LAKE SHORE BANCORP, INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)


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

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and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or anticipated in these 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, 2020 and the following:

?risks, uncertainties and other factors relating to the COVID-19 pandemic,
including the length of time that the pandemic continues, the effectiveness of
vaccination programs, vaccination mandates and their effects on our workforce,
the effect of the pandemic on the general economy and on the businesses of our
borrowers; and the inability of employees to work due to illness or quarantine;

general and local economic conditions;

changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values ​​and competition;

the ability of our clients to make loan repayments;

the effect of competition on deposit and loan growth rates and the 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 associated with our business;

inflation, and market and currency fluctuations;

?reputational risks relating to the Company's participation in the U.S. Small
Business Administration's ("SBA") Paycheck Protection Program ("PPP"), the end
of federal foreclosure moratorium and other pandemic-related legislative and
regulatory initiatives and programs;

• the impact of stricter capital requirements imposed by banking regulators;

changes in laws or regulations; and

“Other economic, competitive, government, regulatory and technological factors affecting our operations, prices, 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.

Overview

The following discussion and analysis is presented to assist in the
understanding and evaluation of our consolidated financial condition and results
of operations. It is intended to complement the unaudited consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-Q and should be
read in conjunction therewith. The detailed discussion focuses on our
consolidated financial condition as of September 30, 2021 compared to the
consolidated financial condition as of December 31, 2020 and the consolidated
results of operations for the three and nine months ended September 30, 2021 and
2020.

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.

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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. In the third quarter of 2018 and the first quarter of 2020, the
Company entered into 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.

RECENT MARKET CONDITIONS, RELATED RISKS AND UNCERTAINTIES

During the first quarter of 2020, an outbreak of a novel strain of coronavirus
("COVID-19") was originally identified in Wuhan, China, and has since spread to
a number of countries around the world, including the United States. The World
Health Organization declared COVID-19 to be a global pandemic. In response to
the COVID-19 pandemic, the federal government, the New York State governor and
state agencies, along with national, state and local health agencies have taken
and continue to take actions designed to mitigate the effect of the virus on
public health and to address the economic impact from the virus. The Federal
Reserve reduced the overnight federal funds rate by 150 basis points in March
2020 and announced the resumption of quantitative easing. Congress passed a
number of measures in 2020 and 2021, designed to infuse cash into the economy to
offset the negative impacts of business closings and restrictions.

The Company quickly responded to the changing environment at the onset of the
pandemic by successfully executing its business continuity plan, including
implementing work from home arrangements and limiting branch activities. Once
the branches received the tools and services necessary to implement appropriate
social distancing protocols and enhanced cleaning services, in-person customer
service activities resumed. As of September 30, 2021, all branches were fully
open with adherence to health and safety requirements, including, among other
things, face mask requirements and social distancing measures.

The direct and indirect effects of COVID-19 and its associated impacts on business, retail, restaurants and bars, travel, productivity and other activities have had, are currently having and may continue for a time

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to impact financial markets and economic activity. The extent of the impact of
the ongoing COVID-19 pandemic on our operational and financial performance
remains uncertain, cannot be predicted and will depend on certain developments,
including, among others, the effectiveness of vaccination and achievement of
herd immunity, the ability to sustainably limit the spread of COVID-19 and/or
its variants, improvement in employment rates and the recovery of economic
activity in our market areas as pandemic restrictions are relaxed. Refer to the
Company's Annual Report on Form 10-K for the year ended December 31, 2020,
specifically Part I. Item 1. Business and Part I. Item 1A. Risk Factors, for
additional details on the related risks and the impact of the pandemic, along
with a description of Company's actions taken to address the pandemic during
2020, which includes the origination of PPP loans under a program authorized by
the Small Business Administration and a loan modification program in line with
regulatory guidance which allowed impacted customers to defer loan payments.

The Federal Reserve's actions and other effects of the COVID-19 pandemic may
negatively impact our interest income and, therefore, our earnings, financial
condition and results of operations. As a result of the spread of COVID-19,
economic uncertainties have arisen which are likely to negatively impact our
provision for loan losses. As restrictions on foreclosure activity are lifted,
the Company may incur potential losses and increased expenses to restart
collection activities on past due loans. Other financial impacts could occur
though such potential impact is unknown at this time. Refer to Note 3 - COVID 19
in this Form 10-Q for a description of actions taken by the Company to assist
borrowers that have been impacted by the pandemic.

As of September 30, 2021, the Bank's capital ratios were in excess of all
regulatory requirements. While management believes we have sufficient capital to
withstand potential losses that may occur as a result of the COVID-19 pandemic,
our regulatory capital ratios could be adversely impacted by further credit
losses. The Company maintains access to multiple sources of liquidity which
could be used to support capital ratios.

Management strategy

There has been no material change in the management strategy of the Company compared to what was disclosed in the Company’s annual report on Form 10-K for the year ended. December 31, 2020.

Critical accounting policies

Disclosure of the Company's significant accounting policies is included in the
notes to the consolidated financial statements of the Company's Annual Report on
Form 10-K for the year ended December 31, 2020. Some of these policies require
significant judgment, estimates and assumptions to be made by management, most
particularly in connection with determining the provision for loan losses and
the appropriate level of the allowance for loan losses, as well as management's
evaluation of securities valuation, impairment of securities and income taxes.
There have been no material changes in critical accounting policies since
December 31, 2020.

