               
Net increase in deposits
    18,696       34,411  
Net decrease in advances from borrowers for taxes and insurance
    (1,263 )     (1,017 )
Net decrease in short-term borrowings
    (1,540 )     (15,855 )
Proceeds from issuance of long-term debt
    2,000       23,000  
Repayment of long-term debt
    (6,560 )     (9,860 )
Purchase of Treasury Stock
    (620 )     (889 )
Cash dividends paid
    (339 )     (375 )
                 
Net Cash Provided by Financing Activities
    10,374       29,415  
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    (9,577 )     14,566  
                 
Cash and Cash Equivalents – Beginning
    29,038       10,091  
                 
Cash and Cash Equivalents – Ending
  $ 19,461     $ 24,657  
                 
Supplementary Cash Flows Information
               
Interest paid
  $ 6,194     $ 6,664  
Income taxes paid
  $ 500     $ 303  
Supplementary Schedule of Noncash Investing and Financing Activities
               
Foreclosed real estate acquired in settlement of loans
  $ 463     $ 422  
See notes to consolidated financial statements.


Notes to Consolidated Financial Statements (unaudited)

 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Lake Shore Bancorp, Inc. (the “Company”) was formed on April 3, 2006 to serve as the stock holding company for Lake Shore Savings Bank (the “Bank”) as part of the Bank’s conversion and reorganization from a New York-chartered mutual savings and loan association to the federal mutual holding company form of organization.
 
The interim consolidated financial statements include the accounts of the Company and the Bank, its wholly owned subsidiary. All intercompany accounts and transactions of the consolidated subsidiary have been eliminated in consolidation.
 
The interim financial statements included herein as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 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 financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.  The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information.  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 Form 10-K for the year ended December 31, 2008.  The consolidated results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2009.
 
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, and income taxes.
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued new authoritative accounting guidance under Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events.”  The Company follows FASB ACS Topic 855 in accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  The Company evaluated events occurring subsequent to September 30, 2009 through November 16, 2009, the date the consolidated financial statements are being issued, and other than as set forth in Note 11, did not identify any subsequent events requiring disclosure pursuant to the provisions of FASB ASC Topic 855.

NOTE 2 – ADOPTION OF NEW ACCOUNTING STANDARDS
 
The Company adopted FASB ASC Topic 105 “Generally Accepted Accounting Principals” (“ASC Topic 105”) effective September 30, 2009. FASB ASC Topic 105 became effective for interim and annual periods ending September 30, 2009. The statement designates “FASB Accounting Standards CodificationTM” as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-


NOTE 2 – ADOPTION OF NEW ACCOUNTING STANDARDS (continued)
 
authoritative. The codification affects the way companies refer to GAAP in financial statements and accounting policies.  The codification reorganizes the thousands of U.S. GAAP pronouncements into approximately 90 accounting topics and displays all topics using a consistent structure.  Citing particular content involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.  As the codification did not change GAAP, the adoption of ASC Topic 105 did not have any impact on the Company’s consolidated financial condition or results of operations.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (“SFAS 167”), “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. This statement is effective for fiscal years beginning after November 15, 2009. Management is currently evaluating the impact of adopting this standard.
 
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166 (“SFAS 166”), “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 166 makes several significant amendments to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” including the removal of the concept of a qualifying special-purpose entity from SFAS No. 140. SFAS No. 166 also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. This statement is effective for fiscal years beginning after November 15, 2009. Management does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial condition or results of operations.

In August 2009, FASB issued Accounting Standards Update (“ASU”) 2009-05 “Measuring Liabilities at Fair Value” (“ASU 2009-5”).  This update provides amendments to ASC Subtopic 820-10 “Fair Value Measurements and Disclosures – Overall” by providing clarification on acceptable valuation techniques to measure fair value of liabilities for circumstances in which a quoted price in an active market for the identical liability is not available. The update also clarifies how to handle fair value estimates when a restriction prevents the transfer of the liability.  Lastly, the update clarified that using quoted prices for identical liabilities are Level 1 fair value measurements. The guidance is effective for the first reporting period (including interim periods) beginning after issuance.  The adoption of this guidance, effective December 31, 2009, should not impact the Company’s consolidated financial condition or results of operations.
 
NOTE 4 – COMPREHENSIVE INCOME
 
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and other-than-temporary impaired (OTTI)  related to non-credit factors, are reported as a separate component of the stockholders’ equity section of the consolidated statements of financial condition, such items, along with net income, are components of comprehensive income or loss.
 



