Lake Shore Bancorp, Inc. Reports Results for the First Quarter 2009

Business Wire, April 30, 2009

DUNKIRK, N.Y. -- Lake Shore Bancorp, Inc. (the “Company”) (NASDAQ Global Market: LSBK), the holding company for Lake Shore Savings Bank (the “Bank”), reported net income of $405,000, or $0.07 per diluted share for the quarter ended March 31, 2009, which represents a 38.4% decrease compared to net income of $658,000, or $0.11 per diluted share for the quarter ended March 31, 2008. The decrease in net income during the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008 was primarily due to a decrease in loan interest income recorded on the Company’s interest rate floor derivative product as a result of the product being sold in January 2009, a loss on the sale of the interest rate floor derivative product, an increase to our provision for loan losses as well as increased costs for our new branch office which opened in Kenmore, New York during December 2008. The decrease in net income was offset in part by increased interest income on mortgage loans and lower interest expenses on deposits and borrowings during the quarter ended March 31, 2009 compared to the same period in the prior year.

The decision to sell the interest rate floor product was made due to management’s determination that the value of the product had reached its peak based on an evaluation of estimated prime rate changes in the future. During the quarter ended March 31, 2008, the mark to market value of the interest rate floor and earnings on the product increased loan interest income by $345,000. During the quarter ended March 31, 2009, earnings on the interest rate floor product increased loan interest income by $43,000, which was $302,000 less than the amount recorded during the same period in 2008. Furthermore, the sale of the interest rate floor product in January 2009 resulted in a loss of $135,000 which was recorded in non-interest expense.

“We are pleased with our results for the first quarter. Our earnings in the first quarter of 2009 are slightly above our expected budget projections,” stated David C. Mancuso, President and CEO. “We anticipated the sale of the interest rate floor derivative product in early 2009 and recognized that our loan interest income would be lower in 2009 as a result of this sale. We have had strong loan originations during the first quarter of 2009 due to interest rates being at historically low levels. Many of our customers are modifying or refinancing their current loans which has put pressure on our net interest margin and spreads. However, interest rates on our deposits and borrowings are also at historically lower levels, thereby minimizing the impact on earnings. Lake Shore Savings is well positioned to continue to fund the residential mortgage and small business needs in the market areas that we serve.”

First Quarter 2009 Results Compared to Same Period in 2008

Net interest income increased $25,000, or 0.9%, for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. Net interest spread and net interest margin were 2.61% and 2.97%, respectively, for the quarter ended March 31, 2009 compared to 2.83% and 3.32% for the quarter ended March 31, 2008. Loan interest income decreased $282,000 to $3.5 million for the quarter ended March 31, 2009 from $3.7 million for the quarter ended March 31, 2008. The decrease in loan interest income is primarily the result of the Company’s sale of its interest rate floor derivative product during the quarter ended March 31, 2009. Loan interest income was positively impacted by a $21.7 million, or 9.9%, increase in the average balance of loans receivable, net from $219.8 million in the first quarter of 2008 to $241.5 million in the first quarter of 2009. Interest expense on deposits decreased by $66,000, or 4.0%, for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008 primarily due to lower interest rates being offered on deposit products during the 2009 period. Interest expense on short-term borrowings and long-term debt decreased by $131,000, or 21.7%, for the quarter ended March 31, 2009 compared to the same period in 2008. The average balance of borrowed funds decreased from $58.6 million as of March 31, 2008 to $51.3 million as of March 31, 2009.

Provision for loan losses during the quarter ended March 31, 2009 was $120,000 compared to no provision for loan losses during the same period in 2008. The increase in the provision for loan losses was primarily due to three commercial loans to one borrower that were considered “impaired” as of March 31, 2009. These loans, with a collective balance of $2.6 million, were made to support operations and building acquisition for a start-up franchise restaurant business. During the first quarter of 2009 we worked with the borrower to restructure the loans and the borrower was current with all payments as of March 31, 2009. At March 31, 2009 our non-performing loans comprised 0.66% of our total loan portfolio, compared to 0.70% of our loan portfolio as of March 31, 2008. At March 31, 2009 and 2008, our allowance for loan losses equaled 93.8% and 73.2% of non-performing loans, respectively. In light of current economic conditions, we are continuing to monitor our loan portfolio and we will modify the provision for loan losses as necessary in subsequent periods.