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 tables set 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. 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
                                        September 30, 2021                     September 30, 2020
                                                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             $     54,339    $      11      0.08%   $     69,561      $    15      0.09%
Securities(1)                        80,410          457      2.27%         79,275          541      2.73%
Loans                               535,823        5,997      4.48%        487,896        5,366      4.40%
Total interest-earning
assets                              670,572        6,465      3.86%        636,732        5,922      3.72%
Other assets                         46,782                                 43,847
Total assets                   $    717,354                           $    680,579

Interest-bearing liabilities
Demand & NOW accounts          $     87,708    $      18      0.08%   $     85,413      $    34      0.16%
Money market accounts               166,352           87      0.21%        152,812          163      0.43%
Savings accounts                     75,017           11      0.06%         62,842            9      0.06%
Time deposits                       148,928          378      1.02%        161,928          627      1.55%
Borrowed funds & other
interest-bearing liabilities         24,825          134      2.16%         33,037          181      2.19%
Total interest-bearing
liabilities                         502,830          628      0.50%        496,032        1,014      0.82%
Other non-interest bearing
liabilities                         127,194                                 99,356
Stockholders' equity            87,330                                 85,191
Total liabilities &
stockholders' equity      $    717,354                           $    680,579
Net interest income                            $   5,837                              $   4,908
Interest rate spread                                          3.36%                                  2.90%
Net interest margin                                           3.48%                                  3.08%

(1) The tax equivalent adjustment for tax-exempt securities leads to rates of 2.63% and 3.13% for the three months ended September 30, 2021 and 2020, respectively.

(2)Annualized

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                                 For the Nine Months Ended             For the Nine Months Ended
                                    September 30, 2021                    September 30, 2020
                                           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        $   43,677    $      25       0.08%   $   51,428     $     92       0.24%
Securities(1)                   78,780        1,392       2.36%       75,102        1,628       2.89%
Loans                          535,899       17,274       4.30%      482,448       16,637       4.60%
Total interest-earning
assets                         658,356       18,691       3.79%      608,978       18,357       4.02%
Other assets                    46,200                                43,833
Total assets                $  704,556                            $  652,811

Interest-bearing
liabilities
Demand & NOW accounts       $   84,059    $      56       0.09%   $   73,460     $     77       0.14%
Money market accounts          163,587          257       0.21%      151,012          809       0.71%
Savings accounts                71,724           29       0.05%       59,024           26       0.06%
Time deposits                  153,872        1,362       1.18%      164,863        2,038       1.65%
Borrowed funds & other
interest-bearing
liabilities                     27,690          449       2.16%       34,457          565       2.19%
Total interest-bearing
liabilities                    500,932        2,153       0.57%      482,816        3,515       0.97%
Other non-interest
bearing liabilities            116,551                                85,421
Stockholders' equity       87,073                                84,574
Total liabilities &
stockholders' equity   $  704,556                            $  652,811
Net interest income                       $  16,538                             $  14,842
Interest rate spread                                      3.22%                                 3.05%
Net interest margin                                       3.35%                                 3.25%


(1) The tax equivalent adjustment for tax-exempt securities results in rates of 2.73% and 3.31% for the nine months ended September 30, 2021 and 2020, respectively.

(2) Annualized.

Rate Volume Analysis. The following tables analyze the dollar amount of changes
in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. The tables show the amount of the
change in interest income or expense caused by either changes in outstanding
balances (volume) or changes in interest rates. The effect of a change in volume
is measured by applying the average rate during the first period to the volume
change between the two periods. The effect of changes in rate is measured by
applying the change in rate between the two periods to the average volume during
the first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the absolute value of the
change due to volume and the change due to rate.



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                                                  Three Months Ended September 30, 2021
                                                               Compared to
                                                  Three Months Ended September 30, 2020
                                                   Rate            Volume       Net Change
                                                           (Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds
sold                                          $           (1)   $        (3)   $        (4)
Securities                                               (92)             8            (84)
Loans, including fees                                     96            535            631
Total interest-earning assets                              3            540            543
Interest-bearing liabilities:
Demand & NOW accounts                                    (17)             1            (16)
Money market accounts                                    (89)            13            (76)
Savings accounts                                          (1)             3              2
Time deposits                                           (202)           (47)          (249)
Total deposits                                          (309)           (30)          (339)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing
liabilities                                               (5)           (42)           (47)
Total interest-bearing liabilities                      (314)           (72)          (386)
Total change in net interest income           $          317    $       612    $       929


                                                 Nine Months Ended September 30, 2021
                                                             Compared to
                                                 Nine Months Ended September 30, 2020
                                                  Rate          Volume        Net Change
                                                        (Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds
sold                                          $        (55)   $      (12)   $       (67)
Securities                                            (313)           77           (236)
Loans, including fees                               (1,131)        1,768            637
Total interest-earning assets                       (1,499)        1,833            334
Interest-bearing liabilities:
Demand & NOW accounts                                  (31)           10            (21)
Money market accounts                                 (614)           62           (552)
Savings accounts                                        (3)            6              3
Time deposits                                         (547)         (129)          (676)
Total deposits                                      (1,195)          (51)        (1,246)
Other interest-bearing liabilities:
Borrowed funds & other interest-bearing
liabilities                                            (28)          (88)   

(116)

Total interest-bearing liabilities                  (1,223)         (139)   

(1,362)

Total change in net interest income           $       (276)   $    1,972    $     1,696




As shown in the above tables, the increase in net interest income for third
quarter 2021 was primarily due to an increase in the average yield on
interest-earning assets and a decrease in the average cost of interest-bearing
liabilities when compared to the prior year period. Net interest margin
increased to 3.48% for the third quarter 2021 as compared to 3.08% for the third
quarter 2020. The average yield on interest-earning assets for the 2021