 
NOTE 4 – COMPREHENSIVE INCOME (continued)
 
The components of other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2009 and 2008 are as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In Thousands)
 
Changes in net unrealized holding gains on securities available for sale
  $ 2,370     $ (1,476 )   $ 1,621     $ (3,246 )
Reclassification adjustment related to impairment charge for losses included in net loss
    -       -       -       1,732  
                                 
Net Unrealized Gains (Losses)
    2,370       (1,476 )     1,621       (1,514 )
                                 
Income tax (expense) benefit
    (917 )     546       (627 )     560  
                                 
Other Comprehensive Gain (Loss)
  $ 1,453     $ (930 )   $ 994     $ (954 )

NOTE 5 – INVESTMENT SECURITIES
 
The amortized cost and fair value of securities are as follows:
 
   
September 30, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
                         
Securities Available for Sale:
                       
U.S. Treasury bonds
  $ 5,130     $ 665     $ -     $ 5,795  
Municipal bonds
    23,218       1,771       -       24,989  
Mortgage-backed securities:
                               
Collateralized mortgage obligations
    57,414       1,844       (169 )     59,089  
Government National Mortgage Association
    8       1       -       9  
Federal National Mortgage Association
    10,298       545       -       10,843  
Federal Home Loan Mortgage Corporation
    10,639       515       -       11,154  
Asset-backed securities
    9,953       10       (1,752 )     8,211  
Equity securities
    22       18       -       40  
                                 
    $ 116,682     $ 5,369     $ (1,921 )   $ 120,130  



NOTE 5 – INVESTMENT SECURITIES (continued)

   
December 31, 2008
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
                         
Securities Available for Sale:
                       
U.S. Treasury bonds
  $ 5,135     $ 1,386     $ -     $ 6,521  
Municipal bonds
    17,192       321       (191 )     17,322  
Mortgage-backed securities:
                               
Collateralized mortgage obligations
    54,626       1,007       (330 )     55,303  
Government National Mortgage Association
    23       2       -       25  
Federal National Mortgage Association
    8,250       411       (4 )     8,657  
Federal Home Loan Mortgage Corporation
    14,385       463       (41 )     14,807  
Asset-backed securities
    11,391       154       (1,333 )     10,212  
Equity securities
    22       -       (6 )     16  
                                 
    $ 111,024     $ 3,744     $ (1,905 )   $ 112,863  

Approximately 97% and 95% of the collateralized mortgage obligations were backed by federal agencies Freddie Mac, Fannie Mae, and Ginnie Mae at September 30, 2009 and December 31, 2008, respectively.

At September 30, 2009 and December 31, 2008, equity securities consisted of 22,336 shares of Federal Home Loan Mortgage Corporation common stock.
 
At September 30, 2009, thirty municipal bonds and one U.S. Treasury bond with a cost of $10,575,000 and fair value of $11,667,000 were pledged under a collateral agreement with the Federal Reserve for liquidity borrowing.  In addition, at September 30, 2009, two municipal bonds with a cost of $1,000,000 and fair value of $1,068,000 were pledged as collateral for customer deposits in excess of the FDIC insurance limits.  At December 31, 2008, four municipal bonds and one U.S. Treasury bond with a cost of $2,515,000 and fair value of $2,950,000 were pledged under a collateral agreement with the Federal Reserve for liquidity borrowing.
 


NOTE 5 – INVESTMENT SECURITIES (continued)
 
The following table sets forth the Company’s investment in 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
 
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
 
   
(In Thousands)
 
                                     
September 30, 2009:
                                   
Mortgage-backed securities
  $ 1,221     $ (45 )   $ 2,004     $ (124 )   $ 3,225     $ (169 )
Asset-backed securities
    -       -       7,871       (1,752 )     7,871       (1,752 )
                                                 
    $ 1,221     $ (45 )   $ 9,875     $ (1,876 )   $ 11,096     $ (1,921 )
                                                 
December 31, 2008:
                                               
Municipal bonds
  $ 4,865     $ (84 )   $ 1,314     $ (107 )   $ 6,179     $ (191 )
Mortgage-backed securities
    12,016       (256 )     7,809       (119 )     19,825       (375 )
Asset-backed securities
    1,859       (254 )     6,279       (1,079 )     8,138       (1,333 )
Equity securities
    16       (6 )     -       -       16       (6 )
                                                 
    $ 18,756     $ (600 )   $ 15,402     $ (1,305 )   $ 34,158     $ (1,905 )

The Company reviews investment securities on an ongoing basis for the presence of OTTI with formal reviews performed quarterly.

