Lake Shore Bancorp, Inc. Reports Results for Second Quarter and Declares Dividend

Business Wire, July 28, 2008

DUNKIRK, N.Y. -- Lake Shore Bancorp, Inc. (the "Company") (NASDAQ Global Market: LSBK), the holding company for Lake Shore Savings Bank (the "Bank"), reported a net loss of $926,000, or $(0.15) per diluted share, for the quarter ended June 30, 2008 compared to net income of $302,000, or $0.05 per diluted share for the quarter ended June 30, 2007. The net loss in the quarter was attributable to a non-cash, pre-tax, impairment charge of $1.7 million ($1.3 million net of tax), related to write-downs of the Company's investments in four non-agency asset-backed securities. Excluding the $1.7 million impairment charge, the Company would have recorded net income for the quarter of $384,000, a 27.2% increase over the quarter ended June 30, 2007, and earnings per diluted share of $0.06.

The decline in value for three of the asset-backed securities comprising the impairment charge was attributable to a significant downgrade by the major rating agencies in the rating for the insurance company backing the bond payments of these securities. The insurance company, Financial Guaranty Insurance Company (FGIC), has been adversely affected by the deterioration in the U.S. housing and mortgage markets. The decline in value of the fourth security is attributable to significant declines in the bond's market value, but it has not been downgraded from its Aaa rating. The price declines, current accounting rules and associated SEC guidance contributed to management's determination that the impairment on these securities was "other-than-temporary." It should be noted that all of the securities continue to make payments in accordance with their terms.

"The impairment charge represents approximately 1.6% of our total investment portfolio," stated Mr. David C. Mancuso, CEO. "The accounting rules dictate what banks must do when investments continue to have a down-turn in value over a period of time. We continue to have good deposit growth, strong capital, and high quality loans in our commercial and residential loan portfolios."

Dividend Declared

The Company also announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on its outstanding common stock. The dividend is payable on August 15, 2008 to shareholders of record as of August 4, 2008. The Company is the majority-owned subsidiary of Lake Shore, MHC, a federal mutual holding company which owns 57.1% of its outstanding shares. Lake Shore, MHC has filed a regulatory notice of its intent to waive dividends paid on the shares of the Company it owns.

Second Quarter Results Compared to Same Period of 2007

Net interest income increased $227,000, or 10.4%, to $2.4 million for the quarter ended June 30, 2008 from $2.2 million for the same period last year. Net interest spread and the net interest margin were 2.30% and 2.75%, respectively, for the quarter ended June 30, 2008 compared to 2.22% and 2.71% for the quarter ended June 30, 2007. Loan interest income increased $90,000 to $3.2 million for the quarter ended June 30, 2008 from $3.1 million for the quarter ended June 30, 2007. During the quarter, the fair value of our interest rate floor product decreased $262,000 compared to a decrease of $110,000 in the second quarter of 2007. The decrease in fair value was recorded in loan interest income. Loan interest income was positively impacted by a $17.7 million, or 8.6% increase in the average balance of loans receivable, net from $206.8 million as of June 30, 2007 to $224.5 million as of June 30, 2008. Interest expense on deposits decreased by $121,000 or 6.90% for the three month period ended June 30, 2008 compared to the three month period ended June 30, 2007 despite a 12.4% increase in deposit balances since December 31, 2007, due to lower interest rates being offered on deposit products.

Provision for loan losses increased by $150,000 for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007. Management deemed the increase was necessary due to a $9.2 million increase in loans, net since December 31, 2007 and a slight increase in non-performing loans as a percent of total net loans as of June 30, 2008 of 0.83% compared to 0.75% as of December 31, 2007.

Non-interest income decreased by $1.6 million for a loss of $1.1 million for the quarter ending June 30, 2008 compared to income of $492,000 for the same period in 2007. The decrease was mainly due to a pre-tax $1.7 million other-than-temporary impairment charge recorded on certain non-agency asset-backed securities. Excluding the $1.7 million impairment charge, the Company would have recorded non-interest income for the quarter ended June 30, 2008 of $647,000, a 31.5% increase over the quarter ended June 30, 2007, mainly due to an increase in service fees implemented in July 2007 and implementation of a new fee based service in February 2008.

Non-interest expense was $2.3 million for the quarters ended June 30, 2008 and 2007.

Year to Date Results Compared to Same Period of 2007

The Company had a net loss of $268,000 for the six month period ended June 30, 2008 compared to net income of $600,000 for the six month period ended June 30, 2007. The net loss was attributable to a non-cash, pre-tax, impairment charge of $1.7 million ($1.3 million net of tax), related to write-downs of the Company's investments in four non-agency asset-backed securities. Excluding the $1.7 million impairment charge, the Company would have recorded net income for the six month period ended June 30, 2008 of $1.0 million, a 66.7% increase over the six month period ended June 30, 2007, and earnings per diluted share of $0.17.