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third quarter increased by 14 basis points when compared to the prior year
period primarily due to an increase of $363,000 in prepayment penalties received
on commercial real estate loans which accounted for a 22 basis points increase
in the average yield on interest-earnings assets during the third quarter 2021
when compared to the prior year period. The third quarter 2021 increase in
average yield on interest earning assets was also due to an increase in the
average balance of the loan portfolio. The average balance of the loan portfolio
increased $47.9 million, or 9.8%, during the 2021 third quarter compared to the
prior year quarter. The increase in the average balance of the loan portfolio
was primarily due to an increase in the average balance of commercial real
estate, commercial construction and one-to four-family real estate loans. These
increases were partially offset by a decrease in market interest rates since the
prior year period. The net interest margin was also positively impacted by a 32
basis points decrease in the average interest rate paid on interest-bearing
liabilities, from 0.82% during third quarter 2020 to 0.50% during third quarter
2021. The decrease in the average interest rate paid on interest-bearing
liabilities during third quarter 2021 was partially offset by a $15.0 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 organic growth, the deposit of PPP loan
proceeds and government stimulus funds into our customers' deposit accounts and
the impact of COVID-19 on consumer and business spending and savings levels.

As shown in the above tables, the increase in net interest income for the nine
months ended September 30, 2021 was primarily driven by a decrease in the
average cost of interest bearing liabilities that was partially offset by a
decrease in the average yield on interest earning assets. Net interest margin
increased 10 basis points to 3.35% for the first nine months of 2021 as compared
to the first nine months of 2020. The average interest rate paid on interest
bearing liabilities decreased 40 basis points from 0.97% during the first nine
months of 2020 to 0.57% during the first nine months of 2021 due to a decrease
in market interest rates. The decrease in the average interest rate paid on
interest bearing liabilities during the nine months ended September 30, 2021 was
partially offset by a $24.9 million increase in the average balance of
interest-bearing deposits in comparison to the nine months ended September 30,
2020. The increase in the average balance of interest-bearing deposits was
primarily drive by organic growth, the deposit of PPP loan proceeds and
government stimulus funds into our customers' deposit accounts and the impact of
COVID-19 on consumer and business spending and savings levels. The increase in
net interest margin was partially offset by a 23 basis points decrease in the
average yield on interest-earning assets during the first nine months of 2021
primarily due to a decrease in market rates and PPP loans, which have an
interest rate of 1.00% as per the SBA guidelines, which was partially offset by
an increase in the average balance of loans. The average balance of the loan
portfolio increased $53.5 million, or 11.1%, during the nine months ended
September 30, 2021 as compared to the same period in the prior year. The
increase in the average balance of the loan portfolio was primarily due to an
increase in the average balances of commercial real estate, commercial
construction and PPP loans. Prepayment penalties increased $337,000 and PPP loan
fees increased $148,000 which positively impacted the net interest margin by 10
basis points during the nine months ended September 30, 2021 when compared to
the prior year period.

Comparison of financial position to September 30, 2021 and December 31, 2020

Total assets at September 30, 2021 were $709.3 million, an increase of $23.1
million, or 3.4%, from $686.2 million at December 31, 2020. The increase in
total assets was primarily due to an $18.0 million increase in cash and cash
equivalents driven by deposit growth and a $4.4 million increase in securities
available for sale.

Cash and cash equivalents increased by $ 18.0 million, or 41.9%, of $ 43 million To December 31, 2020 To $ 61.0 million To September 30, 2021. The increase is mainly due to a $ 31.5 million increase in deposits, partially offset by a $ 7.8 million outflow of funds to repay long-term debt and a $ 6.0 million cash outflow linked to net purchases of securities.

Securities increased by $4.4 million, or 5.6%, from $79.3 million at December
31, 2020 to $83.7 million at September 30, 2021. The increase was primarily due
to $21.3 million of securities purchases, which was partially offset by $15.4
million in securities paydowns as a result of maturities, calls and prepayments,
along with a $1.2 million, or 54.2%, decrease in unrealized mark to market gains
during the nine months ended September 30, 2021.

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Net loans receivable increased during the nine months ended September 30, 2021
as shown in the table below:

                                       At September 30,     At December 31,            Change
                                             2021                2020              $            %
                                                          (Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family(1)   $         159,286    $        150,660    $   8,626       5.7  %
Home equity                                      50,064              47,603        2,461       5.2  %
Commercial                                      267,000             257,321        9,679       3.8  %
Construction - Commercial                        20,015              28,923       (8,908)   (30.8)  %
Total real estate loans                         496,365             484,507       11,858       2.4  %
Other Loans:
Commercial(2)                                    29,545              40,772      (11,227)   (27.5)  %
Consumer                                          1,346               1,353           (7)    (0.5)  %
Total gross loans                               527,256             526,632          624       0.1  %
Allowance for loan losses                        (6,125)             (5,857)        (268)      4.6  %
Net deferred loan costs                           3,516               3,368          148       4.4  %
Loans receivable, net                 $         524,647    $        524,143    $     504       0.1  %

(1) Includes construction loans for one to four families.

(2) Includes PPP loans from $ 10.7 million To September 30, 2021 and $ 18.1 million
from December 31, 2020.