At September 30, 2009 the Company’s investment portfolio included two agency mortgage backed securities with gross unrealized losses in the less than twelve months category.  The securities were not evaluated further for OTTI as the unrealized losses on the individual securities were less than 20% of their book value, which management deemed to be immaterial, and the credit ratings remained strong.  The Company expects these securities to be repaid in full, with no losses realized.  Management does not intend to sell these securities and it is more likely than not that it will not be required to sell these securities.

As of September 30, 2009, the Company had 17 securities in the unrealized loss of twelve months or more category, which primarily consisted of non-agency asset-backed securities.  Seven non-agency asset-backed securities in this category were subject to a formal OTTI review as the unrealized losses were greater than 20% of book value for the individual security, the related credit ratings were below investment grade, and the Company’s analysis indicated a possible loss of principal.  The OTTI analysis for these securities is discussed further below.  The remaining 10 securities in this category consist of agency and non-agency mortgage-backed securities and non-agency asset-backed securities, and were not evaluated further for OTTI as the unrealized loss was less than 20% of book value and the credit ratings remained high.  The temporary impairments in these securities are due to declines in fair values resulting from changes in interest rates or increased credit/liquidity spreads since the time the securities were purchased.  The Company expects these securities to be repaid in full, with no losses realized.  Management does not intend to sell these securities and it is more likely than not that it will not be required to sell these securities.
 
The Company determines whether the unrealized losses are other than temporary in accordance with FASB ASC Topic 320.  The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, and the continuing performance of the securities.  Management also evaluates other facts and circumstances that may be indicative of an OTTI condition.


NOTE 5 – INVESTMENT SECURITIES (continued)

This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which fair value has been less than cost, and near-term prospects of the issuer.  The Company uses the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the provisions in the applicable bond indenture and other factors, then applies a discounting rate equal to the effective yield of the security.  The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss.  The market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from open market and other sources as appropriate for the security.  The difference between the market value and the credit loss is recognized in other comprehensive income.
 
Four non-agency asset backed securities on which OTTI was recorded during 2008 as described below were reviewed as of September 30, 2009 under the guidance of FASB ASC Topic 320.  The Company believes the unrealized losses are due to the current economic environment, rising unemployment rates, a continued decline in housing values in many areas of the country, and increased delinquency trends.  It is expected that principal losses will be incurred on the tranches we hold in these specific securities.  Management’s evaluation of the estimated discounted cash flows in comparison to the amortized book value did not reflect the need to record additional OTTI charges against earnings, as the amount of impairment charges already taken appear to be sufficient. Management also concluded that it does not intend to sell the securities and that it is not likely it will be required to sell the securities.  At September 30, 2009, the difference between the amortized book value and the fair value of $248,000 ($405,000 pre-tax) on these four securities, which represents unrealized losses as calculated under the calculated income approach, was recorded as a component of other comprehensive income, net of tax on the Company’s Consolidated Statements of Stockholders’ Equity.
 
Management reviewed three non-agency asset backed securities, on which an impairment charge has not been taken, under the guidance of FASB ASC Topic 320.  These securities have exhibited significant unrealized losses for a sustained period of time and are determined to be trading in an inactive market.  Management reviewed key credit metrics for these securities, including delinquency rates, cumulative default rates, prepayment speeds, foreclosure rates, loan-to-values and credit support levels.  Although delinquency trends have increased and prepayment speeds have remained slow, the cumulative default rates on these securities have remained low.  Furthermore, management’s calculation of the estimated discounted cash flows did not show principal losses for these securities under various prepayment and default rate scenarios.  As a result of its assessment, management concluded that principal losses were not expected on these three securities.  It further concluded that the unrealized losses reflected a lack of liquidity for these securities due to the inactive market.  As a result of the stress tests that were performed, management concluded that an OTTI did not exist as of September 30, 2009.  Management also concluded that it does not intend to sell the securities and that it is not likely it will be required to sell the securities.  The difference between the amortized book value and the fair value of $733,000 ($1.2 million pre-tax), which represents unrealized losses as calculated under the calculated income approach for these three securities, was recorded as a component of other comprehensive income, net of tax on the Company’s Consolidated Statements of Stockholders’ Equity as of September 30, 2009.
 