The loans receivable, net balance as of September 30, 2021 was impacted by an
increase in commercial real estate, residential, one- to four-family and home
equity loans which was nearly offset by a decrease in commercial business and
commercial construction loans. During the nine month period ended September 30,
2021, $19.1 million of PPP loans originated during 2020 and 2021 were forgiven.
The outstanding balance of PPP loans was $10.7 million at September 30, 2021 as
compared to $18.1 million as of December 31, 2020. During the nine months ended
September 30, 2021, loan originations of $109.1 million were offset by an
increase in loan payoffs of $107.4 million due to the low interest rate
environment. During the nine months ended September 30, 2021, we remained
strategically focused on originating shorter duration, adjustable rate
commercial real estate loans and commercial business loans to diversify our
asset mix and to properly manage interest rate risk.

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Loans Past Due and Non-Performing Assets. The following table presents
information regarding our non-accrual loans, accruing loans delinquent 90 days
or more, non-performing loans, foreclosed real estate, and non-performing and
performing loans classified as troubled debt restructurings, as of the dates
indicated.

                                                    At September 30,     At December 31,
                                                          2021                2020
                                                           (Dollars in thousands)
Loans past due 90 days or more but still
accruing:
Real estate loans:
Residential, one- to four-family                   $               1    $              2
Home equity                                                         -                   -
Commercial                                                          -                   -
Construction - Commercial and Residential, one-
to four-family
Other loans:
Commercial                                                          -                   -
Consumer                                                            -                   -
Total                                              $               1    $              2
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential, one- to four-family                   $           2,135    $          2,392
Home equity                                                      656                 706
Commercial                                                      7,057                   -
Construction - Commercial and Residential, one-
to four-family                                                     -                    -
Other loans:
Commercial                                                          -                   -
Consumer                                                           7                   3
Total non-accrual loans                                        9,855               3,101
Total non-performing loans                                     9,856               3,103
Foreclosed real estate                                            97                  58
Total non-performing assets                        $           9,953    $          3,161
Ratios:
Non-performing loans as a percent of total net
loans:                                                          1.88  %             0.59  %
Non-performing assets as a percent of total
assets:                                                         1.40  %             0.46  %
Troubled debt restructuring:
Loans accounted for on a non-accrual basis
Real estate loans:
Residential, one- to four-family                   $              13    $             18
Commercial                                                     7,057                    -
Performing loans
Real estate loans:
Residential, one- to four-family                   $             252    $            220
Home equity                                                       24                  15


Total non-performing assets increased by $6.8 million, or 214.9%, to $10.0
million at September 30, 2021 from $3.2 million at December 31, 2020, primarily
due to one commercial real estate loan with a balance of $7.1 million being
placed into non-accrual status during the first nine months of 2021. The loan
was restructured and classified as a TDR during the nine months ending September
30, 2021, which resulted in a $426,000 charge-off as noted in the table below,
as well as receipt of a significant payment by the borrower to reduce the

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balance of the outstanding capital. Management continues to closely monitor the performance of this loan, which is well supported by guarantees.

The following table shows the activity of our allowance for loan losses and other ratios on or for the dates indicated:

                                                    At or for the Nine Months Ended
                                                             September 30,
                                                        2021               2020
                                                        (Dollars in thousands)
Balance at beginning of year                      $         5,857     $        4,267
Provision for loan losses                                     650              1,125
Charge-offs:
Real estate loans:
Residential, one- to four-family                              (12)               (26)
Home equity                                                      -                (6)
Commercial                                                   (429)                  -
Construction - Commercial and Residential,
one- to four-family                                              -                  -
Other loans:
Commercial                                                       -                (5)
Consumer                                                      (26)               (27)
Total charge-offs                                            (467)               (64)
Recoveries:
Real estate loans:
Residential, one- to four-family                               49                   -
Home equity                                                     1                  1
Commercial                                                      6                  1
Construction - Commercial and Residential,
one- to four-family                                              -                  -
Other loans:
Commercial                                                     23                  4
Consumer                                                        6                 13
Total recoveries                                               85                 19
Net charge-offs                                              (382)               (45)
Balance at end of period                          $         6,125     $        5,347
Average loans outstanding                         $       535,899     $      482,448
Allowance for loan losses as a percent of
total net loans                                              1.17%          

1.09%

Allowance for loan losses as a percent of
non-performing loans                                        62.14%          

147.38%

Ratio of net charge-offs to average loans
outstanding(1)                                             (0.10)%            (0.01)%


(1)Annualized

                                       42

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The table below shows the evolution of deposit balances by type of deposit account between September 30, 2021 and December 31, 2020:

                              At September 30,     At December 31,            Change
                                    2021                2020              $            %
                                                  (Dollars in thousands)
Core Deposits
Demand deposits and NOW
accounts:
Non-interest bearing         $         115,775    $         91,946    $  23,829      25.9   %
Interest bearing                        87,980              84,839        3,141       3.7   %
Money market                           168,850             158,505       10,345       6.5   %
Savings                                 74,445              65,643        8,802      13.4   %
Total core deposits                    447,050             400,933       46,117      11.5   %
Non-core Deposits
Time deposits                          144,704             159,326      (14,622)     (9.2)  %
Total deposits               $         591,754    $        560,259    $  31,495       5.6   %


The increase in total deposits was primarily due to an overall increase in net
core deposits, partially offset by a decrease in time deposits. A majority of
the growth in core deposits during the nine months ended September 30, 2021 was
primarily due to organic growth and the deposit of PPP funds and government
stimulus payments into our customers' deposit accounts. 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.

Long-term debt consisting of advances from the Federal Home Loan Bank of New
York ("FHLBNY"), decreased by $7.8 million, or 26.2%, from $29.8 million at
December 31, 2020 to $22.0 million at September 30, 2021. The decrease was due
to the Company paying off maturing debt with excess cash on hand.