During the twelve months ended December 31, 2008, the Company recorded OTTI charges of $1.9 million ($1.2 million after taxes) related to four debt securities in the available for sale portfolio that were privately issued (i.e., issued by corporations versus government agencies).  At the time of purchase, the securities were all rated AAA.  Three of the securities were collateralized by second lien home equity loans to prime borrowers.  Since, the collateral was on a second lien position these securities were “wrapped” by an insurance guarantee.  However, the insurance company also guaranteed other investment securities, and due to its exposure to the sub-prime housing market and inability to raise capital, in 2008, the major rating agencies downgraded the credit rating of the insurance company.
 


NOTE 5 – INVESTMENT SECURITIES (continued)
 
This, in turn, caused the rating agencies to downgrade some of these securities.  The fourth security was backed by first-lien residential mortgages to sub-prime borrowers.  In the current economic environment, the fair market value of these types of securities declined significantly.  Furthermore, the delinquency, foreclosure and cumulative default rate trends had increased and the securities were trading in “inactive” markets.  As a result of management’s analysis, it was determined that these four asset-backed securities had incurred an other-than-temporary impairment.
 
On June 30, 2009, the Company adopted new guidance, now codified in FASB ASC Topic 320 “Investments – Debt and Equity Securities” that required companies to record all previously recorded non-credit related other-than-temporary impairment charges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption.  Upon adoption of the new guidance on June 30, 2009, the Company determined that $12,000 of the OTTI charges recorded in 2008 was related to non-credit factors.  As such, an $8,000 (net of $4,000 in taxes) increase to retained earnings and a corresponding decrease to accumulated other comprehensive income was recorded as the cumulative effect impact of adopting FASB ASC Topic 320.

The following table presents a summary of the credit related OTTI charges recognized as components of earnings:
 
   
For the Nine
Months Ended
September 30, 2009
 
Beginning balance, January 1, 2009 (1)
  $ 1,934,000  
Adjustments: Cumulative effect of accounting change upon adoption of FASB ASC Topic 320
    (12,000 )
Additions: Credit related OTTI recorded in current period
    -  
Ending Balance, September 30, 2009
  $ 1,922,000  
 
(1) Amount represents the other-than-temporary impairment charges recorded in earnings during the year ended December 31, 2008 on four non-agency asset-backed securities.

Further deterioration in credit quality and/or a continuation of the current imbalances in liquidity that exist in the marketplace 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.

Scheduled contractual maturities of investment securities are as follows:
 
   
Amortized
Cost
 
Fair
Value
 
   
(In Thousands)
September 30, 2009:
           
Within one year
  $ 997     $ 1,033  
After one year through five years
    497       538  
After five years through ten years
    7,486       8,128  
After ten years
    19,368       21,085  
Mortgage-backed securities
    78,359       81,095  
Asset-backed securities
    9,953       8,211  
Equity securities
    22       40  
    $ 116,682     $ 120,130  
 
 
NOTE 5 – INVESTMENT SECURITIES (continued)

During the nine month period ended September 30, 2009 and the year ended December 31, 2008, the Company did not sell any securities available for sale.
 
NOTE 6 – EARNINGS PER SHARE
 
Earnings per share is calculated for the three and nine month periods ending September 30, 2009 and 2008, 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”) and unvested shares of restricted stock.  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 and unvested restricted stock 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.
 
Basic and diluted earnings per share was calculated as follows:
 
   
Three Months Ended
September 30, 2009
   
Three Months Ended
September 30, 2008
 
Numerator – net income
  $ 602,000     $ 867,000  
Denominators:
               
Basic weighted average shares outstanding
    5,887,397       6,038,436  
Increase in weighted average shares outstanding due to: (1)
               
Stock options
    -       -  
Unvested restricted stock awards
    -       -  
Diluted weighted average shares outstanding
    5,887,397       6,038,436  
                 
Earnings per share:
               
Basic
  $ 0.10     $ 0.14  
Diluted
  $ 0.10     $ 0.14  
                 
   
Nine Months Ended
September 30, 2009
   
Nine Months Ended
September 30, 2008
 
Numerator – net income
  $ 1,361,000     $ 599,000  
Denominators:
               
Basic weighted average shares outstanding
    5,905,598       6,066,524  
Increase in weighted average shares outstanding due to: (1)
               
Stock options
    -       -  
Unvested restricted stock awards
    -       -  
Diluted weighted average shares outstanding
    5,905,598       6,066,524  
                 
Earnings per share:
               
Basic
  $ 0.23     $ 0.10  
Diluted
  $ 0.23     $ 0.10  


 
NOTE 6 – EARNINGS PER SHARE (continued)
 
(1) Stock options to purchase 238,258 shares under the Company’s 2006 Stock Option Plan (the “Stock Option Plan”) at $11.22 per share and 81,132 restricted unvested shares under the Company’s 2006 Recognition and Retention Plan (the “RRP”) were outstanding during the nine month period ended September 30, 2009 but were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.  Stock options to purchase 219,289 shares under the Stock Option Plan at $11.50 per share and 92,425 restricted unvested shares under the RRP were outstanding during the nine month period ended September 30, 2008, but were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.
 
NOTE 7 – 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.  The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
 
The following commitments to extend credit were outstanding:

   
Contract Amount
    September 30,   December 31,  
   
2009
 
2008
 
   
(Dollars in thousands)
             
Commitments to grant loans
  $ 5,835     $ 6,445  
Unfunded commitments under lines of credit
  $ 24,460     $ 24,917  

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, 2009 and December 31, 2008, the Company’s fixed rate loan commitments totaled $3.7 million and $3.2 million, respectively.  The range of interest rates on these fixed rate commitments was 3.49% to 8.00% at September 30, 2009.
 
NOTE 8 – STOCK-BASED COMPENSATION
 
As of September 30, 2009, the Company had three 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 $94,000 for the three months ending September 30, 2009 and $92,000 for the three months ended September 30, 2008.  The compensation cost that has been recorded for the nine month periods ended September 30, 2009 and 2008 was $277,000 and $275,000 respectively.
 


NOTE 8 – STOCK-BASED COMPENSATION (continued)
 
Stock Option Plan>
 
The Stock Option Plan, which was approved by the Company’s shareholders, permits the grant of options to its employees and non-employee directors for up to 297,562 shares of common stock.  On November 15, 2006, the Board of Directors granted stock options exercisable into 241,546 shares of common stock to members of management and non-employee directors.  On January 13, 2009, the Board of Directors granted additional stock options exercisable into 18,969 shares of common stock to non-employee directors.  Both incentive stock options and non-qualified stock options may be granted under the Stock Option Plan.  The exercise price of each stock option equals the market price of the Company’s 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.
 
The fair value of the January 13, 2009 stock option grants was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:  dividend yield of 3.18%; expected volatility of 35.54%; risk-free interest rate of 2.296%; and expected life of 10 years.
 
A summary of the status of the Stock Option Plan as of September 30, 2009 and 2008 is presented below:

   
September 30, 2009
 
September 30, 2008
   
Options
   
Exercise Price
 
Remaining
Contractual Life
 
Options
   
Exercise Price
 
Remaining
Contractual Life
                             
Outstanding at beginning of year
    219,289     $ 11.50         241,546     $ 11.50    
Granted
    18,969       8.01         -       -    
Forfeited
    -       -         22,257       11.50    
Outstanding at end of quarter
    238,258     $ 11.22         219,289     $ 11.50    
Options exercisable at end of quarter
    91,065     $ 11.50  
7 years
    48,319     $ 11.50  
8 years
Fair value of options granted
  $ 3.19               $ 3.27            

At September 30, 2009, stock options outstanding did not have an intrinsic value (as the stock price on that date was below the exercise price) and 59,304 options remained unawarded under the Stock Option Plan.  Compensation expense associated with the outstanding stock options amounted to $37,000 for the three months ended September 30, 2009 and $36,000 for the three months ended September 30, 2008.  Compensation expense amounted to $111,000 for the nine months ended September 30, 2009 and $105,000 for the nine months ended September 30, 2008. At September 30, 2009, $353,000 of unrecognized compensation cost related to stock options is expected to be recognized over a period of 29 to 51 months.
 
Recognition and Retention Plan
 
The Recognition and Retention Plan (“RRP”), which was approved by the Company’s shareholders, permits the grant of restricted stock awards (“Awards”) to employees and non-employee directors for up to 119,025 shares of common stock.  On November 15, 2006, the Board of Directors granted Awards for an aggregate of 83,305 shares under the RRP to members of management and non-employee directors.  Awards vest at a rate of 20% per year with the first vesting period ending December 31, 2007.  The fair value of the Awards on the grant date was $11.50 per share.  On January 13, 2009, the Board of Directors granted Awards for an additional 9,996 shares of common stock to members of management and non–employee directors.  Awards vest at a rate of 20% per year with the first vesting period ending January 13, 2010.  The fair value of Awards on the grant date was $8.01 per share.  As of September 30, 2009 there were 26,543 shares vested or distributed to eligible participants under the RRP.  Compensation expense amounted to $43,000 for the three months ended September 30, 2009 and $38,000 for the three months ended September 30, 2008. Compensation expense amounted to $126,000 for the nine months ended September 30, 2009 and $114,000 for the nine months ended September 30, 2008.  At September 30, 2009, $412,000 of unrecognized compensation cost related to the RRP is expected to be recognized over a period of 29 to 51 months.
 