Total stockholders' equity increased $567,000, or 0.7%, to $86.5 million at
September 30, 2021 from $85.9 million at December 31, 2020. Stockholders' equity
as of September 30, 2021 reflected net income of $4.4 million, which was
partially offset by a decrease in accumulated other comprehensive income, an
increase in treasury stock and by dividends paid during the nine months ended
September 30, 2021.

Comparison of operating results for the three months ended September 30, 2021 and 2020

General. Net income was $1.7 million for the three months ended September 30,
2021, or $0.29 per diluted share, an increase of $460,000, or 37.4%, compared to
net income of $1.2 million, or $0.21 per diluted share, for the three months
ended September 30, 2020. Net income for the three months ended September 30,
2021 reflected a $929,000 increase in net interest income and a $300,000
decrease in provision for loans losses, which was partially offset by a $572,000
increase in non-interest expense, a $133,000 increase in income tax expense and
a $64,000 decrease in non-interest income when compared to the three months
ended September 30, 2020.

Interest Income. Interest income increased by $543,000, or 9.2%, to $6.5 million
for the three months ended September 30, 2021 when compared to the three months
ended September 30, 2020. Loan interest income increased by $631,000, or 11.8%,
to $6.0 million for the three months ended September 30, 2021 as compared to the
prior year period primarily due to an increase in the average balance of the
loan portfolio of $47.9 million, or 9.8%, from $487.9 million for the three
months ended September 30, 2020 to $535.8 million for the three months ended
September 30, 2021. The increase in the average balance of loans was primarily
due to increases in the average balance of commercial and residential real
estate loans. The increase in loan interest income was also due to a eight basis
points increase in the average yield on the loan portfolio. The average yield on
loans was 4.48% for the three months ended September 30, 2021 as compared to
4.40% for the three months ended

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September 30, 2020. The increase in the average yield was primarily due to a
$363,000 increase in prepayment penalties received on commercial real estate
loans and the recognition of $27,000 in PPP loan fees which was partially offset
by a decrease in market interest rates.

Investment interest income decreased $84,000, or 15.5%, to $457,000 for the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020, due to a 46 basis points decrease in the average yield
earned on the investment portfolio. The average yield was 2.73% for the three
months ended September 30, 2020 as compared to 2.27% for the three months ended
September 30, 2021. The decrease in the average yield was due to a decrease in
market interest rates since September 30, 2020 and purchases of new securities
at lower interest rates. The average balance of the investment portfolio
increased from $79.3 million for the three months ended September 30, 2020 to
$80.4 million for the three months ended September 30, 2021 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.

Interest Expense. Interest expense decreased $386,000, or 38.1%, to $628,000 for
the three months ended September 30, 2021 compared to $1.0 million for the three
months ended September 30, 2020 primarily due to a decrease in interest paid on
deposits. Interest paid on deposits decreased by $339,000, or 40.7%, to $494,000
for the three months ended September 30, 2021 when compared to the three months
ended September 30, 2020. The decrease in interest expense on deposits was
primarily due to a 31 basis points decrease in the average rate paid on deposits
due to a decrease in market interest rates compared to the same period in 2020.
The decrease was partially offset by a $15.0 million, or 3.2%, increase in
average deposit balances for the three months ended September 30, 2021 as
compared to the three months ended September 30, 2020. The average balance of
deposits for the three months ended September 30, 2021 was $478.0 million with
an average rate of 0.41% compared to the average balance of deposits of $463.0
million and an average rate of 0.72% for the three months ended September 30,
2020. The increase in the average balance of interest-bearing deposits was due
to an increase in core deposit accounts primarily through organic growth and the
deposit of PPP funds and government stimulus payments into our customers'
deposit accounts.

Interest expense on long-term debt decreased by $45,000, or 27.4%, to $119,000
for the three months ended September 30, 2021 when compared to the three months
ended September 30, 2020 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 September 30, 2021 was $24.2 million with an average rate
of 1.97% compared to an average balance of $32.3 million and an average rate of
2.02% for the three months ended September 30, 2020. The decrease in average
balance was due to the Company paying off maturing debt with excess cash on hand
since September 30, 2020.

Provision for Loan Losses. There was no provision to the allowance for loan
losses recorded during the three months ended September 30, 2021 compared to
$300,000 for the three months ended September 30, 2020. There was no provision
for loan losses recorded during the third quarter 2021 primarily due to a net
decrease in commercial real estate construction loans as a result of loan
payoffs, along with the recovery of a reserve on a classified commercial real
estate loan during the three months ended September 30, 2021, which was offset
by an increase in general reserves associated with the existing loan portfolio.
The third quarter 2020 provision expense was primarily due to specific reserves
required for changes in classification for certain commercial business loans and
general reserves for loan originations in the third quarter of 2020.

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 September 30, 2021, the Company recorded a net
credit provision of $168,000 for commercial real estate and construction -
commercial loans. This consisted of a $309,000 credit provision for one
classified commercial real estate loan due to receipt of a partial curtailment
on the principal balance. It also included a $252,000 decrease in general
allowance due to the net payoff of commercial real estate construction loans
during the three months ended September 30, 2021. These credit provisions were
partially offset by a $393,000 provision related to adjustments to certain
qualitative factors for commercial real estate and construction - commercial
loans. A $111,000 net provision was recorded for one-to four-family, home

                                       44

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equity and consumer loans that primarily reflected adjustments to certain
qualitative factors for these loan types, partially offset by net loan
recoveries during the three months ended September 30, 2021. A $29,000 net
credit provision was recorded for commercial business loans which primarily
reflected adjustments to certain qualitative factors for this loan type. An
$86,000 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.

During the three months ended September 30, 2020, the provision consisted of a
$179,000 net provision recorded for commercial business loans. This included a
$192,000 provision to reflect the $4.3 million increase in classified commercial
business loans related to one borrower relationship, partially offset by a
$13,000 credit related to a decrease in outstanding commercial business loans,
excluding PPP loans. There was a $73,000 net provision for commercial real
estate and construction - commercial loans during the three months ended
September 30, 2020. This included a $104,000 provision to account for inherent
losses in the commercial real estate and construction - commercial loan
portfolio due to organic growth. This provision was partially offset by a
$31,000 net credit related to changes in certain loss factors used in the model,
offset by an increase in criticized and classified commercial real estate loans.
A $22,000 net credit provision was recorded for one-to four-family, home equity
and consumer loans primarily to reflect a decrease in classified loans during
the three months ended September 30, 2020. During the three months ended
September 30, 2020, a $70,000 unallocated provision for loan losses 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 to the Consolidated Financial Statements for more details on the allowance for loan losses.

Non-Interest Income. Non-interest income decreased by $64,000, or 8.3%, to
$707,000 for the three months ended September 30, 2021 as compared to the three
months ended September 30, 2020. The decrease was primarily due to an $115,000
decrease in gains on the sale of residential mortgage loans due to the impact of
increased market competition on the pricing of residential mortgage loan
products in our market area, resulting in less income earned per loan at time of
sale. The decrease was also impacted by a $24,000 decrease in earnings on bank
owned life insurance during the three months ended September 30, 2021 as
compared to the three months ended September 30, 2020. The decrease in
non-interest income was partially offset by a $64,000 increase in services
charges and fees during the 2021 period when compared to the prior year period.
During the prior year period, the Company waived certain ATM fees and other
service charges to provide relief to customers during the onset of the COVID-19
pandemic. The decrease was also partially offset by an $18,000 increase in debit
card interchange fee income.

Non-Interest Expense. Non-interest expense increased by $572,000, or 14.6%, to
$4.5 million for the three months ended September 30, 2021 as compared to $3.9
million for the three months ended September 30, 2020. Professional services
increased $209,000, or 85.3%, primarily due to one-time costs of $221,000
associated with the Company's undertaking of a core processing system upgrade
which was completed during the third quarter of 2021. Salary and employee
benefits expense increased $203,000, or 9.3%, primarily due to a $108,000
decrease in deferred salaries associated with a decrease in loan originations
during the third quarter of 2021 as compared to the third quarter of 2020 when a
majority of PPP loans were originated. The increase was also due to annual
salary increases. Data processing expenses increased $72,000, or 20.4%,
primarily due to an increase in core system processing costs and activity.
Occupancy and equipment expenses increased $61,000, or 9.4%, primarily due to
increases in equipment maintenance, depreciation and repairs. Advertising
expense increased $23,000, or 13.9%, primarily due to a change in the schedule
and structure of our marketing activities.

Income Taxes Expense. Income tax expense was $359,000 for the three months ended
September 30, 2021, an increase of $133,000, or 58.8%, as compared to $226,000
for the three months ended September 30, 2020. The increase in income tax
expense was primarily due to an increase in income before taxes and an increase
in the effective tax rate. The effective tax rate for the three months ended
September 30, 2021 and 2020 was

                                       45

————————————————– ——————————-

17.5% and 15.5%, respectively. The increase in the effective tax rate is primarily due to a decrease in the composition of tax-exempt income from our municipal bond portfolio compared to our earnings before tax.

Comparison of operating results for the nine months ended September 30, 2021
and 2020

General. Net income was $4.4 million for the nine months ended September 30,
2021, or $0.74 per diluted share, an increase of $1.1 million, or 31.9%,
compared to net income of $3.3 million, or $0.56 per diluted share, for the nine
months ended September 30, 2020. Net income for the nine months ended September
30, 2021 reflected a $1.7 million increase in net interest income, a $475,000
decrease in provision for loans losses and a $376,000 increase in non-interest
income which was partially offset by a $1.2 million increase in non-interest
expense and a $303,000 increase in income tax expense when compared to the nine
months ended September 30, 2020.

Interest Income. Interest income increased by $334,000, or 1.8%, to $18.7
million for the nine months ended September 30, 2021 when compared to the nine
months ended September 30, 2020 primarily due to an increase in loan interest
income. Loan interest income increased $637,000, or 3.8%, to $17.3 million for
the nine months ended September 30, 2021 when compared to the nine months ended
September 30, 2020. The increase was primarily due to an increase in the average
balance of the loan portfolio of $53.5 million, or 11.1%, from $482.4 million
for the nine months ended September 30, 2020 to $535.9 million for the nine
months ended September 30, 2021. The increase in the average balance of loans
was primarily due to growth in the average balance of commercial real estate,
commercial construction and PPP loans. The increase in loan interest income was
also impacted by a $337,000 increase in prepayment penalties and a $147,000
increase in PPP loan fees during the nine months ended September 30, 2021 when
compared to the prior year period. The increase in loan interest income was
partially offset by a 30 basis points decrease in the average yield on loans to
4.30% for the nine months ended September 30, 2021 as compared to 4.60% for the
nine months ended September 30, 2020. The decrease in average yield on loans was
primarily due to a decrease in market interest rates. It was also due to the
portfolio of PPP loans, which have an interest rate of 1.00% as per the SBA
guidelines. The net yield on the PPP loans, when including the deferred
origination fee income and cost, averaged 2.04%, which is well below traditional
loan yields.