 
Employee Stock Ownership Plan
 
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.  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, 2009, the balance of the loan to the ESOP was $2.3 million and the fair value of unallocated shares was $1.7 million.  As of September 30, 2009, there were 29,756 allocated shares and 208,294 unallocated shares compared to 15,870 allocated shares and 222,180 unallocated shares at September 30, 2008.  The ESOP compensation expense was $14,000 for the three months ending September 30, 2009 and $18,000 for the three months ending September 30, 2008 based on 1,983 shares earned for each of those three month periods. The ESOP compensation expense was $40,000 for the nine months ended September 30, 2009 and $56,000 for the nine months ended September 30, 2008 based on 5,951 shares earned during each period.
 
NOTE 9 – FAIR VALUE MEASUREMENTS AND DISCLOSURES
 
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, 2009 and December 31, 2008 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, 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 Topic 820, “Fair Value Measurements and Disclosures” 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 FASB ASC Topic 820 are as follows:
 
Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to 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. These 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, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 
NOTE 9 – FAIR VALUE MEASUREMENTS AND DISCLOSURES> (continued)
 
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 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.

For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2009 and December 31, 2008 are as follows:
 
   
September 30,
2009
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Other
Unobservable
Inputs
(Level 3)
 
   
(In thousands)
 
Measured at fair value on a recurring basis:
                       
Securities available for sale
  $ 120,130     $ 5,795     $ 108,995     $ 5,340  
                                 
Measured at fair value on a non-recurring basis:
                               
Impaired loans
    1,982       -       -       1,982  
Foreclosed real estate
    236       -       -       236  

   
December 31,
2008
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Other
Unobservable
Inputs (Level 3)
 
   
(In thousands)
 
Measured at fair value on a recurring basis:
                       
Securities available for sale
  $ 112,863     $ 6,521     $ 101,666     $ 4,676  
Interest rate floor
    1,025       -       1,025       -  
                                 
Measured at fair value on a non-recurring basis:
                               
Impaired loans
    2,151       -       -       2,151  

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) for the nine months ended September 30, 2009:



NOTE 9 – FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)
   
(In thousands)
 
Balance at January 1, 2009
  $ 4,676  
Total gains (losses) – realized/unrealized:
       
    Included in earnings
    -  
    Included in other comprehensive income (loss)
    (730 )
    Purchases, issuances and settlements
    -  
    Principal paydowns
    (137 )
         
Transfers to Level 3
    1,531  
         
Balance at September 30, 2009
  $ 5,340  

Both observable and unobservable inputs may be used to determine the fair value of positions 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.  Three non-agency asset-backed securities were transferred to Level 3 during the nine months ended September 30, 2009 as a result of the continued deterioration in the market place since December 31, 2008 and the difficulty in obtaining current pricing for these securities as they were trading in an inactive market.

Fair value on impaired loans is based on either recent appraisals less estimated selling costs of related collateral or discounted cash flows based on current market conditions.
 
As of September 30, 2009, impaired loans had a gross carrying amount of $2,680,000 with a valuation allowance of $698,000, resulting in additional provision for loan losses of $128,000 for the nine months ended September 30, 2009. As of December 31, 2008, impaired loans had a gross carrying amount of $2,748,000, with a valuation allowance of $597,000, resulting in additional provision for loan losses of $576,000 for the year ended December 31, 2008.

Foreclosed real estate consists of property acquired in settlement of loans which is carried at its fair value based on recent appraisals less estimated selling costs.
 
FASB ASC 825-10-65, Transition Related to FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.


NOTE 9 – FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)
 
The carrying amount and estimated fair value of the Company’s financial instruments are as follows:
 
   
September 30, 2009
   
December 31, 2008
 
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
   
(In Thousands)
 
                         
Financial assets:
                       
Cash and cash equivalents
  $ 19,461     $ 19,461     $ 29,038     $ 29,038  
Securities available for sale
    120,130       120,130       112,863       112,863  
Federal Home Loan Bank stock
    2,664       2,664       2,890       2,890