Investment interest income decreased $236,000, or 14.5%, to $1.4 million for the
nine months ended September 30, 2021 compared to the nine months ended September
30, 2020, due to a 53 basis points decrease in the average yield of the
investment portfolio. The average yield was 2.89% for the nine months ended
September 30, 2020 as compared to 2.36% for the nine months ended September 30,
2021. The decrease in the average yield was due to a decrease in market interest
rates since September 30, 2020 and purchases of new securities at lower interest
rates. The average balance of the investment portfolio increased from $75.1
million for the nine months ended September 30, 2020 to $78.8 million for the
nine months ended September 30, 2021 primarily due to securities purchases which
largely consisted of municipal bond and mortgage backed securities purchases,
partially offset by securities paydowns and redemptions of "callable" municipal
bonds.

Other interest income decreased by $67,000, or 72.8%, to $25,000 for the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020. The average yield on other interest income decreased 16 basis points
to 0.08% for the nine months ended September 30, 2021 from 0.24% for the nine
months ended September 30, 2020 and the average balance of other interest
earning assets decreased from $51.4 million for the nine months ended September
30, 2020 to $43.7 million for the nine months ended September 30, 2021. The
decrease in the average yield was primarily due to the 150 basis points decrease
in short term market interest rates during the first quarter of 2020 as a
response to the economic impact of the COVID-19 pandemic. The decrease in the
average balance of other interest earning assets was primarily due to a decrease
in the average balance of interest earning deposits held by the Company as
excess funds were used to fund loan originations, purchase securities available
for sale and pay-off long-term debt.

Interest Expense. Interest expense decreased $1.4 million, or 38.7%, to $2.2
million for the nine months ended September 30, 2021 compared to $3.5 million
for the nine months ended September 30, 2020 primarily due to a decrease in
interest paid on deposits. Interest paid on deposits decreased by $1.2 million,
or 42.4%, to $1.7 million for the nine months ended September 30, 2021 when
compared to the nine months ended September 30, 2020. The decrease in interest
expense on deposits was primarily due to a 40 basis points decrease in the

                                       46

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average rate paid on deposits due to a decrease in market interest rates
compared to the same period in 2020. The decrease was partially offset by a
$24.9 million, or 5.5%, increase in average deposit balances for the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020. The average balance of deposits for the nine months ended September 30,
2021 was $473.2 million with an average rate of 0.48% compared to the average
balance of deposits of $448.4 million and an average rate of 0.88% for the nine
months ended September 30, 2020. The increase in the average balance of
interest-bearing deposits was due to an increase in core deposit accounts
primarily through organic growth and the deposit of PPP funds and government
stimulus payments into our customers' deposit accounts.

Interest expense on long-term debt decreased by $112,000, or 21.8%, to $401,000
for the nine months ended September 30, 2021 when compared to the nine months
ended September 30, 2020 primarily due to a decrease in the average balance of
advances from the FHLBNY. The average balance of advances from the FHLBNY for
the nine months ended September 30, 2021 was $27.0 million with an average rate
of 1.98% compared to an average balance of $33.7 million with an average rate of
2.03% for the nine months ended September 30, 2020. The decrease in average
balance was due to the Company paying off maturing debt with excess cash on hand
since September 30, 2020.

Provision for Loan Losses. A $650,000 provision to the allowance for loan losses
was recorded during the nine months ended September 30, 2021 compared to $1.1
million for the nine months ended September 30, 2020. During the nine months
ended September 30, 2020, the Company's provision for loan losses included an
adjustment of certain qualitative factors to take into account the uncertainty
surrounding the impact of COVID-19 and related economic conditions on borrowers'
ability to repay loans. The provision for the nine months ended September 30,
2021 was primarily due to a charge-off associated with the downgrade and
impairment of one commercial real estate loan and general reserves for loan
originations during the period.

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 nine months ended September 30, 2021, the Company recorded a $642,000
net provision for commercial real estate and construction - commercial loans.
This consisted of a $426,000 provision for a charge-off related to one
commercial real estate loan during the period. The remaining provision was
primarily related to adjustments to certain qualitative factors for commercial
real estate and construction - commercial loans during the nine months ended
September 30, 2021. An $110,000 net 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, partially offset by net
loan recoveries for these loan types during the nine months ended September 30,
2021. A $144,000 net credit provision was recorded for commercial business loans
which reflected a $69,000 credit allowance to account for an $115,000 decrease
in criticized and classified commercial business loans and adjustments to
certain qualitative factors. Furthermore, a $75,000 credit allowance to account
for a $3.4 million decrease in outstanding commercial business loans, excluding
PPP loans, during the nine months ended September 30, 2021 was recorded. A
$42,000 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.

During the nine months ended September 30, 2020, the Company recorded a $933,000
net provision for commercial real estate and construction - commercial loans.
This consisted of a $693,000 provision to reflect an adjustment of certain
qualitative factors to take into account the uncertain impacts of COVID-19 on
economic conditions and borrowers' ability to repay loans and a $156,000 general
allowance to reflect inherent losses within the portfolio due to organic growth.
It also included an $84,000 provision to reflect the $11.9 million increase in
criticized and classified commercial real estate loans, which consists primarily
of one loan relationship which is well-collateralized. An $183,000 net provision
was recorded for commercial business loans which reflected adjustments to
certain qualitative factors relating to the COVID-19 impact on economic
conditions and an increase in classified loans. The provision also reflected a
credit allowance to account for a $5.7 million decrease in outstanding
commercial business loans, excluding PPP loans, during the nine months ended
September 30, 2020. A $44,000 provision was recorded for one-to four-family,
home equity and consumer loans primarily to reflect an increase in classified
loans during the nine months ended September 30,

                                       47

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2020. A $35,000 unallocated credit 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 to the Consolidated Financial Statements for more details on the allowance for loan losses.

Non-Interest Income. Non-interest income increased by $376,000, or 20.5%, to
$2.2 million for the nine months ended September 30, 2021 as compared to $1.8
million for the nine months ended September 30, 2020. The increase was primarily
due to a $277,000 increase in unrealized gains on interest rate swaps due to an
increase in long-term interest rates during the nine months ended September 30,
2021. Non-interest income was also positively impacted by a $121,000 increase in
service charges and fees and a $94,000 increase in debit card fee income. During
the prior year period, the Company waived certain ATM fees and other service
charges to provide relief to customers during the onset of the COVID-19
pandemic. The increase in non-interest income was partially offset by a $61,000
decrease in earnings on bank owned life insurance during the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020. The
decrease was also due to a $55,000 decrease in gains on the sale of residential
mortgage loans due to impact of increased market competition on the pricing of
residential mortgage loan products in our market area, resulting in less income
earned per loan at time of sale during the nine months ended September 30, 2021.

Non-Interest Expense. Non-interest expense increased by $1.2 million, or 10.2%,
to $12.8 million for the nine months ended September 30, 2021 as compared to
$11.7 million for the nine months ended September 30, 2020. Professional
services increased $462,000, or 62.4%, primarily due to one-time costs of
$509,000 associated with the Company's undertaking of a core processing system
upgrade which was completed during the third quarter of 2021. Salary and
employee benefits expense increased $408,000, or 6.5%, primarily due to an
increase in annual salaries and the creation of an officer position for retail,
sales and marketing which was filled in August 2020. Data processing expenses
increased $146,000, or 14.4%, primarily due to an increase in core system
processing costs and activity. Occupancy and equipment expenses increased
$127,000, or 6.6%, primarily due to increases in building maintenance and
repairs and also additional cleaning expense related to the COVID-19 pandemic.
FDIC Insurance expense increased $56,000, or 70.9%, due to the receipt of small
bank assessment credits during the nine months ended September 30, 2020. These
increases were partially offset by a decrease in advertising expense of $35,000,
or 6.5%, primarily due to a change in the schedule and structure of our
marketing activities.

Income Taxes Expense. Income tax expense was $884,000 for the nine months ended
September 30, 2021, an increase of $303,000, or 52.2%, as compared to $581,000
for the nine months ended September 30, 2020. The increase in income tax expense
was primarily due to an increase in income before taxes and an increase in the
effective tax rate. The effective tax rate for the nine months ended September
30, 2021 and 2020 was 16.8% and 14.9%, respectively. The increase in the
effective tax rate was primarily due to a decrease in the mix of tax-exempt
income derived from our municipal bond portfolio in relation to our pre-tax
income.

Liquidity and capital resources

Liquidity describes our ability to meet the financial obligations that arise
during the ordinary course of business. Liquidity is primarily needed to fund
loan commitments, to pay the deposit withdrawal requirements of our customers as
well as to fund current and planned expenditures. Our primary sources of funds
consist of deposits, 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 September 30, 2021, the maximum amount that we can borrow from the FHLBNY
was $115.2 million and was collateralized by a pledge of certain fixed-rate
residential, one- to four-family loans. At September 30, 2021, we had
outstanding advances under this agreement of $22.2 million. We have a written
agreement with the Federal Reserve Bank discount window for overnight borrowings
which is collateralized by a pledge of our securities and allows us to borrow up
to the value of the securities pledged, which was equal to a book value of $11.0
million and a fair value of $11.3 million as of September 30, 2021. There were
no balances outstanding with the Federal Reserve Bank at September 30, 2021. We
have also

                                       48
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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 September 30, 2021.

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. We have not experienced any unusual pressure on our deposit
balances or our liquidity position as a result of the COVID-19 pandemic.

Our primary investing activities include the origination of loans and the
purchase of investment securities. For the nine months ended September 30, 2021,
we originated loans of approximately $109.1 million as compared to approximately
$117.3 million of loans originated during the nine months ended September 30,
2020. Loan originations exceeded principal repayments and other deductions
during the first nine months of 2021 by $1.7 million. Purchases of investment
securities totaled $21.3 million and $20.3 million during the nine months ended
September 30, 2021 and 2020, 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 $591.8
million at September 30, 2021, as compared to $560.3 million at December 31,
2020. Approximately $80.3 million of time deposit accounts are scheduled to
mature within one year as of September 30, 2021. 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 2021. We do not have
any balloon or other payments due on any long-term obligations, other than the
borrowing agreements noted above.

Capital city

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, 2020.

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 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. Pursuant to the
CARES Act, the federal banking agencies issued final rules that temporarily
lowered the Community Bank Leverage Ratio during 2020 to 8%, with a gradual
return to the standard rate beginning in 2022. Effective January 1,

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2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. The ratio will return to 9.0% on January 1, 2022.

As of September 30, 2021, the Bank was considered a "qualifying community bank"
and its Community Bank Leverage Ratio was 11.51% 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 provisions

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 8 in the Notes to our Consolidated
Financial Statements for a summary of loan commitments outstanding as of
September 30, 2021.

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